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Basic Insurance Concepts Basic purposes of insurance Protect you and dependents from losing your acquired assets Shield you and your family from an interruption in earnings

The Concept of Risk Risk: chance of economic loss Insurance planning: reduces risk that losses will cause financial devastation

The Concept of Risk Risk Avoidance – Avoiding an act that would create a risk Example: not driving to avoid car accident Risk avoidance is not always practical or possible

Loss Prevention and Control Prevention - reduce chance that loss will occur Example: Driving the speed limit may reduce likelihood of car accident Control - reduce severity of loss once it occurs Example: Wearing a seat belt can minimize effects of an accident

The Concept of Risk Insurance pay someone to bear your risk of loss Example: Buy an insurance policy to transfer risk to insurance company Assuming Risk choice to accept and bear the risk of loss yourself Example: Bear the cost of replacing stolen calculator

Underwriting Basics Insurance company decides whom to insure and rate to be charged Company must guard against adverse selection - a disproportionate number of bad risks

Benefits of Life Insurance Financial protection for dependents Protection from creditors Tax benefits Vehicle for savings

Do You Need Life Insurance? Consider if Dependents count on your financial support You have debts –home mortgage Maybe Not if No one depends on your support You are a child

How Much Life Insurance is Right for You Multiple-of- Earnings Method Multiply annual earnings by an arbitrary number Needs Analysis Method Estimate needs and examine available resources

How Much Life Insurance Is Right For You?

Assess Family’s Total Economic Needs Family income Additional expenses Special needs of dependents Pay off debts Liquidity

Savings and investments Social Security benefits Pension or retirement plans Other life insurance Income of surviving spouse or children Real estate or other assets Determine Financial Resources

This is the amount of life insurance needed to provide your family with desired standard of living Subtract Resources From Needs

Term Life Insurance Specified amount of insurance protection for a set period Benefit paid if insured dies during that time Simplest type of insurance policy

Types of Term Insurance Straight term Coverage remains the same while premiums can increase Decreasing term Premiums remain the same while coverage decreases

Important Features In Term Insurance Renewability Renew policy without evidence of insurability Renewability Renew policy without evidence of insurability Convertibility Convert to whole life policy without evidence of insurability Convertibility Convert to whole life policy without evidence of insurability

Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

Advantages Economical way for young families to purchase large amounts of life insurance Provides for needs that disappear over time Disadvantages Premiums become more costly as you get older Does not build cash value Term Insurance

Whole Life Insurance Cash value Provides death protection plus a savings feature Nonforfeiture right Right to cash value when canceled prior to death

How Cash Value Accumulates In A $200,000 Whole Life Policy

Representative Whole Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

Types of Whole Life Policies Continuous premium (straight life) Level premiums paid until death or policy cancellation Limited payment Level premiums paid for specified number of years, insurance in force until death Single premium Lifetime coverage purchased with a single premium

Advantages of Whole Life Advantages Savings vehicle Borrow against cash value Premiums remain constant Cash value accumulates tax-free until redeemed

Disadvantages of Whole Life Disadvantages Less death protection for young people Low return on savings Tax penalties possible on early withdrawal Outstanding loan subtracted from face value of policy upon death

Universal Life Insurance Permanent cash-value insurance that combines term insurance with tax sheltered savings account Provides death protection plus savings feature Premiums are “unbundled” into 2 accounts Savings grow at current interest rate vs. guaranteed minimum rate Provides flexibility in premiums paid and death benefit Understand the risks before you buy!

Representative Universal Life Insurance Annual Outlays: $100,000 Policy, Preferred Nonsmoker Rates

Other Types of Life Insurance Variable life insurance Provides death protection plus a savings or cash value feature Cash value can be invested in mutual funds for greater possible return Returns not guaranteed and actual death benefit can vary

Representative Variable Life Insurance Values: $100,000 Policy, Preferred Nonsmoker, Male, Age 45

Other Types of Life Insurance Variable life insurance Combines flexibility of premium payment feature of universal with investment choices offered by variable Group life insurance Usually term insurance offered through employers Premiums usually lower than individually purchased policies

Other Special-Purpose Life Insurance Credit and Mortgage life insurance Decreasing term insurance Pays off outstanding balance if borrower dies before repaid Costly form of coverage Industrial life insurance Whole life policies with small face amounts For low-income families

Buying Life Insurance Compare costs and features Select a large, highly rated, financially secure company Choose a reputable agent

Key Features of Various Types of Life Insurance

Life Insurance Contract Features Beneficiary clause Settlement options Policy loans Premium payments Grace period Nonforfeiture options Policy reinstatement Change of policy

Other Policy Features Multiple indemnity Disability clause Guaranteed purchase options Suicide clause Exclusions Participation Living benefits Viatical Settlement