FIN 201: Chapter 12 - Life Insurance
Policy Loan Provision
Allows Holder to borrow against cash value - Holder must wait 1, 2 or 3 years for this provision to begin
Estimating Life Insurance Needs: The DINK Method
Dual Income No Kids: 1/2 debts + Funeral Expenses ex: Mortgage = $140,000 Other Debt = $10,000 Funeral Expenses = $5,000 Insurance needed = $80,000 = (140,000 + 10,000)/2 + 5,000
Life Insurance Annuity
Financial contract written by an insurance company that provides holder with a regular income.
Waiver of Premium Disability Benefit
If holder becomes permanently disabled, the premium fee's are waived. This option generally raises the premiums
Estimating Life Insurance Needs: The Easy Method
It is 70% of the holders salary for seven years while the familia adjusts. ex: For a salary of $100,000, the Life Insurance needed will be $490,000 which comes from: 100,000 x (0.70) x 7 yrs
What is Life Insurance?
It is a policy honoured by an insurance company guaranteeing payout of a certain amount to the named beneficiaries, after the death of the holder. Sometimes payout comes before death.
Term Life Insurance Options: Multi-year level term (or straight term)
Most popular form of term insurance that guarantees the same premium for the life of the policy.
Estimating Life Insurance Needs: The "Non-working" Spouse Method
Multiply the number of years until the youngest child reaches 18 by 10,000. ex: Youngest child is 4yrs. Life Insurance needed is $140,000 (18-4) x 10,000
Mutual Life Insurance Companies
- 25% are of this type - Owned by policy holders - With participating policies, the premiums are higher than with non-participating policies - Part of the Premium is refunded to the policy holders annually. This is called the POLICY DIVIDEND.
Cost of Living Protection
- Adjusts benefits for Inflation
Incontestability Clause
- After the policy has been in force for a period of time (like 2 yrs), the company isn't able to dispute it's validity for any reason, not even fraud or tampering by rival ninja clans
General Insurability Option
- Allows holder to buy additional insurance without needing to pass a physical
Choosing Settlement Options: Limited Installment Payment
- Beneficiaries are paid for a specific number of years after the holder passes
Term Life Insurance Options: Conversion Option
- Can exchange term policy for whole life policy without having a physical (This option increases the premium)
Universal Life
- Combines term insurance and investment elements - Gives holder the most control - Can pay premiums at anytime in almost any amount - Allows you to access cash value by a policy loan or withdrawal - The increase in the cash value of this policy reflects the interest earned on short term loans.
Credit Life Insurance
- Covers Debts such as Car Loan, which are then paid off if holder dies - Also protects lenders - It is extensive protection and is generally considered a waste of resources
Things to consider when choosing an agent
- Does the Agent have a professional designation like a Chartered Life Underwriter (CLU)? - Is the agent willing to find a policy that fits you personally or are they just pushing their own agenda - Do they inquire about your financial plan? - Do you feel pressured?
Accidental Death Benefit - Double Indemnity
- Double benefit if holder dies from accident specifically covered by the policy - Comes with an age limit - Premium is higher - Holder may choose different "accident" coverages
Things to consider when buying insurance:
- Examine both private and public sources - Look up companies rating in the A.M. Best or with other rating agencies - Ask friends and colleagues
Misstatement of Age Provision
- Holder only gets the benefit of their true age, so if they lie and get caught, the death benefit will be equal to their true age
Health Care and Reconciliation Act of 2010
- Imposes a 3.8% income tax on high income individuals, as of 2013. The tax will be applied on interest, dividends and capital gains.
Second to die option / Survivorship
- Insures two lives, usually a husband and wife - pays out after the second person dies
Why use an "Interest-adjusted index" to compare policies?
- It takes into account the time value of money (The lower the index, the lower the cost) - Helps you make cost comparisons among insurance companies
Provisions: Non-forfeiture
- Keep accrued benefits if you drop the policy -
What are the requirements to "revive" a lapsed policy if it hasn't been cashed out?
- Must re-qualify as an acceptable risk - Must pay overdue premiums with interest - Time limit of 1-2 years
What is a stock Life Insurance Company
- Owned by shareholders - 75% are of this type - Sell non-participating policies (doesn't provide policy dividends at the end of the year, though has cheaper premium) - If you want to pay the same premium every year, choose a non-participating policy with guaranteed premiums.
