Life Insurance

Objectives Students will define keys terms related to life insurance Students will identify key features of various types of life insurance coverage Students will identify the key provisions in a life insurance policy Students will analyze and identify how much life insurance is needed for varying life circumstances

What is Life Insurance A contract that is purchased from a life insurance company that provides funds to the beneficiaries when the insured dies in exchange for premium payments

What is Life Insurance Beneficiary – person or persons named by the policyholder to receive the policy benefits at the death of the insured

Types of Life Insurance Policies Two Categories –Term Insurance –Permanent Insurance

Term Insurance Term Insurance (temporary) – insurance protection for a set period of time which is called the policy term

Term Insurance Main advantage – low cost Especially suited for young families when the insurance need is perhaps higher and the family income is not as great as it may be later in life

Term Insurance Time periods of term policies often are 1, 5, 10, 20 years, or up to age 70

Types of Term Policies Level Term –Has the same face amount (amount payable at death) as long as the policy is in effect

Types of Term Policies Decreasing Term –Has a face amount that gets smaller as time goes on –Often used to cover the balance on a home mortgage

Types of Term Policies Increasing Term –Has a face amount that increases over time –Makes sure that policy’s benefits do not become inadequate for future needs (inflation)

Types of Term Policies Renewable Term (often available with term policies of different types) –Allows the policyholder to renew for another term at the conclusion of one term. Will renew at a higher cost, however

Types of Term Policies Conversion Term –Allows the insured to convert from term insurance to permanent insurance

Term Insurance Advantages –Initial premiums are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need is usually greatest –Good for covering needs that will disappear in time, such as mortgages or car loans

Term Insurance Disadvantages of Term Insurance –Premiums increase as you grow older –Coverage may terminate at the end of the term or become too expensive to continue –Term insurance does not offer cash value or paid-up insurance

Permanent Insurance Insurance protection that stays in force for your entire lifetime as long as premiums are paid when due. Additionally, permanent insurance provides cash values

Types of Permanent Insurance Whole Life Insurance –A permanent policy for which you pay a specified premium each year for the rest of your life –Insurance stays in force for your whole life

Types of Permanent Insurance Whole Life Insurance –Premium is based on your age at the time you buy the policy, but never goes up –Much higher than term initially, but would be less than what term would cost in later years of life (if purchased at a young age)

Types of Permanent Insurance Whole Life Insurance –Combines life insurance protection with a cash value element Cash Value – money that the policyholder is entitled to if they ever cancel the policy. Cash value can also be borrowed against

Types of Permanent Insurance Limited Payment Policy –A type of whole life policy where the policyholder only pay premiums for a certain length of time (20 – 30 years) at which time the policy is “paid up” and the coverage continues for the rest of their life

Types of Permanent Insurance Adjustable Life/ Universal Life / Flexible Premium Life –Allows policyholders to change the coverage as needs change –Provides flexibility in that the policyholders can change their coverage by changing their premium payments, changing the face amount of the policy, etc. –Provides cash value, but unlike whole life, the insurance company actually separates the pure protection, investment, and expense components

Types of Permanent Insurance Variable Life –Premium payments are fixed –Part of the premium is placed into a separate account and the money is invested in a stock, bond, or money market fund –Death benefit is guaranteed, but the cash value varies according to the performance of the investments within the policy

Advantages of Permanent Insurance As long as premiums are paid, protection is guaranteed for life Premium costs can be fixed or flexible to meet personal financial needs The policy accumulates cash value against which you can borrow Policy can be surrendered for the cash value A rider can be added that gives you the option to purchase additional insurance without proving insurability

Disadvantages of Permanent Insurance Required premium levels may make it hard to buy enough protection May be more costly than term insurance if you don’t keep it long enough

Other Types of Life Insurance Policies Group Life Insurance –Variation of term insurance that covers a large number of people under a single policy –Usually offered by employers who pay part or all of the costs

Other Types of Life Insurance Policies Credit Life Insurance –Pays off debts (car loans, etc) in the event the insured dies before the loans are paid

Other Types of Life Insurance Policies Endowment Life Insurance –Provides coverage for a specific period of time and pays a sum of money to the policyholder at the end of the endowment period

Key Provisions in a Life Insurance Policy Beneficiary Designation –Who receives the benefit of your life insurance policy in the event of death –Should be updated and changed as your needs change

Key Provisions in a Life Insurance Policy Incontestability Clause –Says that the company cannot contest or void the policy (except for nonpayment of premiums) after it has been in effect for a specified time period (usually 2 years)

Key Provisions in a Life Insurance Policy Suicide Clause –Says that in the event of suicide in the first 2 years of the policy, only the premiums will be paid back. After that time period it will be paid as any other claim

Riders to a Life Insurance Policy

Accidental Death Benefit Rider –Pays double indemnity – twice the face amount if death results from an accident There are restrictions

Riders to a Life Insurance Policy Waiver of Premium Rider –Allows the policyholder to stop paying premiums and keep the coverage in force if they insured becomes disabled and are no longer able to work When buying a policy should note the differences in how disability is defined

Riders to a Life Insurance Policy Guaranteed Insurability Rider –Gives the policyholder the right to purchase additional coverage at a later time on specified dates and up to a certain age without showing evidence of insurability

Riders to a Life Insurance Policy Cost of Living Rider –Allows insured to buy more insurance each year to help offset increasing insurance needs due to inflation without having to prove insurability –There are limits to how much can be added

Important Life Insurance Terms Beneficiary – person or persons named by the policyholder to receive the policy benefits at the death of the insured –Primary Beneficiary – person or persons who have first right to receive the policy proceeds –Contingent Beneficiary – person or person who will receive the proceeds of the policy should the primary beneficiary die before the insured

Important Life Insurance Terms Cash Value – the amount of money the insurance company will pay the policyholder if a permanent life insurance policy is surrendered or otherwise terminated

Important Life Insurance Terms Endorsement – a written agreement attached to a policy that adds or changes coverage. An endorsement takes precedence over original provisions of the policy

Important Life Insurance Terms Evidence of insurability – any statement about he insured’s health, finances, or employment which helps the insurance company determine if the insured is an acceptable risk

Important Life Insurance Terms Group Life Insurance – provides coverage for a group of people under one contract –Contributory plan – participants pay a portion of the cost –Noncontributory plan – participants are not required to pay a portion of the cost

Important Life Insurance Terms Insurability- conditions relating to the insured’s age, occupation, medical history, lifestyle and physical condition which must be met for a person to be considered an acceptable risk by an insurance company

Important Life Insurance Terms Insurer – Company issuing the insurance policy

Important Life Insurance Terms Policy – the contract between the insurance company and the policyowner. –Face Amount (death benefit) – the amount that is payable at the death of the insured –Premium – amount the policyowner pays to the insurance company for the policy

Insurance Needs When buying a life insurance policy, the policyowner must: –Decide how much coverage is needed –Name the beneficiary –How the proceeds will be paid out at death

Insurance Needs Decision of how much to buy is one of the most important decisions to be made and should consider the following: –Final Expenses –Debts and mortgages to be paid off –Money for college education

Insurance Needs Decision of how much to buy is one of the most important decisions to be made and should consider the following: –How much do you want insurance to contribute to ongoing family budget after death –Taxes due at death –Money you may want to leave to charities –What assets do you presently have that could be used for the above

Insurance Needs Decision of how much to buy is one of the most important decisions to be made and should consider the following: –How much insurance can you afford –Amount of insurance should be sufficient for your family to maintain their present lifestyle