Insurance on The Person

1
Insurance on The Person

• Insurance on the Person

2
Insurance (Risk)

• Life insurance (untimely death)
• Health insurance (catastrophic illness)
• Disability insurance (disability)
• Long-term care (long-term care)

3
Why Purchase Life Insurance?

• Risk of untimely death
• Income replacement
• Estate preservation
• Tax benefits

4
Income Replacement

• Income for the readjustment period
• Financial support of dependents
• Other personal financial plans

5
Estate Preservation

• Medical expenses prior to death
• Disposal and ceremonial expenses
• Probate expenses
• Taxes
• Federal state inheritance taxes
• Federal state income taxes
• Debt retirement

6
Tax Benefits

• Death proceeds are not taxable to the recipient
• Interest on cash value life Insurance policy is
  tax deferred until the cash value is withdrawn
  (or never taxed if insured dies w/o surrendering
  or withdrawing the cash value)

7
Estate Tax Issues

• IRC Section 2042 life insurance death proceeds
  are included in a decedents gross estate if
  either
• The proceeds are payable to or for the benefit of
  the estate
• The insured possessed, at death, any incident of
  ownership in the policy
• Also, if ownership is transferred via gift made
  within three years of death

8
Gifts of Life Insurance

• Insured irrevocably assigns all rights in an
  existing insurance contract for less than
  adequate consideration, or as a gift
• Value fair market value (replacement cost of
  comparable contract)
• Interpolated terminal reserve if comparable
  contract not ascertainable

9
Terminal Reserve Example

• Assume a gift is made today of a contract issued
  10 years, 8 mos ago
• Annual premium 1,800 paid 8 mos ago on due date
• Eleventh-year terminal reserve 16,000
• Tenth-year terminal reserve 13,900

10
Terminal Reserve Example

• Increase in reserve 16,000 13,900 2,100
• Value of Gift interpolated reserve value
  unearned premium
• 13,900 8/12 x 2,100 4/12 x 1,800 15,900

11
Life Insurance Gifts

• Premium payment on life insurance policy (or
  annuity) not owned
• Premium paid by an insured if the insured has no
  incidents of ownership and the proceeds are
  payable to beneficiary other than estate
• Gifts of proceeds One owns a policy, a second is
  insured, and a third is beneficiary

12
Approaches to Providing Adequate Protection

• Needs Approach
• Human Life Value Approach
• Capital Retention Approach

13
Needs Approach

• Add
• Cash needs
• Income needs
• Special needs
• Less
• Current wealth
• Additional life insurance needed
• Should be reevaluated regularly

14
Needs Approach - example

• Assume need 50,000 per year, after
• Social security benefits
• Other income sources
• Have 200,000 in assets, after paying off
  mortgage, estate taxes, etc.
• Can earn 7
• Needs exist for 25 years
• Insurance 582,679 200,000 382,679

15
Capital Retention Approach

• Preserves capital
• Previous example
• 200,000 capital available
• Income need 50,000
• Income exist 14,000 (7x200,000)
• Income shortage 36,000
• 36,000/.07 514,286

16
Human Life Approach

• Calculates PV of expected lifetime earnings, less
  personal consumption
• Expected earnings less
• Taxes
• Personal consumption
• Work-life expectancy
• Calculate present value

17
Human Life Example

• 45 year-old expected to retire at age 62
• Currently earns 80,000 per year assume grows by
  3
• Taxes are 30
• Personal Consumption is 25
• Discount rate is 5

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Example, cont.

• Pymt
• 42,000 80,000 x (1 - .30)(1 - .25)
• N 17 (62 45)
• I 1.9417
• Cpt PV 603,192

19
Types of Life Insurance

• Term
• Whole Life
• Ordinary
• Limited payment
• Variable Life Insurance
• Universal Life Insurance
• Variable Universal Life
• Current Assumption Whole Life

20
Term Insurance

• Temporary protection
• No savings or cash-value component
• Pays face amount if insured dies within stated
  period or before certain age
• Renewable can be renewed for additional periods
  w/o evidence of insurability (guarantee purchased
  by insured)
• Convertible permanent policy can be obtained
  w/o evidence of insurability