Variable Life Policy
- Pay out varies based on the yield earned by separate funds (stocks, bonds, etc). - Offers a Minimum death benefit payment, however the actual death benefit can be greater than the minimum depending on the return from dollars invested in stocks or bonds, etc - The holder assumes the investment risk
Limited Payment Policy
- Pay premiums for a stipulated period, usually around 20 or 30 years, or until holder reaches specific age (65) - The Policy then becomes "Paid Up" and the holder remains insured for life.
Choosing Settlement Options: Life Income Option
- Payment to the beneficiary for life - Payments are primarily based on the age and sex of the beneficiaries at the time of the holders death
Choosing Settlement Options: Proceeds Left with the Company
- Pays interest to the beneficiary
Accelerated Benefits / Living Benefits
- Pays to those who are terminally ill, before they die
Term Life Insurance Options: Return of Premium
- Policy refunds every penny of the premiums if one outlives the defined term. - You must continue to make premium payments - They cost 30% - 50% more than regular prices
Whole Life Insurance (Straight Life Insurance)
- Premium is paid over entire life of policy holder - Amount of the Premium depends on the age when the holder signs up - Provides death benefits and accumulates a CASH VALUE (What you receive if you give up the insurance) - You can borrow against the cash value or draw it out at retirement. - The Premiums will be higher as compared to Term Life policies
Endowment Life Insurance
- Provides Coverage from the beginning of the contract to Maturity - Guarantees payment of a specified sum to the insured even if still living at the end of the endowment period.
Types of Life Insurance Policies: Term Life Insurance
- Provides protection for a specific period of time - Also known as Temporary Life Insurance - (Life insurance matters when raising small children) - If you stop paying premiums, coverage stops - Renew-ability: You can renew the policy at the end of the term, without getting a physical, up to a certain age, if you have this option.
When comparing policy costs, compare those affected by:
- Selectivity of policy holders - Their cost of doing business - Return on investments - Mortality rate among their policy holders - Policy features and competition from other firms
Group Life Insurance
- Supplemental Term Insurance - Often provided by an employer - No physical required - Often much more expensive
Tell us about annuities
- They're tax deferred investment plans - The interest on the principal, as well as compounding interest, builds up free of current income tax - Those who expect to have a prolonged life will benefit the most from annuities
Automatic Premium Loans
- Uses the accumulated cash value to pay the premiums if you do not pay it during the grace period
Adjustable Life Policy
- Whole Life Insurance policy, but holder can change the policy as their needs change. - You can change your premium payments to increase or decrease coverage
What are the steps in Obtaining a Policy?
1. Apply 2. Provide Medical History 3. Usually no physical for group contract 4. Read every word of the contract 5. After holder buys the policy, you have 10 days to rescind it 6. Give the beneficiaries and lawyer a copy
When is it a good idea to switch policies?
Switch if the benefits exceed the costs of getting another physical and paying policy setup costs (The older the holder, the higher the premiums) (Half of those who buy whole life or universal life insurance drop the policies within 10 yrs.)
Term Life Insurance Options: Decreasing Term Insurance
The Premium stays the same, though the amount of coverage decreases as the holder ages. This option is good for things like Mortgage, because a mortgage generally decreases, and the proceeds can pay off the remainder of the mortgage.
What is the premium based on?
The average life expectancy and the projected payouts for the deceased person(s)
What is a beneficiary?
The recipient of the Holders Life Insurance payout
Choosing Settlement Options: Lump Sum Payment
This is the most common option, as huge lumps sums of money are generally desirable.
Estimating Life Insurance Needs: The "Family Need" Method
This method is more thorough than the first three because it also considers employer provided insurance, social security benefits, income & assets. So it really looks at what your truly need, taking into consideration what provisions you already have in store.
Policy "Rider"
This modifies a policy by adding or excluding conditions or altering benefits
What is the purpose of Life Insurance?
To protect the dependent from financial loss at the time of the caregivers passing. Other uses include: - Paying off home mortgage, or other debts - To leave as part of your estate - To Save $ for retirement, education for kids - Alternative income
Why do people buy annuities?
To supplement retirement income and shelter their income from taxes
What is the length of the late payment grace period?
Usually 28-31 days
Suicide Clause
Valid for the first two years, if holder commits suicide with this time frame, the death benefit will be equal to the amount of premiums paid.