6. RISK OF PREMATURE DEATH AND LIFE INSURANCE

education fund

- Covering educational expenses for family member. - *529 Plan (prepaid tuition plan) - *Coverdell education savings accounts: allows contributions of $2000 per year per chid until the child turns 18. (fund must be used by youngest child turns 30) Functions like a Roth IRA, not taxed. Has 10% penalty if withdraw past 30 years old. The beneficiary will not owe tax on the distributions if they are less than a beneficiary's qualified education expenses at an eligible institution.

Why people might need cash at death?

-income replacement -to pay off debts -cover final expenses -inheritance -charitable bequest -to pay estate taxes

Reasons for buying life insurance other than to provide cash at death?

-to provide cash at death -to prepare insurability for the future -tax-deferred investing

life expectancy

A figure indicating how long, on average, a person may be expected to live

emergency fund

Five hundred dollars in readily available cash to be used only in the event of an emergency; the goal of the First Foundation

fixed-amount option

a fixed amount is periodically paid to the beneficiary

dependency

a logical relationship that exists between the project tasks, or between a project task and a milestone

readjustment period

a one- or two-year period following the breadwinner's death

What is 2nd-to-die policy used for?

a policy on 2 lives thats pays out the second death

asset allocation

allocation of an investment portfolio across broad asset classes

interest option

beneficiary leaves the death benefit with the carrier, who pays the beneficiary interest on that amount

lump sum

beneficiary takes the money right away. carrier pays the beneficiary: policy face amount + interest from date of death through date of payment

grace period

brief period after the premium due date during which the policy remains in force if the premium is unpaid

estate clearance fund

cash needed for burial expenses, uninsured medical bills, and taxes

know how to determine the amount of life insurance needed under the capital needs (capital retention) approach (formula NOT on Official Cheat Sheet)

check Risk of Premature Death, Pt. II capital needed= annual income to be provided / rate of return on investments

misstatement of gender clause

death benefits equal the amount of insurance that the premium would have purchased for the correct gender

mortality

death rate

What is the goal of the capital needs (capital retention) approach to life insurance?

determine how much capital would be needed (= death benefit needed) in the event that the insured passes away prematurely to generate a certain amount of income for the survivors

premature death

dying with unfulfilled financial obligation

suicide clause

excludes coverage for suicide within 2 years (1 yr in colorado) of policy insurance

misstatement of age clause

if the insured's age is misstated, death benefits equal the amount of insurance the premium would have purchased at the correct age

co-beneficiary

more than one beneficiary

contingent (secondary) beneficiary

receives the death benefit if the primary beneficiary passes away before the insured does

Another term for 2nd-to-die policies

survivorship insurance

Difference between term and permanent insurance? Which is cheaper for young people? Which is generally too expensive for older adults?

term- you pay in advance for coverage for a period of time. CHEAPER for young people and too expensive for adults permanent insurance- a portion of your premium is used to purchase insurance and a portion is invested

mortgage redemption fund

the amount of monthly income needed by surviving family members is greatly reduced when monthly mortgage payments or rent payments are not required

life income (life annuity)

the carrier uses the death benefit to purchase an annuity for the beneficiary

beneficiary

the individual(s) who will receive the death benefit.

blackout period

the period from the time that Social Security survivor benefits terminate to the time the benefits are resumed

fixed-period option

the policy proceeds are paid to a beneficiary over some fixed period of time

Examples of types of permanent insurance

variable life and variable universal life - offer an opportunity for greater investment returns but also have greater risk