Fin 350 Chapter #11 : Life Insurance

Types of Life Insurance (2)

1) term insurance 2) cash value life insurance

Decreasing Term

is a form of insurance where the face amount gradually declines each year

Estate Clearance Fund

is needed immediately when the family head dies

Two forms of Universal Life Insurance (2)

1) Option A: pays a level death benefit during the early years, as cash value increases, the risk declines 2) Option B: provides for an increasing death benefit, as cash value increases, death benefit increases

Types of Term Insurance (6)

1) Yearly renewable term 2) 5,10,15,20,25, or 30 year term 3) term to age 65 4) decreasing term 5) reentry term 6) return of premium term insurance

Industrial Life Insurance (4)

1) a class of life insurance that as issued in small amounts 2) premiums were payable monthly or weekly 3) an agent of the company collected the premiums at the insureds home 4) more than 9 out of 10 polices where cash value policies

Sandwiched Families & premature death (2)

1) a son or daughter with children provides financial support or other services to one or both parents 2) a working spouse needs a substantial amount of life insurance

Common features of Current Assumption Whole Life Insurance (4)

1) accumulation account reflects cash value under the policy 2) if the policy is surrendered, a surrender charge is deducted from the accumulation account 3) guaranteed interest rate and current interest rate are used to determine cash values 4) a fixed death benefit and maximum premium level at the time of issue are stated in the policy

Life Expectancy has risen in recent years due to (4)

1) breakthroughs in medical science 2) rising real incomes 3) economic growth 4) improvement in health and sanitation

Needs Approach (2)

1) can be used to determine the amount of life insurance to purchase 2) the total amount of existing life insurance and financial assets is subtracted from the total amount needed

If retirement needs are not met by Social Security benefits, you can obtain additional income from (4)

1) cash-value life insurance 2) individual investments 3) retirement annuity 4) IRA

LIMRA''s reasons why people are underinsured & delay in purchasing life insurance (3)

1) consumers believe life insurance is too expensive even though premiums have declined 2) consumers have difficulty in making correct decisions regarding life insurance 3) consumers procrastinate and never get to buying life insurance

Capital Retention Approach (2)

1) estimates life insurance based on the assumption that income-producing capital will be preserved and not liquidated 2) preserves the capital needed to provide income to the family

Disadvantages of a Decreasing Term Insurance (2)

1) if you become uninsurable, you must convert the remaining insurance to permanent plan to freeze the remaining amount of insurance 2) it does not provide for changing needs, such as a birth of a child

In the Life Income to the Surviving Spouse, two conditions must be considered (2)

1) income during the blackout period 2) income to supplement Social Security benefits after the blackout period

Whole Life Insurance (2)

1) is a cash-value policy that provides lifetime protection 2) a stated amount is paid to a designated beneficiary when the insured dies, regardless when the death occurs

Legal Reserve (2)

1) is a liability item that must be offset by sufficient financial assets, otherwise officials may declare the insurer insolvent 2) the purpose is to provide lifetime protection

Savings Bank Life Insurance (SBLI) (2)

1) is a type of life insurance that was originally sold by savings banks in NY, MA and CT 2) the objective is to provide low-cost life insurance to consumers by holding down operating costs and payment of high sales commissions

Ordinary Life Insurance (2)

1) is appropriate when lifetime protection is needed 2) is a level-premium policy that provides cash values and protection to age 121

Costs associated with premature death (4)

1) loss of human life value 2) family's share of deceased breadwinners earnings 3) additional expenses (funerals, estate settlement costs) 4)) insufficient income resulting in reduction in standard of living

Many insurers sell policies with (lower/higher) rates of risk (2)

1) lower rate of risk 2) policies are carefully underwritten and sold to individuals whose health, age, etc. have a favorable mortality rate

Indexed Universal Life Insurance is a variation of ULI with certain key characteristics such as (3)

1) minimum interest rate guarantee 2) additional interest may be credited to the policy based on investment gains of a stock market index 3) there is a formula for determining the amount of additional interest credited to the policy

Limitations of Universal Life Insurance (4)

1) misleading rates of return 2) declining interest rates 3) right to increase the mortality change 4) lack of firm commitment to pay premiums

Special Needs Families should consider (4)

1) mortgage redemption fund 2) educational fund 3) emergency fund 4) mentally or physically challenged family members

Reasons why U.S lag behind countries in life expectancy (5)

1) obesity 2) bad diets 3) lack of health insurance 4) minority group have shorter life expectancy 5) infant mortality rate is higher

Endowment Insurance (2)

1) pays the face amount of insurance if the insured dies within a specified period 2) if the insured survives to the end of the period, the face amount is paid to the policy holder

Variable Life Insurance Features (3)

1) policy is a permanent lifetime contract with a fixed premium 2) the entire reserve is held in a separate account and is invested in common stock or other investments 3) cash-surrender values are not guaranteed and there are no minimum guaranteed cash values

Term Insurance Limitations

1) premiums increase with age at an increasing rate and eventually reaches prohibitive levels 2) its inappropriate if you wish to save money for a specific need

Capital Retention Approach can be calculated by (3)

1) preparing personal balance sheet 2) determine the amount of income-producing capital 3) determine the amount of additional capital needed

Term Insurance is appropriate for people when (3)

1) the amount of income can be spent of life insurance is limited 2) the need for protection is temporary 3) it can be used to guarantee future insurability

Limited Payment Life Insurance (2)

1) the insurance is permanent, and the insured has lifetime protection 2) the premiums are level, but they are paid for a certain period

Insurance is Economically Justified if (2)

