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Areas of analysis

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Deciphering life insurance policy illustrations. Reviewing policy comparison measurements ... Tools & Techniques of Life. Insurance Planning. 4 - 2. How To ... – PowerPoint PPT presentation

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Title: Areas of analysis


1
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Areas of analysis
  • Selection of the proper type of product
  • Deciphering life insurance policy illustrations
  • Reviewing policy comparison measurements
  • Studying company comparison measurements

2
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Selection of the proper type of product
  • Personal preferences
  • Own versus renting insurance
  • Cash accumulation versus buy term and invest the
    difference
  • Rules of thumb
  • Buy term
  • If risk taking propensity is high
  • If client has a lease versus own preference
  • Buy permanent
  • If client has an own rather than loan
    preference
  • If client wants something to show for the money
  • Buy a blend
  • if client is somewhere in between these two
    preferences

3
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Amount of insurance needed
  • Rules of thumb
  • Buy term when there is no way to satisfy the
    death need without it
  • Buy a combination of term and permanent insurance

  • Client can cover the entire death need, and
  • Able and willing to allocate additional dollars
    to appropriate permanent coverage
  • Cash flow considerations
  • Multiple premium cash flow combinations
    (examples)
  • Pre-pay coverage as fast as possible
  • Limited payments over a regular interval
  • Pay premiums over a lifetime

4
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Cash flow considerations (cont'd)
  • Rules of Thumb
  • Prepay coverage if the client expects to live
    longer than average
  • Pay on an installment basis if the client expects
    to face a greater than average mortality risk
  • Purchase YRT if the client wants to pay the
    absolutely minimum premiums
  • But is willing to pay increasingly larger
    premiums each and every year
  • Duration of need considerations
  • Needs less than 10 years Term
  • Needs 10 to 15 years Term and/or permanent
    coverage

5
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Duration of need considerations (cont'd)
  • Needs 15 years or more Permanent coverage
  • Needs to cover buy-sell agreement permanent
    coverage
  • Needs to cover estate taxes permanent coverage
  • How to decipher policy illustrations
  • Identify the columns
  • Premiums, cash values, death benefits
  • Policy dividends

6
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • How to decipher policy illustrations (cont'd)
  • Critical questions to ask
  • What does the client pay versus what the client
    gets if the client lives and the beneficiaries
    receive if the client dies?
  • What portion of those amounts are guaranteed and
    what portion of those amounts are not?
  • What interest or other assumptions are built into
    these figures?
  • Emphasis on
  • Surrender charges
  • Cash value projections
  • Policy loans
  • Dividends

7
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • How to decipher policy illustrations (cont'd)
  • Surrender charges
  • Difference between the gross cash value and the
    net surrender value for the given year
  • Cash value projections
  • Based on the guaranteed interest rate versus
    current portfolio earnings
  • Questions to ask
  • Are the assumptions realistic?
  • Does the guaranteed cash value drop to zero after
    some duration?
  • When does the policy lapse?

8
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • How to decipher policy illustrations (cont'd)
  • Policy Loans
  • Ledger statement will indicate the interest rate
    charged and if it is fixed or variable
  • If variable is it reasonable over the policy
    period?
  • Dividends
  • Dividends are not guaranteed
  • Are dividends reduced when loans are
    outstanding?
  • What interest rate must the company earn to
    support policy dividends?
  • Ledger statement should reflect how dividends are
    being used

9
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • How to decipher policy illustrations (cont'd)
  • Dividends (cont'd)
  • Questions to ask
  • Is illustration from the home office or from the
    agents computer?
  • Does the illustration use a reasonable interest
    rate assumption?
  • Are dividends puffed?
  • Are cash flow amounts in one illustration
    comparable to those in another?
  • For universal life policies
  • What variables are incorporated in the
    illustration?
  • Insist all competitive illustrations use the same
    assumptions

10
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • How to compare policies
  • The Traditional Net Cost Method
  • Sum of Premiums Paid Sum of Dividends
    Net Cash Value
  • Face Amount of the Policy (in
    thousands)
  • Step 1divided by the number of years index is
    targeting
  • This measure ignores the time value of money

11
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Example - The Traditional Net Cost Method
  • Total Premiums 222.40
  • Minus Total Dividends -55.10
  • Equals Total Net Premiums 167.30
  • Cash Value Year 10 160.00
  • Plus Terminal Dividend 5.25
  • Minus surrender charge - 0.00
  • Equals Net Cash Value 165.25
  • Total Premiums 167.30
  • Minus Net Cash Value -165.25
  • Equals Total Net Cost 2.05
  • Total Net Cost 2.05
  • Divided by Number of Years / 10

12
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • How to compare policies (cont'd)
  • The Interest-Adjusted Cost Methods
  • Compare the cost of policies considering that
    money spent on premium dollars could have been
    invested elsewhere and earned a minimum after-tax
    return
  • Interest-Adjusted Net Surrender Cost Index
  • Relative measure of the cost of a policy assuming
    it is surrendered
  • Interest-Adjusted Net Payment Cost Index
  • Relative measure of the cost of a policy assuming
    the insured dies

13
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Example Interest Adjusted Surrender Cost
    Index
  • Total Premiums Compounded _at_ 5 293.72
  • Minus Total Dividends _at_ 5 -68.26
  • Equals FV Net Premiums 225.46
  • Cash Value Year 10 160.00
  • Plus Terminal Dividend 5.25
  • Minus surrender charge - 0.00
  • Equals Net Cash Value 165.25
  • FV Net Premiums 225.46
  • Minus Net Cash Value - 165.25
  • Equals FV Net Cost 60.21
  • FV Net Cost 60.21
  • Divided by Annuity Due Factor / 13.2068
  • Equals Surrender Cost Index(Per 1,000)
    4.56

14
How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
  • Example Payment Cost Index
  • Total Premiums Compounded _at_ 5 293.72
  • Minus Total Dividends _at_ 5 -68.26
  • Equals FV Net Premiums 225.46
  • FV of Net Premiums 225.46
  • Divided by Annuity Due Factor / 13.2068
  • Equals Payment Cost Index(Per 1,000) 17.07
  • All premiums, dividends and cash values are per
    1,000 of coverage
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