21
Term Insurance

• Yearly renewable
• 5,10, 15, 20-year term
• Term to age 65 expires at age 65
• Decreasing term face amount gradually declines
  (ex mortgage)
• Reentry term uses select rates if evidence of
  insurability demonstrated

22
Yearly Renewable v. Level Premium

• Yearly renewable
• Renew each year
• No evidence of insurability required
• Premiums increase each year
• Level Premium (5, 10, 15, etc.)
• Overpayment in early years relative to yearly
  renewable
• Underpayment in later years

23
Term Insurance - pros

• Small budget and maximum protection needed
  (Highest coverage/premium )
• Need for protection is temporary
• Can be used to guarantee future insurability

24
Term Insurance - cons

• Term insurance premiums increase with age and
  reach prohibitive levels
• Not suitable for lifetime protection
• Not appropriate if you wish to save money for a
  specific need

25
Best Buys in Term Life Insurance, 250,000
26
Whole Life

• Cash value policy providing lifetime protection
• Ordinary
• Also straight life or continuous premium
• Lifetime protection to age 100 face amount paid
  at that time
• Level premiums
• Overpayment in early years under later
• Cash surrender value

27
Ordinary Life

• Appropriate if lifetime protection needed
• Can be used to save money
• Ex
• To pay estate taxes
• Capital gain Liquidity needs
• To leave a legacy
• Not sure how long you will need insurance

28
Limited Payment

• Premiums are level
• Payable only for stipulated time
• 10, 20, 25, or 30 yrs (or, single premium)
• Or to age 65 or 70
• Policy becomes paid up at that time
• Very high premiums cannot buy as much permanent
  insurance

29
Whole Life Variations

• Variable life insurance
• Universal life insurance
• Variable universal life insurance
• Current assumption whole life
• Indeterminate premium whole life

30
Variable Life Insurance

• Fixed premium policy level and guaranteed not
  to increase
• Guaranteed minimum death benefit
• Death benefit and cash surrender value vary
  depending on investment results
• Many investment options for reserve
• Investment risk borne by policyowner

31
Universal life

• Flexible premium policy
• Unbundling of component parts
• Two forms of universal
• Considerable flexibility
• Cash withdrawals permitted
• Favorable income-tax treatment

32
Unbundling

• Mortality charge monthly charge deducted from
  cash value for pure insurance protection
• Expense charges
• Acquisition expenses
• Administrative expenses
• Back or front-end load
• Interest rate credited (minimum/ current)

33
Two forms

• Level death benefit
• As cash value increases amount of pure insurance
  protection decreases
• Increasing death benefit
• Death benefit equals specified amount plus cash
  value

34
Universal Life Insurance Death Benefits
35
Flexibility

• Premiums can be varied
• Death benefit can be varied (Evidence of
  insurability needed to increase)
• Can add to cash value at any time
• Policy loans are permitted

36
Other

• Part or all of cash value can be withdrawn
• No interest death benefit reduced by amount of
  w/d may be surrender fee
• Policy loans allowed
• Tax treatment
• Death benefit is received income-tax free
• Interest credited not taxed in year credited

37
Limitations

• Misleading rates of return
• Incomplete disclosure
• How are expenses allocated between protection
  (pure insurance) and saving components
• Decline in interest rates
• Right of company to increase mortality charge
• Lack of firm commitment to pay premiums

38
Variable Universal

• Like universal except
• Many investment options
• No minimum guaranteed rate of interest cash
  values not guaranteed

39
Life Insurance Comparison Chart
40
Group Life Insurance

• Group term
• Group whole life insurance
• Conversion
• Coverage for retirees

41
Life Annuity Contracts

• What is an annuity?
• Types of annuities
• Timing of annuity payments

42
Annuities

• Annuity a periodic payment that continues for a
  fixed period or for the duration of a designated
  life or lives
• Purpose to provide lifetime income that cannot
  be outlived
• Advantage Investment income accumulates on
  tax-deferred basis taxed when paid out

43
Tax-deferred Compounding Builds Wealth Faster
44
Annuities

• Types
• Fixed Annuity
• Variable Annuity
• Equity Indexed

45
Fixed Annuity

• Pays periodic income payments that are guaranteed
  and fixed in amount
• Two rates
• Guaranteed rate minimum rate credited
• Current rate based on market conditions
• Accumulation period
• Liquidation Period

