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Retirement Needs:
Lust in case current retirement income is inadequate.
Term to Age 65
Provides protection to age 65, when the policy expires. oCan be converted to a permanent plan of insurance, but decision to convert must be made before age 65.
Reentry Term
Renewal premiums are based on lower mortality rates if the insured can periodically demonstrate acceptable evidence of insurability.
Premature Death Definition
The death of a family head with outstanding unfulfilled financial obligations, such as independents to support, children to educate, and a mortgage to pay off.
•Financial Impact of Premature Death on Different Types of Families: Two-Income Earners
•Families in which both spouses work have largely replaced the traditional family. •Needs: •Both income earners need large amounts of lifeinsurance (if there are children) oIf there are no children, need for large amounts of insurance are much less.
Typed of Term Insurance
•Yearly Renewable Term •Term to Age 65 •Decreasing Term •Reentry Term •Return of Premium Term
•Financial Impact of Premature Death on Different Types of Families: Single-Parent Families
# of single parent families with children under 18 has increased due to: •Large # of children born outside of wed- lock, divorce, legal separation, and death. •Needs: •Large amounts of life insurance for family heads. •Many single parents (especially females) have incomes below the poverty line and cannot afford to purchase large amounts of life insurance.
•Financial Impact of Premature Death on Different Types of Families: Single People
# of singles has increased in recent years due to: •Younger adults are postponing marriage beyond age 30. •Middle aged adults single again due to divorce. •Not likely to create a financial problem for others because: •No dependents to support or other financial obligations •Needs: •A modest amount of life insurance for funeral insurance and uninsured medical bills.
Life Income To The Surviving Spouse:
Blackout Period: The period from the time that SS survivor benefits terminate (when youngest child reaches age 16) to the time that the benefits are resumed (when surviving spouse reaches age 60).
Economically justified if
Economically justified if the insured has earned income, and others are dependent on those earnings for part of or all of their financial support. If the family head dies prematurely with dependents to support and outstanding financial obligations, the surviving family members are exposed to great economic insecurity. Life insurance can be used to restore the family's share of the deceased breadwinner's earnings.
The Most Important Family Needs:
Estate Clearance Fund Income During The Readjustment Period Income During The Dependency Period Life Income To The Surviving Spouse Special Needs Retirement Needs
Decreasing Term
Face amount of insurance declines each year. oPremiums are level throughout the period.
Variable Life
Fixed premiums, but you can make decisions on how your Cash Value is invested. •Cash Value can grow or decline based on your decisions.
Income During The Dependency Period
Follows the readjustment period it is the period until the youngest child reaches the age of 18. Should be sufficient enough for the surviving spouse to stay home and care for the children.
Income During The Readjustment Period
For a period of 1-2 years after the death of the deceased, the family should receive approximately the same amount of income re received while the family head was still alive. The purpose of the readjustment period is to give the family time to adjust its standard of living
•Estimating the Amount of Life Insurance to Buy (3 Approaches):
Human Life Value, Needs, Capital Retention
Yearly Renewable Term
Issued for a 1 year period, renewable for successive 1 year periods. oCheap, a good option for young people. Premiums increase with age... oMost allow the policy holder to convert to a cash value policy without proving insurability. •Term insurance can also be issued for 5, 10, 15, 20, 25, or 30 year periods. oPremiums paid during the term period are level, but they increase when the policy is renewed.
Estate Clearance Fund
Needed immediately when the family head dies. Includes cash needed for burial expenses, uninsured medical bills, installment debts, estate administration expenses, and estate, inheritance, and income taxes.
Costs premature death
Premature death can cause serious financial problems for the surviving family members because of the following: Deceased family head's future earnings are lost forever. Additional expenses are incurred because of funeral expenses, uninsured medical bills, and estate settlement costs.Because of insufficient income, some families will experience a reduction in their standard of living. Certain Non- Economic Costs are incurred, such as intense grief, loss of a parental role model, and counseling and guidance for children.
Return of Premium Term
Returns premiums at the end of the term period, provided the insurance is still in force. Typical periods are 15, 20, 25, or 30 years. oVery expensive
Economic Justification for Life Insurance:
To protect your loved ones from the income loss and additional expenses related to your death.
Variations of Whole Life
Universal Life Variable Life Variable Universal Life Current Assumption Whole Life Indeterminate-Premium Whole Life
Variable Universal Life
oFlexible Premiums, you can make decisions on how your Cash Value is invested.
