CHAPTER 8: INSURING YOUR LIFE

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CHAPTER 8 INSURING YOUR LIFE
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Basic Insurance Concepts

• Basic purposes of insurance
• Protect you and your dependents from losing the
  assets that youve already acquired.
• Shield you and your family from an interruption
  in your expected earnings.

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Insurance Planning Needs

• Auto Homeowners Insurance
• Reimburses for damage or destruction to existing
  assets
• Life Insurance
• Replaces income lost due to premature death
• Disability Insurance
• Replaces income lost due to disability
• Hospitalization Health Insurance
• Covers medical costs from illness or accident

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Concept of Risk

• Risk is defined as uncertainty with respect to
  economic loss.
• Insurance planning is used to reduce the risk
  that losses will cause financial devastation.
• Risk can be dealt with in the following ways

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Risk Avoidance

• Not participating in activities that have the
  risk of loss.
• Examplenot driving to avoid the risk of an auto
  accident.
• Risk avoidance is not always practical or
  possible!

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Loss Prevention and Control

• Prevention reduces the chance that a loss will
  occur.
• Example Driving within the speed limit reduces
  the likelihood of an accident.
• Control reduces the severity of a loss once it
  occurs.
• Example Wearing a seat belt can minimize the
  effects of an accident.

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Risk Assumption

• You bear the risk of loss yourself.
• Example When your calculator gets stolen, you
  bear the cost out of pocket.
• Transferring Risk
• Pay someone else to bear your risk of loss.
• Example You transfer the risk to the insurance
  company when you buy an insurance policy.

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Underwriting

• Process in which the insurance company decides
  whom to insure and the rate to be charged.
• Company must guard against adverse selection, a
  disproportionate number of bad risks.

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It is economically feasible for insurance
companies to assume risk because they

• Combine the loss experiences of large numbers of
  people.
• Calculate probability of frequency of occurrence
  and amount of loss using past experience.
• Charge rates in proportion to level of risk.

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Benefits of Life Insurance

• Financial protection for dependents
• Provide financial security for those who depend
  on your income.
• Prevent a decline in their standard of living.

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Protection from creditors

• Before death, cash value in life insurance
  policies usually protected against legal
  judgments and bankruptcy proceedings.
• After death, possible to keep benefits out of
  estate and away from creditors.

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Tax benefits

• Savings portion grows tax free unless withdrawn.
• For taxpayers in higher income brackets, these
  relatively low returns become more attractive as
  income taxes take a greater bite from current
  income and short-term capital gains.
• Proceeds not income taxable to beneficiaries.
• Possible to avoid estate taxation on proceeds.

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Medium for savings

• Provides a means of forced savings for those who
  would not do so otherwise.
• Provides preservation of capital for those who
  desire a relatively safe, conservative
  investment.

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Do You Need Life Insurance?

• Consider life insurance
• If you have dependents who count on your
  financial support.
• If you have debts you would like to clear, like a
  home mortgage.
• You may not need life insurance
• If no one depends on your support.
• If you are a child.

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Techniques for estimating life insurance needs

• 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 Is Right For You?
Step 1 Assess Familys Economic Needs

• Family income
• Additional expenses
• Special needs of dependents
• Pay off debts
• Liquidity

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Step 2 Evaluate 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

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Step 3 Calculate the Difference

• This is the amount of life insurance needed to
  provide your family with the desired standard of
  living.

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What Kind of Policy Is Right for You?
1. Term insurance

• Benefit paid if insured dies during the policy
  period.
• When time period over, no more protection unless
  renewed.
• No savings component.

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Types of Term Insurance

• Straight term
• Coverage remains the same while premiums
  increase.
• Decreasing term
• Premiums remain the same while coverage
  decreases.

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Important features to look for in term insurance

• Renewability
• Allows insured to renew policy without evidence
  of insurability.
• Convertibility
• Allows insured to convert to whole life policy
  without evidence of insurability.

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Advantages of Term

• Economical way for young families to purchase
  large amounts of life insurance.
• Provides for needs that will disappear over time.

Disadvantages of Term

• Premiums become more costly as you get older.
• Does not build cash value.

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2. Whole life insurance

• Provides death protection plus a savings feature
  called cash value.
• If policy canceled prior to death, insured has
  right to cash value this is the nonforfeiture
  right.

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How the cash value accumulates in a 200,000
whole life policy
200,000
100,000
Cash Value
0
30 40 50 60 70 80
90 100
Age of insured
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Types of Whole Life Policies

• Continuous premium (straight life)
• Level premiums paid until death or cancellation
  of policy.
• Limited payment
• Level premiums paid for a specified number of
  years insurance remains in force until death.
• Single premium
• Lifetime coverage purchased with a single
  premium.

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Advantages of Whole Life

• Provides a savings vehicle.
• Cash value can be borrowed against.
• Premiums remain constant.
• Cash value accumulates tax-free until redeemed.

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Disadvantages of Whole Life

• Dollar for dollar provides less death protection
  than term for young people.
• Relatively low return on savings.
• Loans must be repaid with interest or
• Tax penalties may be assessed on cash values
  withdrawn early.
• If you have a loan outstanding when you die, that
  amount is subtracted from the face value of your
  policy.

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3. Universal life insurance

• Provides death protection plus a savings feature.
  
• Premiums are unbundled into 2 separate
  accounts.
• Savings grow at the current interest rate vs.
  guaranteed minimum rate.
• Provides flexibility in premiums paid and death
  benefit.
• Understand the risks before you buy!

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4. Other Types of Life Insurance

• Variable life insurance
• Provides death protection plus a savings, or cash
  value, feature.
• Cash value can be invested in a variety of mutual
  funds for greater possible return.
• Returns not guaranteed and actual death benefit
  can vary.

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• Variable universal life insurance

• Combines the flexibility of premium payment
  feature of universal with the investment choices
  offered by variable.
• Group life insurance
• Usually term insurance that is offered through
  employers.
• Premiums usually lower than those on individually
  purchased policies.

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• Credit and mortgage life insurance

• Type of decreasing term insurance.
• Pays off outstanding loan balance if borrower
  dies before loan is repaid.
• Usually a costly form of coverage.
• Consider increasing your regular term insurance
  coverage instead.
• Industrial life insurance
• Whole life policies with small face amounts.
• For low-income families.

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Buying Life Insurance

• Know the amount and type of coverage you need.
• Compare costs and features.
• Select a large, highly rated, financially secure
  company.
• Select a reputable agent.

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Key Life Insurance Contract Features

• Beneficiary clause
• Settlement options
• Policy loans
• Premium payments
• Grace period
• Nonforfeiture options
• Policy reinstatement
• Change of policy

• Multiple indemnity
• Disability clause
• Guaranteed purchase options
• Suicide clause
• Exclusions
• Participation
• Living benefits
• Viatical Settlement

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THE END!