1) the insured has earned income 2) others are dependent on the insured's earned income

Term Insurance (4)

1) the period of protection is temporary, such as 1,5,10,20 years 2) approriate when income is limited, or when there are temporary needs 3) most policies are renewable 4) most policies are convertible, allowing them to change to cash value insurance

Income During Dependency Period (2)

1) the period until the youngest child reaches the age of 18 2) the family should receive income during this period so that the surviving spouse can remain at home if necessary

Differences between Variable Life Insurance and Universal Life Policy (2)

1) the policyholder determines how the premiums are invested, which provides considerable investment flexibility 2) the policy does not guarantee a minimum interest rate or cash value

Two-Income Earners & premature death (2)

1) the premature death of one income earner can cause a decent amount of economic insecurity for the surviving family members because both incomes are needed to maintain the standard of living 2) both income earners need substantial amounts of life insurance

Characteristics of Ordinary Life Insurance (2)

1) the premiums are level throughout the premium-paying period 2) the excess premiums paid during the early years are accumulated at compound interest, then used to supplement the inadequate premiums paid during the later years

Traditional Families & premature death (2)

1) the working parent in the labor force needs substantial amounts of life insurance 2) if the working spouse dies with a insufficient amount of life insurance, the families standard of living could decrease in a major way

Universal Life Insurance Features (5)

1) unbundling protection and saving component 2) two forms of ULI 3) flexibility 4) cash withdrawals permitted 5) favorable income-tax treatment

Income During Readjustment Period (2)

1)is the one or two year period following the breadwinners death 2) during this time, the family receives the same amount of income as when the breadwinner was alive

What is Tom's Total Needs?

Cash Needs + Income Needs + Special Needs $35,000 + $204,000 + $400,000 = $639,000

Cash Needs example: Tom Estimates her family will need $15k for funeral expenses. Although insured under group health insurance plan, certain medical services are excluded. He must pay annual deductible and coinsurance charges. He estimates the family will need $5k for uninsured medical expenses, monthly credit card and car loan total $12k. In addition he estimates the cost of probating his will and attorney fees will be $3k and no federal estate taxes will be payable How much will Toms cash needs be?

Funeral Costs + Uninsured Medical + Card and Auto Debts + Attorney Costs $15,000 + $5,000 + $12,00 + $3,000 = $35,000 needed

Special Needs example: Tom would like the mortgage to be paid off if he dies. The present mortgage balance is $200k. He also wants to establish an emergency fund of $50k for the family, and an educational fund of $150k for his son. What is Toms Special needs total?

Mortgage + Emergency Fund + Education Fund $200,000 + $50,000 + $150,000 = $400,000

Income Needs example: Tom wants to provide monthly income to his family during the readjustment and dependency period until his son reaches 18. Tom and Jen's preferred take home pay is $6k/month. Because their income goal is $4.5k they fall below by $1k. He wants the family to receive $4.5k monthly during the 17 years of dependency and readjustment period, because he believes if they receive 75% of that amount they can keep their standard of living Toms family needs an additional $24k to provide monthly income of $1k during the 2 year readjustment period, and another $180k to provide monthly income for the 15 year dependency period. What is Toms Incomes Needs?

Readjustment period + Dependency Period (24 months x $1,000) + (180 months x $1,000) $24,000 + $180,000= $204,000

Variable Life Insurance

a fixed premium policy in which the death benefit and cash values according to the investment experience of a separate account maintained by the insurer

Universal Life Insurance

a flexible premium policy that provides protection under a contract that unbundles the protection and saving components

A major advantage of a modified life policy is that

applicants for insurance can purchase permanent insurance immediately even though they cannot afford the higher premiums for a regular whole life policy

Income-Producing Assets

calculated by subtracting the liabilities, cash needs, and non-income producing assets from total assets

Premature Death

can be defined as the death of a family head with outstanding unfulfilled financial obligations, such as dependents to support, children to educate, and mortgage to pay off

Second-to-Die Life Insurance

form of life insurance that insures two or more lives and pays the death benefit upon the death of the second or last insured

Blended Families & premature death

in remarried families, the need for life insurance on both family heads is great and the death of one of them could reduce the families standard of living

Additional Capital Needed

involves a comparison of the income objective with other sources of income, such as Social Security survivor benefits

Current Assumption Whole Life Insurance

is a nonparticipating whole life policy in which the cash values are based on the insurers: current morality, investments and expense experience

Reentry Term

is a policy in which renewal premiums are based on lower mortality rates if the insured can demonstrate acceptable evidence of insurability

Return of Premium Term Insurance

is a product that returns the premiums at the end of the term period provided the insurance is still in full force

Group Life Insurance

is a type of insurance that provides life insurance on a group of people in a single master contract

Modified Life Policy

is a whole life policy in which premiums are lower for the first 3-5 years, then get higher

Net Amount at Risk

is the difference between the legal reserve and the face amount of insurance

Balance Sheet

lists all assets and liabilities

Single-Premium Whole Life Insurance

provides lifetime protection with a single premium

Blackout Period

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

Ordinary Life Insurance has limitations because

some people are still underinsured after the policy is purchased

Cash-Surrender Values

the amount paid to a policy holder who surrenders the policy

Single-Parent Families & premature death

the premature death can cause great economic insecurity for the surviving children * most of these families already have income below the poverty line

Single People & premature death

the premature death is not likely to create a financial problem other than needing a modest amount for funeral and uninsured medical bill expenses

Human Life Value

the present value of the family's share of the deceased breadwinner's future earnings

Preferred Risks are

when life insurers sell policies at lower rates to individuals