Life Insurance

What is life insurance?

financial tool that is used to protect families from the financial impact of premature death

What are the six specific reasons for life insurance?

• Replace lost income- income (person did make)

  • survivors standard of living

• Burial expenses

• Pay off Debts

• college planning

• Cash value (income tax free)

• Business and Estate Planning (key employees)

Three key phrases of life insurance?

Risk Management tool: transfers the financial risk of a premature death from a family to the insurance company

• Financial protection

• Income replacement

• stability for the living

What does income replacement mean?

life insurance replaces the economic value of a person

What does financial expenses not include?

medical bills and estate costs

What are some debts that life insurance help pay off?

• mortgages

• auto loans

• student loans

• credit cards

• businesses loans

What is cash value?

cash value can be used while alive for

• emergencies

• supplemental retirement income

• opportunity funding

• tax advantaged access

What is included in Business & Estate planning?

• Buy and sell agreements

• key person protection

• businesses continuity

• estate tax liquidity

• wealth transfer

What does the risk management tie into life insurance?

• pure risk (only loss, no gain)

• low frequency, high severity events

• human capital risk

• businesses continuity risk

• financial dependency risk

What are the four types of need analysis for life insurance?

1. Multiple Income approach

   1. Take your yearly income and multiply by the number of years you want to replace

2. Human Life Value Approach

   1. Determine length of time

   2. estimate future earnings (10 years)

   3. subtract taxes

   4. discount future earning

   5. add cost of necessary benefit (health insurance)

3. Capital Needs Appraoch

   1. Replacement of the proposed insured income

   2. any immediate lump sum needs

   3. long term expenses

4. Capital Retention

   1. Amount of insurance sufficient enough for the lump sum to death benefit will produce annual income to meet the needs

What are the parties of a life insurance contract?

1. Insurance Company

   1. Each insurance company writes its own contract and must have it approved for sale in each state, each company writes their own contract

2. Owner

   1. person/party who owns or controls the “incidents of ownership”

      1. ability to choose change beneficiary

      2. surrender the policy

      3. tale loans

      4. assign the policy

      5. choose dividend option

What are the key roles of life insurance contract?

1. Insured: person that the policy upon whose age, sex, health the premium is determined on

2. Beneficiary: proceeds are paid

What is term life insurance?

Designed for a set period of time/term

Used for debts- mortage, auto, credit card, college, repalcement of income

What are term policies

• Level death benefit

• Increasing premium

• No cash value

• underwritten at issue

• not underwritten at renewal

• convertible

• cost of insurance

What are types of term insurance?

ART: annual renewal term policies

DART: Decreasing annual renewal term

Level Premium Policies

ROP: Return of premium term

What is permanent life insurance?

What are characteristics of whole life insurance?

• premiums

• death benefit

• cash value

• guaranteed cash values

• surrender value

• endowment

How does a whole life policy work?

• Overpayment/underpayment

• net amount of risk

• dividend options

  • cash

  • accumulate at interest

  • reduce premiums

  • paid up additions

What is important about policy loans?

Paying the loan back

paying the loan interest

not paying loan interest

What is non payment of premiums- non forefeiture optiosn?

• surrender

• extended term insurance

• reduced paid up insurance

How does the universal life work?

premiums go into an account

COI comes out- and other montly charges

What is the difference between Whole Life and Universal Life?

Both designed for permanent needs

both develop cash value

both provide income tax free death benefits

What is the difference between Whole life and Universal life?

• premium flexability

• dividends vs. interest

• Universal life insurance premiums and death benefits

  • Option A and B

    • Option A: most conservative- DB remains level

    • Option B: owner can increase the DB and would at death original DB is paid as well as increase

What is index universal life?

• most popular today

• three important factors

  • minimum interest/ credited rate: cash value minimim rate

  • Participation rate; percentage of gain given to policy (how much you participate in the fluctuation)

  • Cap rate: amount actually credited to policy (you wont get full amount increase but only partial)

What is included in a life insurance contract?

• entire contract

• mirepresentation/incontestability

• misstatement of Age or Sex

• Free Look

• Suicide

• Grace period

• reintstatement

• war

• riders

  • insured wavier of premium

  • guaranteed insurability benefit

  • terminal illness riders

  • accidental death benefit

  • term riders

settlement optiosn and taxation?

settlement options

• interest only

• life income options

• non life options

Taxation

• premiums are not eligible for tax purposes

• cash value

• partial surrenders

• complete surrenders

• death benefits

Purchasing a life insurance policy key points

• application

• underwritting

  • issue as applied

  • modify the premium

  • modify the coverage

  • reject

• policy delivery

  • typically 30 days to delivery policy

  • once delivered - free looks take over

  • signature for policy

What is modified endowment contract?