Special Needs:
oMortgage Redemption Fund: Amount needed to pay off the mortgage. oEducational Fund: For kids to go to college. oEmergency Fund: For dental work, home repairs, or a new car. oMentally Of Physically Challenged Family Members: For training, education, and caring for mentally or physically challenged family members.
Current Assumption Whole Life
oPricing is based on current experiences in mortality and expenses.
Indeterminate-Premium Whole Life
oPricing is based on future estimations in mortality and expenses.
Universal Life:
• Marketed as both life insurance and an investment oCharacteristics: •You pay your premium to the insurance company •The insurance company deducts their mortality charge and expenses leaving you with a cash value (which provides a small rate of return) •You are entitled to your Cash Value if you surrender your policy. •You have some flexibility if you miss a premium because it can be borrowed from your Cash Value. •Cash Value can also be used to increase your benefit amounts. oTypes: Cash Values are never to exceed the actual Death Benefits •Type A: Death benefit increases when it has to. •Type B: As Cash Value increases, so does the Death Benefit. •Type B is more expensive.
Temporary Method (Term Insurance): • Two methods for Conversion: • Uses of Term Insurance:
• Protection is temporary (1, 5, 10, 20, or 30 years) • Unless the policy is renewed the protection expires at the end of the period. • Most term insurance policies are Renewable. • The policy can be renewed for additional periods without evidence of insurability. • The premium is increased at each renewal date based on the insured's attained age. • To minimize adverse selection, many insurers have an age limitation beyond which renewal is not allowed (usually age 70 or 80). • High Cost At Advanced Age • Most term insurance policies are also Convertible. • The policy can be exchanged for a cash value policy without evidence of insurability. • Two methods for Conversion: o Attained Age Method: The premium charged is based on the insured's attained age at the time of conversion. o Original Age Method: The premium charged is based on when the term insurance was first purchased. • Uses of Term Insurance: • Great, if you can't afford other types of Life Insurance. • Appropriate if the need for protection is temporary. • Used to guarantee future insurability
Whole Life Insurance (Permanent Coverage) •Characteristics: •Types: •Limited Payment: •Uses:
•Characteristics: •Terminated if you cancel the policy or fail to pay the premium. •Fixed premiums •Types: •Ordinary Version: Historically, claims would be paid out by the age 100 if the person was still living. oAs of right now, the new Maturity Age is 121. •Limited Payment: oYou choose the term of which you pay for the coverage. •You could pay all required premiums in 10 years (Paid- Up Policy) •Uses: If you want, and can afford permanent protection.
•Financial Impact of Premature Death on Different Types of Families: Blended Families
•Families in which a divorced spouse with children remarries a new spouse who also already has children. Both spouses are generally in the work force at the time of re-marriage. •Needs: •Both spouses need large amounts of life insurance.
•Financial Impact of Premature Death on Different Types of Families: Sandwiched Families
•Families in which a son or daughter with children provides financial support of other services to one or both parents. •Needs: •A working spouse in a sandwiched family needs a large amount of life insurance.
•Financial Impact of Premature Death on Different Types of Families: Traditional Families
•Families in which only one parent is in the labor force. •Needs: •The working parent needs a large amount of life insurance •The parent who does not work needs life insurance too.
Human Life Value Approach:
•Looks at the present value of the family's share of the deceased breadwinner's future earnings. •Calculation: •Estimate the individual's average annual earnings over his/ her productive lifetime. •Deduct Federal and State Income taxes, Social Security taxes, Life and Health Insurance Premiums and the costs of Self Maintenance. oThe remaining amount is used to support the family. •Determine the number of years from the person's present age to the contemplated age of retirement. •Using a reasonable discount rate, determine the present value of the family's share of earnings for the period determined.
Needs Approach overall
•Looks at the various family needs that must be met if the family head should die, and the amount of money needed to meet these needs. •The total amount of existing life insurance and financial assets is then subtracted from the total amount needed. •The difference is, if any, the amount of new life insurance that should be purchased.
Tax Treatment: •Premiums: •Death Benefits: •Cash Value:
•Premiums: •Not Deductible unless both the owner of the policy and the beneficiary are charities. •Death Benefits: •Not Taxed unless paid out over multiple taxable years (then interest income is taxed). •Cash Value: •Not Taxed unless Cash Value is more than total premiums paid in. oLooks at CV relative to premiums paid to policy since premiums are paid with after tax dollars.
Capital Retention Approach:
•Preserves the capital needed to provide income to the family. The income producing assets are then available for distribution later to the heirs. •Calculation: •Prepare a personal balance sheet •Determine the amount of income producing capital •Determine the amount of additional capital needed (if any)
