1. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Insuring Your Life #8

2. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Goals Explain the concept if risk and the basics of insurance underwriting Discuss the primary reasons for life insurance and identify those who need coverage Calculate how much life insurance you need Distinguish among the various types of life insurance policies and describe their advantages and disadvantages Choose the best life insurance policy for your needs at the lowest cost Become familiar with the key features of life insurance policies

3. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Basic Insurance Concepts Basic purpose of insurance Protect you and your dependents from the financial consequences of losing assets or income when an accident, illness, or death occurs

4. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Concept of Risk Risk: chance of economic loss There’s a risk anytime you have a financial interest in something Life Health Home Car Business

5. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Concept of Risk Risk Assumption: choice to accept and bear the risk of loss yourself Example: Bear the cost of replacing stolen textbook Risk Avoidance: avoiding an act that would create risk Example: not driving to avoid a car accident

6. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Loss Prevention and Control Prevention - reduce chance that loss will occur Example: Driving the speed limit may reduce likelihood of a car accident Control - reduce severity of loss once it occurs Example: Wearing a seat belt can reduce effects of a car accident

7. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Insurance Insurance Policy -- transferring your risk of loss to the insurance company

8. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

9. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Benefits of Life Insurance Financial protection for dependents Protection from creditorsTax benefitsVehicle for savings

10. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

11. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

12. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Much Life Insurance Do You Need?

13. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Assess Family’s Total Economic Needs Income to maintain lifestyle Extra expenses if income producer dies Special needs of dependentsDebt liquidationLiquidity

14. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determine Financial Resources Savings and investmentsSocial Security benefitsPension or retirement plansOther life insurance Income of surviving spouse or children Real estate or other assets

15. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. This is the amount of life insurance needed to provide your family with desired standard of living Subtract Resources From Needs

16. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

17. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Term Insurance Straight term Coverage remains the same while premiums can increase Decreasing term Premiums remain the same while coverage decreases

18. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

19. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

20. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

21. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

22. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Whole Life Insurance Cash value Provides death protection plus a savings feature Nonforfeiture right Right to cash value when canceled prior to death

23. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Cash Value Accumulates In A $200,000 Whole Life Policy

24. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Whole Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

25. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

26. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages of Whole Life Savings vehicleBorrow against cash valuePremiums remain constant Cash value accumulates tax-free until redeemed

27. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disadvantages of Whole Life Less death protection for young peopleLow return on savingsTax penalties possible on early withdrawal Outstanding loan subtracted from face value of policy upon death

28. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Universal Life Insurance Permanent cash-value insurance that combines term insurance with tax sheltered savings account Provides death protection plus savings featurePremiums are “unbundled” into 2 accounts Savings grow at current interest rate vs. guaranteed minimum rate Provides flexibility in premiums paid and death benefit

29. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Universal Life Insurance Annual Outlays: $100,000 Policy, Preferred Nonsmoker Rates

30. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

31. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Variable Life Insurance Values: $100,000 Policy, Preferred Nonsmoker, Male, Age 45

32. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

33. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

34. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Buying Life Insurance Compare costs and features Select a large, highly rated, financially secure company Choose a reputable agent

35. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Major Advantages and Disadvantages-Life Insurances

36. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Life Insurance Contract Features Beneficiary clause Settlement options Policy loansPremium payments Grace period Nonforfeiture optionsPolicy reinstatement Change of policy

37. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Policy Features Multiple indemnityDisability clauseGuaranteed purchase optionsSuicide clauseExclusionsParticipationLiving benefitsViatical Settlement