PART 3:PROTECTING YOURSELF WITH INSURANCE

Chapter 9

Life and Health Insurance

9-2

Learning Objectives

Reduce your financial risk through insurance. Determine your life insurance needs and design a life

insurance program. Describe the major types of coverage available and the

typical provisions that are included.

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The Logic Behind Insurance:Risk Management

An insurance policy spells out what losses are covered, what the policy costs, andwho receives payment.

Health insurance provides protection against devastating medical bills.

Life insurance protects your family if you die.

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The Logic Behind Insurance:Risk Management

Health care is expensive and there is no incentive to economize:

– Over 50% of Americans receive some government health care.

– 87% of Americans have medical insurance.

Medical care has become extremely sophisticated.– It takes 12 years and over $239 million to develop, test, and

certify a new drug.

Cost of litigation has skyrocketed.– Malpractice premiums cost $150,000-$250,000 yearly.

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Do You Need Life Insurance?

Insurance is based on “risk pooling” - where individuals share the financial risks they face.

The size of the premium depends on the probability you will die.

Face amount - amount of insurance provided at death.

Owner - policy holder. Beneficiary – designated to receive the proceeds.

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How Much Life InsuranceDo You Need?

Earnings MultipleApproach

Buy insurance that is 5-15 times your annual gross income.

Needs Approach Determines the funds

necessary to meet the needs of a family after primary breadwinner’s death.

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Needs Approach

What needs must be met after the death of the breadwinner?

– Immediate needs at time of death– Debt elimination– Immediate transitional funds– Dependency expenses– Spousal life income– Educational expenses for children– Retirement income

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Major Types of Life Insurance

There are 2 major types of life insurance:– Term insurance – pure life insurance.– Cash-value insurance – has a life insurance and a

savings component.

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Term Insurance and Its Features

Pays the death benefit if insured dies during the coverage period.

Has no face value. Sole purpose is to provide death benefits to

beneficiaries. Primary advantage is affordability. Disadvantage is that the cost increases each

time the policy is renewed.

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Renewable Term Insurance

The “term” in a life insurance contract can be from 5 to more than 20 years.

Coverage terminates if not renewed. Renewable term insurance allows for

renewal up to a specified age, regardless of health.

Each time the contract is renewed, the premium is increased.

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Re-entry Term Insurance

Term insurance is guaranteed renewable at one of 2 possible premium levels in the future.

Regular evaluations of your health determine which premium you are eligible for.– Lower rate if you pass the medical exam.– Higher rate if you fail the medical exam.

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Decreasing Term Insurance

Premiums remain constant but the face value declines.

Assumes over time your wealth will increase and your needs will decrease.

Some policies decline at a constant, steady rate, others at accelerating rates.

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Group Term Insurance

Term insurance provided without a medical exam, to a specific group of people.– The group may be employees of the same

company or professional group.

The employer may pay part of the premium. Usually less expensive than an individual

policy.

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Credit or Mortgage GroupLife Insurance

Life insurance provided by a lender for its debtors. Provides enough coverage for an individual’s

outstanding debts. If debtor dies while policy is in effect, proceeds

are used to pay off the debt. Set up as a form of declining insurance.

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Convertible Term Life Insurance

Life insurance that converts into cash-value life insurance, at your discretion, regardless of your medical condition and without a medical exam.

This allows you to continue your coverage when your term expires.

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Cash-Value Insuranceand Its Features

Provides both a death benefit and an opportunity to accumulate cash value.

Permanent type of insurance – you pay the premiums and eventually you will get paid.

3 basic types:– Whole Life– Universal Life– Variable Life

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Whole Life Insuranceand Its Features

Provides a death benefit when the insured dies, turns 100, or reaches the maximum stated age.

Face value is paid provided premiums were paid. In early years, deductions are made from the premium.

The remaining goes into savings (cash value). The policyholder can borrow against the cash value. Nonforfeiture right gives the policyholder the policy’s cash

value in exchange for giving up the death benefit.

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Whole Life Insuranceand Its Features

Modified Whole Life

– Premiums begin below comparable whole life and gradually rise until final premiums are above comparable whole life.

Combination Whole Life

Includes elements of whole life and decreasing term insurance. Face amount remains constant while coverage shifts from term to whole life.

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Whole Life Insuranceand Its Features

Although it does provide for both savings and permanent needs, there are disadvantages of whole life:– Not the same level of death protection that term

insurance provides for the same price.– Yield on the cash value investment portion of the policy

isn’t competitive with yields on alternative investments.

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Universal Life Insuranceand Its Features

A type of cash-value insurance combining term insurance with tax-deferred savings with flexible premiums and benefits.

Pay the dictated premium which goes into savings, once expenses and mortality charges are subtracted.

Policyholder can increase or decrease the premiums to affect the cash value of the policy.

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Universal Life Insuranceand Its Features

Universal life funds have 3 parts:– The mortality charge or term insurance– The cash value or savings– Administrative expenses

With fluctuating returns and high expense charges, you may not end up with the anticipated amount of savings.

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Term Versus Cash-ValueLife Insurance

For most individuals, term insurance is the better alternative.– It provides life insurance needs at a low cost.

The advantage of cash-value insurance is the tax advantages.– Growth of the cash-value is tax-deferred.– Life insurance is not considered part of your estate.