Chapter 8 Insuring Your Life

Risk assumption

choice to accept to bear the risk of loss (accepting the risk if choose to not buy health insurance)

What does interest only mean

company keeps proceeds for specified time, beneficiary receives interest payments When there's no current need for principal

Insurance policy

contract between insured and insurer under which insurer agrees to reimburse insured for any losses suffered according to specified terms

What is multiple-of-earnings method

determines amount of life insurance coverage needed by multiplying gross annual earnings by some selected (random) number Rule of thumb: should equal 5 to 10 times current income Fails to consider financial obligations and resources

What does fixed period mean

face amount of policy, with interest earned, is paid to beneficiary over fixed time period

Underwriting

process used by insurers to decide who can be insured and to determine applicable rates that will be charged for premiums

Insurance premium

relatively small certain amount you pay in exchange for promise the insurance company will reimburse you if you suffer a covered loss

Actuarial data

statistical information to estimate the risk of loss for given population

Where do payable death benefits come from

Accumulated pension plans Profit-sharing programs

What are the living benefits

Allows insured to receive a percentage of death benefits form a whole or universal life policy prior to death

Policy loan

An advance, secured by cash value of whole life policy, made by insurer to policyholder Subtracted from the proceeds to the beneficiary

Annual renewable term policy

Annual premium can increase each year for a straight term policy (not popular today) Females pay less than males for coverage Premiums increase sharply with age

How is universal life flexible

Annual premium can increase or decrease cuz cost of death protection may be covered from either annual premium or accumulation account (i.e. cash value) Death benefit can increase or decrease

What if there is a convertibility provision

At stated times allows you to convert term policy into a comparable whole life policy

What are the exclusions

Aviation, war, hazardous occupation or hobby

Key life insurance contract features

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

What does fixed amount mean

Beneficiary receives proceeds in regular payments

Social security survivor's benefits

Benefits under social security intended to provide basic, minimum support to families faced with loss of a principal wage earner

What is whole life insurance savings feature

Cash value, results from investment earnings on paid-in insurance premiums Longer insured keeps policy in force, greater cash value

Disadvantages of universal life

Changing premium and protection levels Charges or fees (heavy fees compared to other policies)

Steps in buying life insurance

Compare costs and features Select a large and highly rated financially secure company Choose an agent

Disability clause

Containing a waiver-of-premium benefit alone or coupled with disability income

Types of whole life policies

Continuous premium Limited payment Single premium

Premium payments

Contracts specified when premiums are due

What is Limited payment

Covers entire life but the premium payment is based on a specified period during which you pay a level premium On completion of scheduled payments, insurance remains in force at its face value for the rest of insured's life Can be used as part of savings or retirement plans if have life insurance already in force that is sufficient

Health Insurance

Covers medical costs when sick or become disabled

What is universal life savings feature

Credits cash value at "current" interest rate (current may be higher than guaranteed min rate)

Unbundling

Death protection portion and savings portion are identified separately in its premium

Whole life insurance

Designed to offer ongoing insurance coverage over course of insured's entire life Offers a savings feature (cash value)

How to access family's total economic needs

Determine income needed to maintain adequate lifestyle (monthly amount), extra expenses if income producer dies, special needs of dependents, debt liquidation, and liquidity

What is the Needs Analysis Method

Determines amount of insurance coverage needed by considering a person's financial obligations (needs) and available financial (resources) in addition to life insurance

What is a waiver-of-premium benefit

Excuses payment of premiums on life insurance policy if insured becomes totally and permanently disabled prior to age 60

Benefits of life insurance

Financial protection for dependents Protection from creditors Tax free If it has a cash value, can be a savings vehicle

Advantages of universal life

Flexibility Savings feature

What are extra expenses if income producer dies

Funeral costs Child care Housekeeping

What if term policies offer a renewability provision

Gives you the option to renew policy at its expiration, even if you have become uninsurable due to an accident / other illness during original policy period Premium will increase Renewable at end of each term until insured reaches 65 or 70

Who may tend to use term policies to meet specific coverage needs

Healthy older people with adequate financial resources

Life Insurance

Helps replace lost income if premature death occurs Provides funds so loved ones can help their home Maintain acceptable lifestyle Pay for education and meet other special needs

Assets that can provide proceeds after selling

Home/Real estate, jewelry, stocks, bonds, etc

Determine liquidity

If a high percentage of wealth is in illiquid assets, cash life insurance proceeds can pay bills and maintain assets until they can be sold at fair market value

How to know if you need life insurance

If there are dependents counting on you for financial support, debt, assets, home mortgage, children (suffer the greatest loss),

What is Continuous premium (Straight life)

Individuals pay a level premium each year until they either die or exercise a nonforfeiture right Offers greatest amount of permanent death protection and the least amount of savings per premium dollar If whole life is needed, straight life gets the most of life insurance dollars Once needs are reduced, convert policy to smaller amount of paid-up insurance

Advantage of term life

Initial premiums are lower than other insurance types Economical way to buy large amount of protection over a relatively short period to cover needs that disappear over time

Term life insurance

Insurance that provides only death benefits, for a specified period, does not provide for accumulation of cash value Can be bought for many different time increments (5, 10, 30 years) Premiums can be paid annually, semiannually, or quarterly) (most common is straight and decreasing term)

What is extended term insurance

Insured uses accumulated cash value to buy a term life policy for same face value as the lapsed policy Coverage determined by protection bought by single premium at present age

What does life income mean

Insurer guarantees to pay beneficiary certain amount for rest of life (based on sex, age when benefits start, life expectancy, policy face value, and interest rate assumptions

