© 2011 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
Jan 12, 2016
© 2011 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
Basic Insurance Concepts
Basic purposes of insurance• Protect you and dependents from losing
your acquired assets• Shield you and your family from an
interruption in earnings
The Concept of Risk
Risk: chance of economic loss
Insurance planning: reduces risk that losses will cause financial devastation
The Concept of Risk
Risk Avoidance – Avoiding an act that would create a risk
Example: not driving to avoid car accident
Risk avoidance is not always practical or possible
Loss Prevention and Control
Prevention - reduce chance that loss will occur
Example: Driving the speed limit may reduce likelihood of car accident
Control - reduce severity of loss once it occurs
Example: Wearing a seat belt can minimize effects of an accident
The Concept of Risk
Insurance pay someone to bear your risk of loss
Example: Buy an insurance policy to transfer risk to insurance company
Assuming Risk choice to accept and bear the risk of loss yourself
Example: Bear the cost of replacing stolen calculator
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
Benefits of Life Insurance
• Financial protection for dependents• Protection from creditors• Tax benefits• Vehicle for savings
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
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
How Much Life Insurance Is Right For You?
Assess Family’s Total Economic Needs
• Family income• Additional expenses• Special needs of
dependents• Pay off debts• Liquidity
• Savings and investments• Social Security benefits• Pension or retirement plans• Other life insurance• Income of surviving spouse or children• Real estate or other assets
Determine Financial Resources
This is the amount of life insurance needed to provide your family with desired standard of living
Subtract Resources From Needs
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
Types of Term Insurance
Straight term
Coverage remains the same while premiums can increase
Decreasing term
Premiums remain the same while coverage decreases
Important Features In Term Insurance
Renewability
Renew policy without evidence of insurability
Renewability
Renew policy without evidence of insurability
Convertibility
Convert to whole life policy without evidence of insurability
Convertibility
Convert to whole life policy without evidence of insurability
Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates
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
Whole Life Insurance
Cash value
Provides death protection plus a savings feature
Nonforfeiture right
Right to cash value when canceled prior to death
How Cash Value Accumulates In A $200,000 Whole Life Policy
Representative Whole Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates
Types of Whole Life Policies
Continuous premium (straight life) • Level premiums paid until death or policy
cancellationLimited payment• Level premiums paid for specified number
of years, insurance in force until deathSingle premium • Lifetime coverage purchased with a single
premium
Advantages of Whole Life
Advantages • Savings vehicle• Borrow against cash value • Premiums remain constant• Cash value accumulates tax-free
until redeemed
Disadvantages of Whole Life
Disadvantages • 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
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
Understand the risks before you buy!
Representative Universal Life Insurance Annual Outlays: $100,000 Policy, Preferred Nonsmoker Rates
Other Types of Life Insurance
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
Representative Variable Life Insurance Values: $100,000 Policy,Preferred Nonsmoker, Male, Age 45
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
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
Buying Life Insurance
• Compare costs and features
• Select a large, highly rated, financially secure company
• Choose a reputable agent
Key Features of Various Types of Life Insurance
Life Insurance Contract Features
Beneficiary clause
Settlement options
Policy loans
Premium payments
Grace period
Nonforfeiture options
Policy reinstatement
Change of policy
Other Policy Features
Multiple indemnityDisability clause
Guaranteed purchase optionsSuicide clause
ExclusionsParticipation
Living benefitsViatical Settlement