Class 25 - Life Insurance

What are the exposures in life insurance?

The person being insured. Not necessarily the owner of the policy, but have to have some insurable interest: spouse, employer, or dependent

What are the perils in life insurance?

Death, for the most part, doesn’t matter, the cause of death

What are the hazards for life insurance?

Hobbies, occupation, health, bad habits, genetics

What is the purpose of life insurance?

To help survivors with help after the death of a loved ones

Who overpays and/or underpays for life insurance?

Young people (before 60) overpay and older people underpay

Who are the parties to the insurance company?

Owner (not always the person whose life is insured), insured (the person whose life is insured), and beneficiary

• The owner just needs an insurable interest

Who are the beneficiaries of an insurance policy?

The persons who will receive the payment upon the death of the insured

• Primary, secondary, etc.

• Contingent beneficiaries only receive benefits if all the primary, secondary, etc. beneficiaries are dead at the time of the insured’s death

What are the approaches to calculating how much life insurance to purchase?

Considerations

• Who is reliant on the insured

• Am I still the primary breadwinner for my family?

Main methods

• Human life value approach for determining the limit needs

• The needs approach for determining limit needs

What is the human life value approach to life insurance?

• How much longer am I expected to live?

  • In the US, females are expected to live to 81.1, with males living to 77.5

  • What is your family history

  • Do you have any underlying health problems

• What is my average after-tax income?

• What do I expect it to be over my working life?

What is the needs-based approach to life insurance?

• Death expenses (funeral, legal, medical)

• Pay monthly expenses for an adjustment period

• Dependency period for children

• Special needs (college fund, pay-off mortgage, pay-off college loans, other debts) would be added to the initial calculation

Which method of life insurance calculation is appropriate for middle-aged individuals?

Human life value approach. It is not great for a 25-year-old because no insurance company is going to want to cover 2.2 million for someone making 75k because they don’t have dependents

Who can purchase life insurance for an individual?

Anyone with insurable interest (key person insurance)

What is the incontestable clause

2 years after policy inception, the insurer can no longer contest a death claim due to misrepresentation, concealment, or fraud

How is life insurance handled with someone who committs suicide

If the insured dies from suicide within the first two years of the policy, then the policy is canceled and any premiums paid are returned to the insured’s estate. After two years, suicide is covered and the full policy limit be paid

What is an accidental death rider?

Optional coverage that will double or triple the policy limit if the death is caused by an accident. Usually have to die within 1 year of the accident occuring.

Define accelerated death benefit rider

Also known as a living benefit rider, it lets the owner of the policy access a portion of the death benefit early if diagnosed with a qualifying serious illness (terminal, critical, or chronic) or needing long-term care, helping with medical costs or other expenses before death. Any payment made before death will reduce the benefit after death

What are the types of life insurance proceeds payment options?

• Lump sum

• Interest only (for some stated period)

• Fixed period of payments

• Fixed amount of payments

• Lifetime income (an annuity is purchased)

What decides if the estate tax kicks in?

An estate over 15M for individuals and 30M for married people

Are life insurance proceeds taxable?

No, unless the estate tax is triggered