7.1 Life Insurance Calculate life insurance premiums Lesson 7.1 4/22/2017 7.1 Life Insurance Calculate life insurance premiums Calculate the net cost of life insurance Calculate the cash and loan values of a life insurance policy Lesson 7.1 BUSINESS MATH

Life Insurance Life insurance is a way of protecting your family from financial hardship when you die. Lesson 7.1

Some Reasons for Purchasing Life Insurance If your income supports your family, they will need to replace that income when you die. If you are a homemaker, your surviving spouse may need to pay someone to care for your children and home. In both cases, money is needed to pay funeral costs. Life insurance may also be bought to repay debts when you die, such as a home mortgage or a car loan. Lesson 7.1

Life Insurance Policy A life insurance policy is a contract between the insured, the person whose life is covered, and the insurer, the insurance company. The contract states the amount of insurance to be paid on the death of the insured, or the death benefits of the policy. The death benefits are usually equal to the face amount (or face value) of the policy. (continued on the next slide) Lesson 7.1

Life Insurance Policy (continued) The money paid to an insurance company for life insurance is the premium. When the insured dies, death benefits are paid to the beneficiary. The beneficiary is the person named in the policy to receive the death benefits. Lesson 7.1

Two Types of Life Insurance There are two basic types of life insurance policies: term life insurance and permanent life insurance. Insurance companies have designed many variations of these two types for people with different needs and budgets. Lesson 7.1

Term Life Insurance Term life insurance offers protection for a fixed period of time, such as 1, 5, or 10 years. If you die within that time, your beneficiary receives the face value of the policy. Term insurance can usually be renewed after the fixed term expires, but usually the policy premiums will be higher because you are older and more likely to die. Term insurance is the least expensive kind of life insurance. Lesson 7.1

Decreasing Term Life Insurance One variation of term life insurance is decreasing term life insurance. With decreasing term life, the face amount of the policy decreases over time. Decreasing term life insurance is popular with homeowners who use the policies to cover their mortgage loans. Because the amount of insurance declines over time, the premiums are lower than with standard term life insurance. Lesson 7.1

Permanent Life Insurance Permanent life insurance insures you for your whole life, and is often called whole, or straight life insurance. Premiums usually are paid for your whole life. A variation of permanent life insurance is universal life insurance. Lesson 7.1

Universal Life Insurance Universal life insurance allows you limited ability to change the amount of the death benefit and how much you pay in premiums. A certain amount of each premium payment is invested and earns tax-free income. In years when you can, you may pay in more than the premium. The overpayment is invested. In years when your money is tight, you can pay in less than the premium or skip it entirely. The premium is then paid from the invested funds. Lesson 7.1

Annual Premiums per $1,000 of Life Insurance Lesson 7.1

Annual Premium for a Policy To find the annual premium for a policy, divide the face amount by $1,000 and then multiply the result by the cost per $1,000 in the table. Cost per $1,000 × Face of Policy $1,000 Annual Premium = Lesson 7.1

BUSINESS TIP If your reason for buying life insurance is to protect your family from the loss of your income, one way to estimate how much insurance you need is to estimate how much you would have received in take-home pay from your death until the usual retirement age. (continued on the next slide) Lesson 7.1

Net Cost of Insurance Some insurance companies may return part of your premium to you as a dividend. You may deduct the dividend from the premium due or leave the dividend with the company to buy more insurance or to earn interest. The total premium for the year less the dividend is the net cost of the insurance for the year. Total Premiums – Dividends = Net Cost of Insurance Lesson 7.1

Life Insurance Cash Values Cash value is the money that you get if you cancel the policy. If you cancel a term policy, you get nothing. Whole life policies build cash value after premiums have been paid for a few years. The cash values of universal life insurance policies will vary with the current value of the investments that have been made. Lesson 7.1

Whole Life Cash Values The policy may give you a choice of taking the cash, or using it to buy a small amount of whole life insurance that is totally paid up, or to buy term insurance. The policy may also allow you to borrow up to the total amount of the cash value, often at a lower interest rate than that offered by other lenders. If you don’t pay back the loan, it will be subtracted from the amount paid to your beneficiaries. Lesson 7.1