Term Insurance  Characteristics  Payments at death only  Contract expires at the end of the term  When is the use of this tool indicated  Provide income to dependants  Liquidate debts  Cash for college education  Cash for federal and state inheritance inheritance taxes, funeral expenses and administrative costs  Funding a Buy-Sell agreement  Key employee insurance Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  When is the use of this tool indicated (cont'd)  Fund benefits to help recruit, retain and reward key employees  Bequests for children, grandchildren  Charitable bequests  Preserve confidentiality of financial affairs  Instant access to cash for dependants  Direct assets to family members in a tax efficient manner Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  When is the use of this tool indicated (cont'd)  The product should match the problem  When the need for life insurance is temporary  When the need is long term, but cash flow is insufficient to consider a more permanent type of policy such a whole life  When investment opportunities outside the policy is better than those inside a permanent policy  To guarantee a savings fund  For liquidity in the event of death Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  When is the use of this tool indicated (cont'd)  The product should match the problem (cont'd)  For business purposes  For additional benefits in conjunction with other permanent forms of insurance  To assure coverage in the event of unemployment or loss of employer provided coverage  Advantages  Acquire the greatest death benefit for the lowest initial cost  Term insurance may not be the least expensive form of coverage over the full duration of the coverage need.  Yearly renewable term premiums increase each year Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  Advantages (cont'd)  Best alternative for temporary insurance needs  Generally for needs less than 10 years  As a general rule of thumb, term insurance will tend to be better than cash value Insurance at issue ages below as 45  Younger persons may acquire substantial face amounts of coverage at relatively low initial costs  The conversion feature allows policyholders to enjoy higher death benefit protection than they otherwise could not afford  Upon conversion, they can “lock-in” their premiums and build cash values when their ability to pay premiums increases. Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  Advantages (cont'd)  Various types of policies can be combined with riders to met the affordability and special needs of individuals  Proceeds are outside of probate  No public record of proceed amounts or beneficiary designation  Generally, proceeds not subject to income taxation  If properly structured, the proceeds not subject to estate taxation  Policy could could used as collateral for a loan Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  Disadvantages  No tax-free automatic savings feature as does permanent coverage  Premiums increases in the future could become prohibitive  No loan values and no living benefits  Coverage may expire before the need does  Generally not available to persons in extremely poor health Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  Tax implications  Same income, estate and gift taxation as other types of life insurance policies  Alternatives  No good alternatives that could provide tax-free cash upon death  Where and how do I get it?  Nearly 2,000 Life insurance companies  Commercial companies, fraternal organizations, savings banks (Not all states), professional associations, membership organizations, employer group benefit packages Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  Where and how do I get it? (cont'd)  For persons with health problems  Seek agents who specialize in “substandard” markets  Limited benefit policies  If death occurs < 2 years, then benefit is return of premiums paid  If death occurs > 2 years, then benefit is equal to face amount of policy  Credit insurance  Form of group insurance associated with lenders for the purchase of automobiles Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  What fees or other acquisition costs are involved?  Premiums are set by the insurance company  Includes premium “loading” factors  Commissions  Premium taxes  Operating expenses  Federal income taxes  Other administrative expenses (e.g, claims and policy change services)  Bulk of insurance companies expenses are incurred at issue  Recovery of expenses takes many years (9+)  Commissions are less than that for permanent coverage  Premiums are lower  Commission rates (as a percentage of premium) may be lower Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  Selecting the best type of policy  Generally the lowest premium among all identical term policies is desirable  Term insurance can be purchased as a commodity  Comparing term insurance policies  Check the schedule of renewal premiums  Check age to which coverage may be continued without evidence of insurability  Check the grace period (typically 31 days)  Check the age to which the policy may be converted to a permanent policy Chapter 16 Tools & Techniques of Life Insurance Planning

Term Insurance  Selecting the best type of policy (cont'd)  Comparing term insurance policies (cont'd)  Does the incontestable and suicide clauses run from the issue date of the term policy?  Can conversion occur without evidence of insurability?  Check the financial stability of the issuing insurance company  Information that ledger statements do NOT provide  A full explanation of the reissue rules  Compound rate of return upon death  On a reissue basis  On a non-reissue basis  comparative rate of return upon death (before tax) with non-insurance investments such as mutual funds, bonds or certificates of deposits Chapter 16 Tools & Techniques of Life Insurance Planning