Life Insurance – Quick Review

Life Insurance Basics

• Life insurance = contract: you pay premiums; insurer pays death benefit to beneficiary upon death
• Primary purpose: protect dependents from financial loss
• Common uses: pay debts, income replacement, education funds, estate planning, charitable gifts

Determining Coverage Needs (LO11.1)

• Buy only if someone would face $\text{financial hardship}$ at your death
• Consider employer‐provided group coverage first
• Quick estimation methods:
  • Easy Method: $\text{Need}=\text{Annual income}\times7\times0.70$
  • DINK Method: $\text{Need}=\text{Funeral}+\tfrac12(\text{joint debts})$
  • Non-working Spouse: $\text{Need}=20{,}000\times(18-\text{youngest child age})$
  • Family Need: detailed worksheet (adds living expenses, special needs, emergency fund, minus liquid assets)
• Online tools/apps: Bankrate, CalcXML, NerdWallet, Life Happens, Fabric, Lemonade

Life Insurance Companies (LO11.2)

• Stock companies → nonparticipating (non-par) policies (no dividends)
• Mutual companies → participating (par) policies (may pay policy dividends)

Major Policy Categories

• Term (temporary)
  • Pure protection; no cash value; lower initial cost
  • Variants: Renewable, Multiyear Level, Convertible, