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Life Insurance

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Explain the purpose and basic characteristics of life insurance. ... 1 in 5 households have no life insurance. ... Can be used for term or permanent life insurance. ... – PowerPoint PPT presentation

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Title: Life Insurance


1
Life Insurance
  • RMI 3500
  • Intro. to Risk Mang. Ins.
  • Robert Klein

Revised 10/14/07
2
Topic Objectives
  • Explain the purpose and basic characteristics of
    life insurance.
  • Review different types of products.
  • Important contract provisions.
  • Determining life insurance needs.

3
Why Buy Life Insurance?
  • Why would a risk averse person purchase insurance
    against a certain event?

4
Why Buy Life Insurance?
  • Why would a risk averse person purchase insurance
    against a certain event?
  • Timing is not known and premature death poses
    risk.
  • Unfulfilled obligations to dependents others.

5
Features of Life Insurance
  • Purpose
  • Meet financial needs of survivors.
  • Savings?
  • Distinguishing Features
  • Valued policy.
  • Payment is made to named beneficiary.
  • Benefit is not taxable.
  • Insurance against a certain event.

6
Risk of Premature Death
  • Cost of premature death
  • Unfulfilled financial obligations
  • Loss of income
  • Funeral expenses
  • Estate settlement expenses

When you say Do we have enough life insurance,
I assume you mean me.
  • Impact of early death depends on type of family.

7
Family Characteristics
  • Number and ages of dependents.
  • Employment status of heads of household wage
    earners.
  • Age and health of wage earners.
  • Income and assets.
  • Special needs.
  • 1 in 5 households have no life insurance.
  • Median amount of life insurance purchased covers
    only 2 years of income.

8
Mortality Rates
9
How much life insurance?
  • In general it depends on many things.
  • How much income is lost?
  • How much debt is there?
  • Income goals
  • Expected inflation
  • Methods
  • Human Life Value
  • Needs Approach
  • Capital Retention Approach

10
Needs Approach
  • Needs
  • Cash Needs
  • Income Needs
  • Other
  • Project needs of survivors over their remaining
    lives.
  • Total Needs Assets
  • Additional Life Insurance Needed

11
Life Insurance Pricing
  • Three Components
  • Mortality charge
  • Interest Adjustment
  • Expense and profit loading
  • Net Premium mortality charge with the interest
    adjustment
  • Net Single Premium
  • Net Level Premium

12
Yearly vs. Level Pricing
  • Yearly Pricing
  • Premium is adjusted each year based on insureds
    age.
  • Rates escalate rapidly with age.
  • Used only for yearly term insurance.
  • Level Pricing
  • Level premium is charged through policy term.
  • Can be used for term or permanent life insurance.
  • Premiums income will be higher in early years and
    lower in later years remainder is invested into
    a legal reserve.
  • Net amount at risk - difference between the face
    value of the policy minus the legal reserve.

13
(No Transcript)
14
Example 1,000 Face Amount, Male 45, P 5/year
15
Types of Life Policies
Term Insurance
Yearly
Multi-Year
Whole Life
Ordinary
Variable
Universal
Variable Universal
16
Major Types of Life Insurance
17
Term Insurance
  • Characteristics
  • Temporary
  • Renewable
  • Convertible
  • Pure insurance protection only
  • Types
  • Yearly renewable
  • X-year renewable
  • Term to age A
  • Decreasing term
  • Re-entry term
  • Advantages and disadvantages?
  • Max protection for lowest cost.
  • Not permanent, no forced savings.

18
Whole Life Insurance
  • Characteristics
  • Lifetime protection
  • Includes a savings and insurance element.
  • Cash Value vs. Surrender Value.
  • Savings element earns a stated investment return.
  • Option to borrow against cash value at stated
    interest rate.

19
Whole Life Insurance
  • Types
  • Ordinary life
  • Limited payment life
  • Participating vs. non-participating policies
  • Advantages and disadvantages?
  • Less protection for given premium.
  • Permanent nature and savings element.

20
Universal Life Insurance
  • Characteristics
  • Death benefit and cash values vary according to
    investment experience and premiums paid.
  • Policyholder determines amount and frequency of
    premium payments, subject to minimums.
  • Unbundling of components
  • savings
  • protection
  • expense charges

Thank you, but Ive already provided for my
childrens education.
21
Universal Life Insurance
  • Advantages Disadvantages?
  • flexibility, higher returns on investment
  • complex, buyer misunderstanding

22
Universal Life Flexibility
  • Change death benefits.
  • Change premium payments.
  • Make partial cash withdrawals.
  • Policy loans allowed at competitive interest
    rates.
  • More competitive with term insurance investment
    of premium savings approach.

23
Variable Life Insurance
  • Variable Life
  • Premiums fixed.
  • Death benefit and cash value vary according to
    investment return on funds held in separate
    account by insurer.
  • Variable Universal Life
  • Policyowner determines how premiums are invested.
  • No guaranteed minimum interest rate or cash value.

24
Life Insurance Purchases in the United States
Percent of Face Value In Force by Type of Policy
(Individual)
25
Major Contract Provisions
  • Exclusions
  • Beneficiary Designations
  • Policy Loans
  • Participation/Dividends
  • Non-Forfeiture/Surrender
  • Settlement Options
  • Guaranteed Purchase Option

We cannot write a life policy for your husband,
Mrs. Blaine, because he is already dead. In
insurance terms, that is considered a prexisting
condition
26
Significant Clauses
  • Incontestable Clause
  • Insurer cant contest policy after 2 years.
  • Grace Period
  • Reinstatement Clause
  • Permits reinstatement of lapsed policy.
  • Evidence of insurability required.
  • Exclusions
  • war, aviation

27
Policy Loans
  • Allows the insured to borrow the cash value of
    his/her policy.
  • Insured must pay interest to cover the loss of
    interest income to insurer.
  • Loan and interest must be repaid or deducted from
    benefits.
  • Policy loans pose disintermediation risk to
    insurers.

28
Non-Forfeiture Options
  • If policy is surrendered, insured has some rights
    to cash value.
  • Options
  • cash
  • reduced paid-up insurance
  • extended term insurance
  • Surrender charges discourage adverse selection,
    disintermediation.

29
Guaranteed Purchase Option
  • Insured can purchase additional amounts of life
    insurance at specified times in the future
    without evidence of insurability.
  • Poses adverse selection risk to insurer.
  • Restrictions on option limit risk to insurer.

30
Speculating on Death
  • Need for terminally ill people to collect all or
    a portion of their life insurance proceeds.
  • Accelerated Death Benefits Rider
  • Terminal Illness Rider
  • Catastrophic Illness Rider
  • Long-Term Care Rider
  • Viatical Settlements
  • Firms buy the life insurance policies of
    terminally ill insureds at a discount.
  • Issues and Abuses

31
Conclusions
  • Life insurance decision determined by income,
    needs, family circumstances goals.
  • Tradeoffs between term life vs. other life
    insurance products.
  • Importance of contract provisions and flexibility.
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