Life insurance- Basics

Calculate an Individual's Life Value

The agent must do the following: Determine the insured's after-tax income from the present date until retirement. Deduct the insured's annual expenses for food, clothing, medical and other expenses. Calculate the number of years to retirement. Estimate the effect inflation would have on income over the required number of years.

Natural Premium

The amount of premium that must be collected from each member of a group composed for the same age, sex and risk in order to pay $1,000 for each death that will occur in the group each year.

Limit of Liability

The face value/amount or death benefit of an individual life insurance policy, subject to any exclusions or riders as applicable, minus any outstanding policy loans and interest payments due to the insurer. =Face Amount- (Outstanding Policy Loan + Loan Interest)

Transferring

The most effective way to handle risk is to do this so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring. Several ways to do this with risk, such as hold harmless agreements and other contractual agreements, but the safest and most common method is the purchase insurance coverage.

Retention

The planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose is: 1. Toe reduce expenses and improve cash flow; 2. To increase control of claim reserving and claims settlements; and 3. To fund for losses that cannot be insured.

Estate Creation

The purchaser of life insurance. Is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, he/she will have an estate of at least that amount the moment the first premium is paid. There is no other legal method whereby an immediate creation at such a small cost.

Mortality

The ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population.

Family Dependency Period

This is the period when, should the insured die prematurely, the surviving spouse will have dependent children to support. The family's income need will be greatest during this period.

Human Life Value Approach

This methods required the calculation of the probable future earning of the insured using wages, inflation, the number of years to retirement, and the time value of money. Will give the insured an estimate of what would be lost to the family in the event of the premature death of insured.

Preretirement Period

This period after the children are not longer dependent upon the surviving spouse qualifies for Social Security survivor benefits ("Blackout Period") The income needs of the surviving spouse lessen during this period; however, until the surviving spouse reaches age 60, SS benefits are not available.

Cross Purchase Method

Used when each partner buys a policy on the other.

Entity Purchase Method

Used when the partnership buys the policies on the partners.

Stock Purchase Method (Privately Owned)

When each stockholder buys a policy on each of the others.

Stock Redemption Method

When the corporation buys one policy on each shareholder.

Key Person Insurance

A business can lessen the risk of such loss by use of this insurance. With this coverage, the business is the applicant, owner, premium payer, and beneficiary. In the event of death of a key employee, the business would use the money for the additional cost of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if they die, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed to except that the employee would need to give permission for this coverage.

Buy-Sell Insurance

A legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. Also referred to as a business continuation agreement. Two principal types of buy-sell agreements for partnerships and corporations.

Sharing

A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk sharing agreement.

Insurable Interest

According to state law every person has has this in: Himself or herself; Any person upon whom he/she depends wholly or in part for education or support; Any persona under a legal obligation for the payment of money or respecting property or services which may be delays or prevented by death or illness; and Any person upon whose life any estate or interest vested in him/her depends. Applies to the policyowner, not the beneficiary. Must exist at the time of application but not necessarily at the time of the loss occurs.

Bequests

An insured may wish to leave funds to their church, school, or other organization at the time of their death.

Reduction

Attempt to lessen the possibility or severity of a loss. Would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.

Retirement Period

During this period, the surviving spouse's working income ceases and his or her Social Security benefits begin. Since the surviving spouse's standard of living does not lessen, his or she will require an income comparable to the Preretirement Period during this time.

Avoidance

Eliminating exposure to a loss.

Retention of Capital

Enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without invading the principal.

Liquidity

In life insurance refers to availability of cash to the policy owner. Some life insurance policies offer cash values that can be borrowed against at any time and used for immediate needs.

Needs Approach

In purchasing life insurance is based on the predicted needs of a family after the premature death of the insured. This method provides the proper amount of coverage immediately. When using this approach, always assume that the insured's death will occur immediately.

Mortality Tables

Indicate the number of individuals within a specified group starting at a certain age, who are expected to be alive at a succeeding age. Indicate to a life insurance company the natural premium for an individual applying for life insurance.

Debt Cancellation

Insurance may be used to crate a fund to pay off debts of the insured such as home mortgage or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan.)

Retirement Fund

Insurance proceeds may be used as a source of retirement income.

Emergency Reserve Funds

Insurance proceeds may be used to assist in paying for sudden expenses following the death of insured, such as travel expenses and lodging for family members coming from a distance.

Education Funds

Insurance proceeds may may be used to pay for children's education expenses so they can remain in school, or sometimes a surviving spouse who has worked in the home caring for children will need to receive education or training in order to re-enter the job market.

Split Dollar

Is an arrangement where the employer and employee agree to purchase and fund life insurance on an employee. In the most common form, the employer pays the part of the premiums that equals the annual increase in the cash value of the policy, while the employee pays the balance. Should an employee die, the employer recovers the total of its payments from the policy proceeds, with the balance being paid to the employee's beneficiary.