Presentation on theme: "Chapter 10 Life Insurance"— Presentation transcript:
1 Chapter 10 Life Insurance Reasons People Purchase Life Insurance1. Cash for immediate needs2. Readjustment funds3. Replacement income4. Special situations
2 Chapter 10 Life Insurance How Much Life Insurance Do You Need?Two theories for determining life insurance needs:Human value approach.Attempts to forecast the value of income the person would have earned had they lived an average number of yearsInexact science at best
3 Chapter 10 Life Insurance How Much Life Insurance Do You Need?Multiple earnings approachSufficient earnings must be available to replace earnings for certain number of yearsMultiply the number of years left to replace income by factor from the multiple earnings table
4 Chapter 10 Life Insurance Types of Life Insurance PoliciesLife insurance policies can be classified into three broad categories:Term insuranceWhole-life insuranceUniversal life insurance
5 Chapter 10 Life Insurance Term Insurance“Term” is a specified period of time in the life of the insured.It is pure insurance because it offers nothing more than financial protection if you dieOnce policy expires, the insurance company has no further obligation to youThe least expensive option. For the same premium, you can purchase 5 to 10 times as much term insurance as any other type of life insurance.
6 Chapter 10 Life Insurance Level TermCommonly issued for periods of one year, five years, or 10 yearsOffers a fixed amount of insurance coverage with premiums that are constant over length of the termHowever, when term insurance is renewed, the premiums increase to reflect greater risk of dying associated with older age.
7 Chapter 10 Life Insurance Decreasing TermDesigned for people whose need for insurance diminishes as they get older (i.e. the mortgage is paid off, the children have finished college)While premiums remain constant over time, insurance coverage automatically decreases as you get older
8 Chapter 10 Life Insurance Renewable Feature Available With Term InsuranceRenewable -- gives policy holder option of renewing insurance for at least one additional period without having to pass another physicalUsually additional period is same length as the original term. Many companies allow renewals an unlimited number of times until certain age, 65 or 70.
9 Chapter 10 Life Insurance Deposit Term InsuranceDesigned to reward policyholders who keep insurance in force for a long term (time)Has savings component as well as an insurance component so it is not true term insurance
10 Chapter 10 Life Insurance Deposit Term InsuranceDuring first year, you pay deposit as well as regular premium. Deposit placed in interest bearing account which you receive back with interest after end of term insurance.If policy lapses before end of term, you forfeit the deposit and the interest earned
11 Chapter 10 Life Insurance Whole-Life InsuranceTwo basic differences between term and whole-life insurance:1. Whole-life purchased for entire life whereas term is only for specified number of years2. Savings component in whole-life which is not present in termAllows flexibilityIncreases the cost of the insurance
12 Chapter 10 Life Insurance Straight Life InsuranceAlso termed continuous-premium whole-life or ordinary whole-life insurancePremiums remain same throughout life of policy (determined by age and health at time of enrollment)Premiums build cash value (accumulated savings) in the early years and help pay for the increased risk of death in later yearsMajority of whole-life policies are straight life
13 Chapter 10 Life Insurance Borrowing From a Whole-Life PolicyCan borrow all or part of cash value in form of policy loanLoans do not have to be paid back; Unpaid portion plus interest deducted from death benefit when paid
14 Chapter 10 Life Insurance Other Life Insurance OptionsGroup Life InsuranceVariable Life InsuranceCredit Life Insurance
15 Chapter 10 Life Insurance The Life Insurance ContractContracts (legally binding you and the company) contain various type of provisions:1. The Beneficiary ClauseThe beneficiary is the individual or organization who receives proceeds upon the policyholder’s death. Life insurance proceeds are NOT TAXABLE to the individual, but may be subject to estate taxes.
16 Chapter 10 Life Insurance 1. The Beneficiary ClauseThe primary beneficiary receives payment first (more than one may be named.)A contingent beneficiary should be named if primary beneficiary is no longer living.An irrevocable beneficiary cannot be changed without his consent; otherwise you can change beneficiaries as often as you wish
17 Chapter 10 Life Insurance The Life Insurance Contract2. Settlement OptionsThe settlement option specifies how death benefits will be paid:Lump sum -- beneficiary receives entire amount at once (98% choose this method)Life income -- beneficiary receives monthly payments for rest of life (size of payment determined by age of beneficiary)
18 Chapter 10 Life Insurance 2. Settlement Options, cont.Fixed income -- beneficiary receives fixed monthly payment depending on face value of policyInterest only -- beneficiary receives interest only paid at guaranteed rate; principal is received at a later date
19 Chapter 10 Life Insurance The Life Insurance Contract3. Premium Payment ClauseThe policy states how much premiums are, where they are paid, to whom they are paid, and how often.annuallysemiannuallyquarterlymonthlyUsually small discount offered for annual premium payment.
20 Chapter 10 Life Insurance The Life Insurance Contract4. The Dividend ClauseThis clause only applies to those policies issued by mutual life insurance companies.It may specify how dividends are paid or it may give policyholder options for payments of dividendsReceiving the dividends in cashUsing them to reduce premiumsUsing them to purchase additional life insurance
21 Chapter 10 Life Insurance The Life Insurance Contract5. The Accidental Death ClauseThis clause guarantees an additional amount of insurance if policyholder dies as a result of an accident.Usually doubles or triples the face amount so it is referred to as double or triple indemnity. Some accidental deaths are excluded:a suicidea riot or insurrectionan airplane disastercommission of a felony
22 Chapter 10 Life Insurance The Life Insurance Contract6. The Suicide ClauseThis clause limits the company’s liability in the event of suicide.Since suicide is not accidental, if suicide occurs within two years of policy’s issue date, the company is only liable for the amount the policyholder has already paid in premiums.
23 Chapter 10 Life Insurance The Life Insurance Contract7. Waiver-of-Premium ClauseThis clause commits the insurance company to pay your premiums if an illness or accident prevents you from working.The clause usually takes effect six months after policyholder is totally disabled. Some companies are now offering the same type of protection if you lose your job.
24 Chapter 10 Life Insurance The Life Insurance Contract8. Guaranteed Insurability ClauseThis clause allows you to increase amounts of insurance at certain dates and by certain amounts without undergoing a physical examination.
25 Chapter 10 Life Insurance The Life Insurance Contract9. Nonforfeiture OptionThis clause protects the cash value of your policy if your premiums are unpaid. Policyholder may choose to:Surrender the policy for cash accumulatedPurchase term insurance for as long as the single premium will allowUse the cash as a single premium and purchase a reduced amount of paid-up life insurance
26 Chapter 10 Life Insurance The Life Insurance Contract10. Policy ReinstatementThis provision allows policyholders to put lapsed policy back into effect. Typically requires:Furnished proof of continued insurabilityPayment of accumulated premiums, plus interestApplication for reinstatement must take place within a specified time period, usually a year