Chapter 11 Life Insurance

Premature death

the death of a person with outstanding unfulfilled financial obligations, or the death of a person that creates negative business consequence

life expectancy

the average number of years of life remaining to a person at a particular age

traditional families

only one parent is the labor forc

blended families

a divorced spouse with children remarries and has a new spouse and children

sandwiched families

families with three generations

human life value approach

depends on the insured’s human life value which is the present value of the family’s share of the deceased breadwinner’s future earnings

estimate annual earnings. deduct taxes, insurance premiums, and self-maintain costs. determine number of remaining years and determine present value

how to estimate using human life value approach

needs approach

depends on the financial needs that must be met if the family head should die

term insurance policy

protection is temporary, policies are renewable, premiums increase, insurers have age limitation for renewal, policies are convertible

whole life insurance

stated amount is paid to a designated beneficiary when the insured dies

ordinary life insurance

level premium that provides lifetime protection, early premiums supplement later premiums

legal reserve

a liability that must be offset by sufficient financial assets

net amount at risk

difference between legal reserve and face amount of insurance

endowment insurance

pays face amount if insured dies within a specified period, if insured is still alive face amount goes to beneficiary, less than one percent of life policies out there

variable life insurance

level fixed premium, reserve is held in a seperate account like a mutual fund, no minimum guaranteed cash values

universal life insurance

policy holder decides amount and frequency of premiums, premiums earn interest, monthly deduction for admin expenses, flexible, GUARANTEES MINIMUM PROTECTION

variable universal life insurance

sold as investments or tax shelters, insured decides how premiums are invested, does not guarantee minimum cash value, high expense charges, substantial investment risk