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Chapter 9: Managing Life , Health, and Disability Risks Chapter 9 Managing Life, Health, and Disability Risks
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Chapter 9: Managing Life, Health, and Disability Risks
Chapter 9
Managing Life, Health, and Disability Risks
Chapter 9: Managing Life, Health, and Disability Risks
2005 Kaplan Financial
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Identifying Risks Associated with Premature Death
Inadequate financial resources Estate preservation
Chapter 9: Managing Life, Health, and Disability Risks
2005 Kaplan Financial
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Inadequate Financial Resources
Income for the readjustment period
Financial support of dependents Funds for specific goals
Chapter 9: Managing Life, Health, and Disability Risks
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Estate Preservation
Medical expenses prior to death Disposal and ceremonial expenses Probate expenses
Chapter 9: Managing Life, Health, and Disability Risks
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Measuring Needs Related to Premature Death
Human Life Value Approach Financial Needs Approach Capital Retention Approach
Chapter 9: Managing Life, Health, and Disability Risks
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Human Life Value Approach
1. Calculate the family’s share of earnings (FSE).
2. Determine Work Life Expectancy.
3. Determine present value of worker’s stream of expected earnings.
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Financial Needs Approach
Lump-sum (cash) needs Final expenses and debts Mortgage liquidation or payment fund Education expenses Emergency expenses
Income (cash flow) needs Readjustment period Dependency period Spousal life income (pre- and postretirement)
Chapter 9: Managing Life, Health, and Disability Risks
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Capital Retention Approach
1. Prepare a personal balance sheet.2. Calculate the capital available for
income.3. Determine the amount of
additional capital required.
Chapter 9: Managing Life, Health, and Disability Risks
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Individual Life Insurance Policies
Term insurance Whole life insurance Universal life insurance
Chapter 9: Managing Life, Health, and Disability Risks
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Term Insurance (1 of 3)
Affordable Maximum Coverage/$ of
premium Fulfills temporary need Ensures insurability Cost Prohibitive at Older Ages No Savings Feature
Chapter 9: Managing Life, Health, and Disability Risks
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Term Insurance (2 of 3)
Types Annual Renewable Term (ART) Level Premium Term to age 65 or 70 Decreasing/Increasing Reentry
Chapter 9: Managing Life, Health, and Disability Risks
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Term Insurance (3 of 3)
Riders Waiver of Premium Accidental Death Benefit Accelerated Death Benefit Return of Premium Spouse Insurance Child Insurance
Chapter 9: Managing Life, Health, and Disability Risks
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Whole Life Insurance
Permanent protection Cash value build-up Level premium (in general) Mortality charges Administrative costs and insurer
profit
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Whole Life Insurance (cont.)
Types Ordinary Life/Continuous Premium Limited-Pay Policy Modified Life Single Premium/MEC Current Assumption (Interest-
Sensitive) Variable Life Joint Life
Chapter 9: Managing Life, Health, and Disability Risks
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Dividend Options
Cash Paid-Up Additions Accumulate at Interest Reduce Premium One-Year Term Insurance (5th
Dividend Option)
Chapter 9: Managing Life, Health, and Disability Risks
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Nonforfeiture Options
Cash Surrender Value Reduced Paid-Up Insurance Extended Term Insurance
Chapter 9: Managing Life, Health, and Disability Risks
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Whole Life Riders
Waiver of Premium Accidental Death Benefit Spouse and Children’s Riders Term Insurance Living Benefits Option to Purchase Paid-Up Additions Unemployment Rider
Chapter 9: Managing Life, Health, and Disability Risks
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Universal Life Insurance
Premium Flexibility Ability to Change Death Benefit
Amount Current Assumptions Fewer Guarantees
Chapter 9: Managing Life, Health, and Disability Risks
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Structure of a Universal Life Policy
Chapter 9: Managing Life, Health, and Disability Risks
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Universal Life Death Benefit Options
Option A (Option 1) Level Death Benefit Net Amount at Risk equals Death
Benefit less Cash Value Option B (Option 2)
Increasing Death Benefit Net Amount at Risk Remains Level
Throughout the Policy
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Variable Universal Life Combines investment direction of variable
life, and the premium death benefit and cash value flexibility of universal life
Policyowner directs investment and bears investment risk
Cash value maintained in one or more separate accounts
Must be approved by SEC Agents/brokers who sell VUL must have
license for insurance and securities
Chapter 9: Managing Life, Health, and Disability Risks
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Modified Endowment Contracts (MECs)
“7-pay” Test Material Change LIFO Treatment 10% Penalty (< age 59½)
Chapter 9: Managing Life, Health, and Disability Risks
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Universal Life Riders and Optional Benefits
Waiver of Premium Accidental Death Benefit Other Insured Living Benefits
Chapter 9: Managing Life, Health, and Disability Risks
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Group Life Insurance
Group term Group whole life insurance Group universal life
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Policy Replacement
Belth price of protection model:
CPT = (P + CV0)(1 + i) – (CV1 + D)
(DB – CV1) (0.001)
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Life Insurance Policy Provisions
Grace Period Incontestability Entire Contract Clause Misstatement of Age or Gender Assignment
Absolute Collateral
Suicide
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Life Insurance Policy Provisions (cont.)
Reinstatement Policy Loans Beneficiary Designations
Revocable and Irrevocable Primary and Contingent Survivorship Clause
War Exclusion Simultaneous Death
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Life Insurance Settlement Options
Interest Only Fixed Amount Fixed Period Life Income Life Income and Period Certain Life Income with Refund Joint and Survivor Income
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Life Annuity Contracts What is an annuity? Types of annuities
Immediate/Deferred Flexible/Single Premium Fixed/Variable
Timing of annuity payments Straight Life Life with Period Certain Installment Refund Joint & Survivor
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Taxation of Life Insurance Dividends as return of principal Withdrawals
LIFO – MEC/1st 15 years FIFO – After 15 years
Death benefit excluded from beneficiary’s gross income
Proceeds lose tax-free status if transfer is not a gift, transfer to insured, or transfer to insured’s business
Premiums are not tax deductible except to employer for group life
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Taxation of Viatical Agreements and Annuities
Viatical Agreements Tax free to insured Proceeds taxable to purchaser
Annuities Inclusion/Exclusion ratio 100% taxable if exceed original life
expectancy
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Individual Health Insurance
Purpose Cost concerns Eligibility Medical expense insurance Major medical insurance
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Long-Term Care Insurance
Types of Care Skilled Nursing Care Custodial Care Home Health Care Assisted Living Adult Day Care Hospice Care
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Long-Term Care Insurance (cont.)
Eligibility Chronically Ill
2 of 6 ADLs Substantial Cognitive Impairment
Tax deductible premiums and tax-free benefits
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Disability Income Insurance
Definition of disability Any occupation Own occupation Split definition Social Security
Characteristics Benefit period Elimination period Partial disability Waiver of premium Cost of living rider Future increase option Automatic increase
rider
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Disability Income Insurance (cont.)
Taxation of benefits Tax free if insured pays premium Taxable if employer pays premium
Integration with Social Security Termination of beneifts Residual benefits
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Group Health Insurance
Eligibility Characteristics
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Group Health Insurance (cont.)
Basic and major medical Dental and vision Disability income Managed care Coordination of benefits
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Group Health Insurance (cont.)
Termination of benefits COBRA Coverage for elderly employees Coverage for retirees Taxation of group health benefits HIPAA
