Life & Health Insurance Chapter 15

Kinds of Life Insurance 1. Term Insurance –For a short period of time (parent with young children) 2.Permanent Insurance - for life of person

Term Insurance *Insurance that gives protection against loss of life for a period of time (usually one, five, or ten years). *Benefits are paid only if the policyholder dies within that period. *If the policyholder lives till the end of the term, the policy expires and the insured loses coverage. *Main advantage of term insurance is its cost – it is very low. *A physical exam is required each time a new policy is purchased. *Gets more expensive as you get older (greater chance of dying or having health problems)

Renewable Term *Some guarantee the right to renew without having another physical *Premium will be higher since you will be older *Policies are limited to a certain # of terms and cannot be renewed after a certain age

Convertible Term *Allows the insured to change from term to permanent coverage without having a physical exam *Important to those who need flexibility – young couples with families (at first low-cost protection is all they need, but as they earn more they may want to add enforced savings)

Policy Features & Provisions

Beneficiaries People to whom your policy benefits will be paid if you die.

Premiums Due on the date listed on your policy. Can be paid annually, semiannually, quarterly, or monthly. (Annual tends to cost less per year than the others)

Payments: 1. Proceeds 1.Beneficiary must make a claim to the insurance company when the insured dies in order to receive the proceeds, or face amount of the policy…proceeds are non-taxable and can be paid in several ways 2.Lump-sum option - you can take the entire amount in cash 3.Amount option - take a certain amount each month until the money & interest run out 4.Time option - have the money plus interest paid out over a certain period of time in monthly installments 5.Interest option - leave money on deposit w/the company to earn interest indefinitely. Can withdraw any or all of the money at any time 6.Lifetime income option - leave money on deposit & receive a guarantee interest payment for life

Payments: 2. Cash Value Borrowing against the policy Buying reduced coverage Buying term insurance

General Notes Policy should clearly state the amount of cash value available to you for each year you keep it. This information is important in deciding whether or not to keep up payments on a given policy. Experts say that you should keep this kind of a policy for at least 10 yrs. This way you will get cash back in cash value as much money as you have paid out in premiums. You can receive the cash value of the policy at any time at your own request. Other possibilities of what can be done:

Borrowing against the policy You pay interest on the loan. If you die before the loan is repaid, the amount you owe is subtracted from the money paid to beneficiary.

Buying reduced coverage If you cannot afford to pay the premiums but wish to keep the protection. Your cash value is used to buy a smaller policy that is paid in full.

Buying term insurance Can stop paying premiums but keep the same amount of protection for a limited period of time. (device is called extended term life) Cash value is used to buy a fully paid term policy for a certain number of years or days.

Payments: 3. Dividends Refunds of premiums given to insured persons who have participating policies. A participating policy is one that has a premium fixed at an amount higher than the insurance company believes will be needed to cover the costs of providing protection. A nonparticipating policy has premiums fixed as close as possible to the actual costs. Thus, there are no dividends.

Special Clauses May limit your rights or grant you important privileges.

Purchase Considerations

Term Versus Permanent Insurance Term insurance costs much less for the same amount of coverage. Permanent insurance has a built-in savings feature.

Type of life insurance Whether you buy term or permanent protection makes a big difference in cost.

Age of Insured The younger you are, the less you will pay for insurance. As people get older, they have a greater chance of dying.

Claims Paid Insurance companies base their rates on what they pay in claims.

Operating Expenses The costs of running the insurance company and a profit for the owners (shareholders) are included in the premiums.

Reserve Fund Each company sets aside a reserve fund for meeting emergencies, such as heavy future claims, mortality changes, and so forth.

Investments Insurance companies invest their funds in mortgages, corporate stock, and government bonds. Amount of income earned on these investments will affect premiums.

Insured’s Health If you buy the insurance when your health is poor, the premium will be high. If your health is good, the premium will be low.

Company Selected Different companies charge different premiums for the same coverage. Shop around to find the best rates possible.

Insured’s Occupation You job and its hazards can affect your premiums. Nine out of ten people have jobs that allow them to pay standard rates.

Gender Women tend to live longer than men. Therefore, they pay less for life insurance.

Face amount of Policy The larger the face amount of the policy, the more it will cost.

Other Benefits Some policies contain clauses that grant the insured special privileges or rights. These come at a price – higher premiums.