Copyright © 2008 Pearson Education Canada 5-1 Chapter 5 Life Insurance.

Copyright © 2008 Pearson Education Canada5-1

Chapter 5

Life Insurance

Copyright © 2008 Pearson Education Canada 5-2

Purpose of Life Insurance Protect dependent’s income

stream Provide liquidity for estate


Life Insurance Proceeds Can Be Used to

Provide education or income for children Pay off the mortgage or other debts Provide retirement income Make estate or tax payments Provide survivor benefits Establish endowment funds for children



Basic Concepts of Life Insurance


Policy Agreement or contract Between

Insured person and insurance company

States which risks the life insurance company has agreed to assume


Face Amount Amount of agreed payout

At time of death


Beneficiary Person named in the policy

To receive the death benefit


Premiums Regular payments by the insured

To the insurance company


Insurable Interest Relationship between

Insured and event insured against Essential for all insurance

Insure your own life Insure life of another person

Spouse, child, grandchild, employee Or any person on whom insured may

be wholly or partially dependent


Three Basic Principles of Life Insurance

1. Pooling risk2. The pure cost of insurance3. The level premium


1. Pooling Risk Pooling small contributions of

many people Compensate a few experiencing a

loss Based on mortality tables


2. The Pure Cost of Life Insurance Follows mortality curve More expensive

With age For males


Mortality Rate Deaths per thousand of population Rises with age Higher for males General state of health Hazardous activities

Scuba diving Hang gliding



Mortality Cost

Death ofy ProbabilitBenefitDeath


3. The Level Premium Constant premium over the life of

the policy Causes overpayment at beginning

of the policy And underpayment at end

Gives rise to policy reserves



Policy Reserves Also called cash surrender value Overpayment of premium in early

years Level premium > pure cost of insurance

Refundable If policy cancelled If coverage reduced

Not a saving feature!


Factors Affecting Cost of Life Insurance Mortality rate Loading charges

Administrative costs, commissions, dividends

Frequency of premium payments Annual payments cheaper than monthly

How premiums are calculated Participating policies Non-participating policies


Participating Policies Premiums generally higher Policy-holder gets refund

If premiums are too high Refund called a dividend Refund not taxable


Refund, Dividend, Depends Upon Company’s efficiency Return on investment Amount paid in claims Policy cancellations


Non-participating Policies Premiums cannot be increased No dividends


Types of Life Insurance Term life Whole life Combination


Term Life Insurance Term life insurance Decreasing term life insurance Group life insurance Credit life insurance


Term Life Insurance Constant face value Constant premium during term

Premium increases upon renewal No cash surrender value Most face value per dollar premium

Specified risk Not 100% probability

Definite time Not life



Decreasing Term Life Insurance Variation of term insurance Decreasing face value

Falls to zero at end of term Constant premium Income protection for young families

Maximum coverage when children young Reduced coverage when children older


Decreasing Term Life Insurance May be used as mortgage

insurance To pay off mortgage balance No legal obligation to pay off

mortgage



Group Life Insurance A variation of term insurance Bought by employers Paid for by workers/employer Usually one-year renewable term Terminates with employment

Possible option to convert to individual policy Premiums lower

Especially for older employees

Copyright © 2008 Pearson Education Canada 5-1 Chapter 5 Life Insurance.

Documents

pearson education canada

estate slide

dependent slide

mortality cost slide

level premium slide

life insurance company

purpose of life insurance

life insurance proceeds