Nonforfeiture right

Life insurance feature giving whole life policyholder, upon cancellation, the portion of those assets that were set aside to provide payment for future death claims

What are special needs of dependents

Long-term nursing care for disabled or chronically ill children Emergency fund for unexpected financial burdens College education fund for children

A way to keep cost of whole life down

Low-load whole life insurance

What are settlement options (ways of paying proceeds)

Lump sum Interest only Fixed period Fixed amount Life income

What financial resources can be available after death

Money from savings Investments Social security survivor's benefits Proceeds from employer-sponsored group life insurance policies Death benefits payable Proceeds from selling assets Income earned by surviving spouse or children

Two methods to find out how much life insurance is right

Multiple-of-earnings method Needs analysis method

How are the savings rates on whole life policies

Normally fixed and guaranteed to be more than a certain rate Ex. 4 to 6 percent

Disadvantages of term life

Offers only temporary coverage (renewal can be a problem if then have factors that make it difficult to qualify)

Through underwriting, insurance companies try to guard against adverse selection, which happens when..

Only high-risk clients apply for and get insurance coverage (means a disproportionate number of bad risks)

Guaranteed purchase option

Option giving policyholder the right to purchase additional coverage at stipulated intervals without evidence of insurability

Two options of nonforfeiture instead of giving policy's cash value

Paid-up insurance Extended term insurance

What happens to the premium of universal life

Part pays administrative fees and cost of death benefit Remainder is put into cash value (savings) portion, earning a certain return rate Savings portion must have enough to buy death protection at all times When cash value grows, amount of coverage must increase to retain favorable tax treatment

Nonforfeiture options

Pays a cash value policyholder the policy's cash value when a policy is terminated before its maturity (required by all whole, universal, variable policies)

Participation policy

Pays dividends reflecting difference between premiums that are charged and amount of premium necessary to fund actual mortality experience of company

Universal life insurance

Permanent cash-value insurance, combines term insurance (which provides death benefits) with tax sheltered savings/investment account that pays interest (usually competitive money market rates)

Grace period

Permits policyholder to retain full death protection for short period (usually 31 days) after missing a premium payment

Beneficiary (person who receives death benefits of policy) Clause

Policies should have primary beneficiary and various contingent beneficiaries If primary doesn't survive, insurer will distribute benefits to contingent beneficiaries If neither survive, benefits pass to insured's estate

Policy reinstatement

Policyholder may reinstate original policy, usually within 3 to 5 years of lapsing, by paying all premiums back plus interest, so long as whole life policy is under reduced paid-up option or extended term option Must pass a physical examination / other requirements Would buying a new policy be less costly?

What is paid-up insurance

Policyholder uses cash value to buy a new, single premium policy with a lower face value No further premium payments, cash value continues to grow, useful when income and need for death protection decline

What happens if policyholder cancels contract prior to death

Portion of assets set aside to provide payment for death claim is available to him (nonforfeiture right)

Level premium term policy

Premium can remain level throughout policy period for a straight term policy Must requalify at end of each term to retain low premium Cost less than annul renewable term for same period

Advantages of whole life

Premium payments contribute toward building estate Insured can borrow against policy / withdrawal cash value when the need for protection has expired Can budget premium payments over relatively long period Underlying cash value increases much faster Ability to continue coverage after policy lapses cuz premiums weren't paid (nonforfeiture option) Ability to revive older, favorably priced policy that lapsed (policy reinstatement)

What about the changing premium and protection levels for universal life

Premiums must be higher than originally planned in later years to keep policy in force Often premiums never disappear or reappear when interest rates fall

Disadvantages of whole life

Provides less death protection per premium dollar Investment feature provides lower yields Should not be used to obtain max return on investment

Change of policy

Provision that permits insured to switch from one policy to another without penalty

What is Single premium (SPLI)

Purchased with one cash premium payment at inception of contract, buying life insurance coverage for rest of life (limited in usefulness) Appeals to those looking for tax-sheltered investment vehicle Any cash withdrawals/loans taken against its cash value before 59.5 are taxed as capital gains and subject to penalty for early withdrawal

Property Insurance

Reimburses if car or home is destroyed or damaged

What is low-load whole life insurance

Sold directly by insurers to consumers, eliminates sales agents and large commissions from transactions Cash values grow much quicker than traditional policies sold by agents

How to calculate how much life insurance you require

Subtract resources from needs

How is universal life insurance tax treatment

Tax free death benefits Amounts credited to cash value (including investment earnings) accumulate on a tax-deferred basis, prior to insured's death

Decreasing term policy

Term insurance policy maintains a level premium throughout all period of coverage while amount of protection decreases

Straight term policy

Term insurance policy written for a given number of years, with coverage remaining unchanged throughout effective period

Debt liquidation

To leave family relatively debt free, determine average amount needed to pay off outstanding bills, other similar obligations, possibly home mortgage

Multiple indemnity clause

Typically doubles or triples policy's face amount if insured dies in an accident

Suicide clause

Voids contract if insured commits suicide within certain period, normally two years after policy's inception

When is decreasing term policy used

When amount of needed coverage declines over time Ex. homeowner can match coverage with declining balance of mortgage, or families with young children match coverage with declining level of income needed as kids grow and become independent

Who has a high need for death protection

Young families on limited budgets Focus on guaranteed renewable and convertible term insurance, and preserve financial resources for meeting immediate and future consumption and savings goals

Loss control

any activity that lessens severity of loss once it occurs (wearing seatbelt)

Loss Prevention

any activity that reduces probability that a loss will occur (driving speed limit)

Risk Avoidance

avoiding an act that would create risk (not driving to avoid a car accident)