© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Insuring Your Life#8
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Goals
Explain the concept if risk and the basics of insurance underwriting
Discuss the primary reasons for life insurance and identify those who need coverage
Calculate how much life insurance you need
Distinguish among the various types of life insurance policies and describe their advantages and disadvantages
Choose the best life insurance policy for your needs at the lowest cost
Become familiar with the key features of life insurance policies
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Basic Insurance Concepts
Basic purpose of insurance
Protect you and your dependents from the financial consequences of
losing assets or income when an accident, illness, or death occurs
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Concept of Risk
Risk: chance of economic loss
There’s a risk anytime you have a financial interest in something• Life• Health• Home• Car• Business
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The Concept of Risk
Risk Assumption: choice to accept and bear the risk of loss yourself
Example: Bear the cost of replacing stolen textbook
Risk Avoidance: avoiding an act that would create risk
Example: not driving to avoid a car accident
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Loss Prevention and Control
Prevention - reduce chance that loss will occur
Example: Driving the speed limit may reduce likelihood of a car accident
Control - reduce severity of loss once it occurs
Example: Wearing a seat belt can reduce effects of a car accident
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Insurance
Insurance Policy --transferring your risk of loss to the insurance company
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Underwriting Basics
Insurance company decides whom to insure and rate to be charged
Company must guard against adverse selection – a disproportionate number of bad risks
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Benefits of Life Insurance
Financial protection for dependents
Protection from creditors
Tax benefits
Vehicle for savings
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Do You Need Life Insurance?
Consider if • Dependents count
on your financial support
• You have debts – home mortgage
Maybe Not if• No one
depends on your support
• You are a child
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Much Life Insurance is Right for You?
Multiple-of-Earnings Method
• Multiply annual earnings by an arbitrary number
Needs Analysis Method
• Estimate needs and examine available resources
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How Much Life Insurance Do You Need?
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Assess Family’s Total Economic Needs
Income to maintain lifestyle
Extra expenses if income producer dies
Special needs of dependents
Debt liquidation
Liquidity
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Determine Financial Resources
Savings and investments
Social Security benefits
Pension or retirement plans
Other life insurance
Income of surviving spouse or children
Real estate or other assets
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
This is the amount of life insurance needed to provide your family with desired standard of living
Subtract Resources From Needs
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Term Life Insurance
Specified amount of insurance protection for a set period
Benefit paid if insured dies during that time
Simplest type of insurance policy
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Types of Term Insurance
Straight termCoverage remains the same while premiums can increase
Decreasing term Premiums remain the same while coverage decreases
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Important Features In Term Insurance
RenewabilityRenew policy without evidence of insurability
Convertibility Convert to whole life policy without evidence of insurability
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advantages• Economical way for
young families to purchase large amounts of life insurance
• Provides for needs that disappear over time
Disadvantages• Premiums
become more costly as you get older
• Does not build cash value
Term Insurance
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Whole Life Insurance
Cash value Provides death
protection plus a savings feature
Nonforfeiture right
Right to cash value when canceled prior to death
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Cash Value Accumulates In A $200,000 Whole Life Policy
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Representative Whole Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Whole Life Policies
Continuous premium (straight life) -- Level premiums paid until death or policy cancellation
Limited payment --Level premiums paid for specified number of years, insurance in force until death
Single premium --Lifetime coverage purchased with a single premium
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advantages of Whole Life
Savings vehicle
Borrow against cash value
Premiums remain constant
Cash value accumulates tax-free until redeemed
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Disadvantages of Whole Life
Less death protection for young people
Low return on savings
Tax penalties possible on early withdrawal
Outstanding loan subtracted from face value of policy upon death
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Universal Life Insurance
Permanent cash-value insurance that combines term insurance with tax sheltered savings account
Provides death protection plus savings feature
Premiums are “unbundled” into 2 accounts
Savings grow at current interest rate vs. guaranteed minimum rate
Provides flexibility in premiums paid and death benefit
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Representative Universal Life Insurance Annual Outlays: $100,000 Policy, Preferred Nonsmoker Rates
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Variable Life Insurance
Provides death protection plus a savings or cash value feature
Cash value can be invested in mutual funds for greater possible return
Returns not guaranteed and actual death benefit can vary
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Representative Variable Life Insurance Values: $100,000 Policy,Preferred Nonsmoker, Male, Age 45
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Other Types of Life Insurance
Variable life insurance• Combines flexibility of premium payment feature of universal with investment choices offered by variable
Group life insurance• Usually term
insurance offered through employers
• Premiums usually lower than individually purchased policies
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Other Special-Purpose Life Insurance
Credit and Mortgage life insurance
• Decreasing term insurance • Pays off outstanding
balance if borrower dies before repaid
• Costly form of coverage
Industrial life insurance
• Whole life policies with small face amounts
• For low-income families
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Buying Life Insurance
Compare costs and features
Select a large, highly rated, financially secure company
Choose a reputable agent
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Major Advantages and Disadvantages-Life Insurances
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Life Insurance Contract Features
Beneficiary clauseSettlement optionsPolicy loansPremium paymentsGrace periodNonforfeiture optionsPolicy reinstatementChange of policy
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Other Policy Features
Multiple indemnityDisability clauseGuaranteed purchase optionsSuicide clauseExclusionsParticipationLiving benefitsViatical Settlement