46
Illustration of the Accumulation Period and the
Liquidation Period
47
Fixed Annuity, cont.

• Immediate annuity first payment begins one
  interval from date of purchase
• Deferred annuity income payments begin at
  future date
• Annuitant dies death benefit paid out typically
  equal to sum of premiums or cash value, whichever
  is higher
• Single-premium deferred annuity
• Flexible premium annuity

48
Annuity Settlement Options

• Cash option lump sum or in installments
• Life annuity (no refund) provides life income
  while annuitant alive payments end at death
• Highest periodic income
• Suitable for income needs w/ no dependents
• Life annuity w/ guaranteed payments
• Usually 5, 10, 15 or 20 years

49
Annuity Settlement Options

• Installment refund pays life income to
  annuitant
• If annuitant dies, payments continue to a
  designated beneficiary until they equal the
  purchase price
• Joint and survivor pays benefits based on the
  lives of two or more annuitants
• Income paid until last survivor dies

50
Variable Annuity

• Pays lifetime income, but income payments vary
  depending on stock prices
• Considered an inflation hedge
• Premiums invested in portfolio of stocks and
  other investments
• Premiums purchase accumulation units
• More or less units depending on price

51
Variable Annuity

• At retirement, accumulation units converted into
  annuity units
• Number of annuity units remains constant, but the
  value of each unit changes with stock prices
• Ex 10,000 accumulation units converted into 100
  annuity units (monthly)
• If value of unit 10, receive 1,000 if value
  falls to 9.90, receive 990

52
Variable Annuities, cont.

• Typically provide a guaranteed death benefit
• Paid higher of
• Amount invested in contract
• Cash value of account
• Some pay enhanced benefits rising floor or
  stepped up benefits

53
Variable Annuities, cont.

• Fees and expenses
• Investment management charge
• Administrative charge
• Management and expense risk (ME) charge
  mortality risk associated with guaranteed death
  benefit
• Surrender charge
• Front and/or back-end loads
• Can easily exceed 2 of assets

54
Five Low-Cost Variable Annuities
55
Annuity Funds Performance and Fees
56
Equity-Indexed Annuity

• Fixed, deferred annuity that
• Allows participation in growth of stock market
• Provides downside protection against loss of
  principal if held to term
• Participation rate percentage of growth in
  stock index credited to account (25 to 90)
• Maximum percentage of gain
• Guaranteed minimum value (usually 90 of premium
  accumulated at 3)

57
Taxation of Annuities

• Do not qualify for retirement plan benefits
• Premiums not tax-deductible and are paid with
  after-tax dollars
• Taxable portion taxed as ordinary income
• 10 penalty for distribution prior to 59 ½
• Exclusion ratio investment in contract/
  expected return (expected total payments)
• Net cost is recovered using exclusion ratio
  income tax free

58
Why Purchase Health Insurance?

• To pay medical bills
• To replace lost income

59
Individual Health Insurance Coverage

• Purpose
• Cost concerns
• Eligibility
• Medical expense insurance
• Major medical insurance
• Disability income insurance
• Portability of group plans
• Long-term care insurance

60
Disability

• Replacement income while injured or disabled
• Totally disabled remain so until elimination
  period has ended
• Any v. own occupation definitions
• Any occupation to which suited
• Each and every duty of own occupation
• Taxed if paid by employer or b/4 tax
• Social Security any occupation

61
Group Health Insurance

• Eligibility
• Characteristics

62
Various Types of Group Health Insurance

• Basic and major medical
• Dental and vision
• Disability income
• Managed care
• Coordination of benefits

63
Various Types of Group Health Insurance (contd)

• Termination of benefits
• COBRA
• Coverage for elderly employees
• Coverage for retirees
• Taxation of group health benefits

64
Managed Care

• Managed Care v. Indemnity plan
• Indemnity pays certain of covered medical
  expenses
• Managed Care agrees to provide specified services
• MCP contracts with providers and users
• HMOs
• Preferred Provider Organization - PPOs
• Insurer receives discounted rates from service
  providers
• Members can use non PPO providers
• PCP paid on fee for service basis rather than as
  employee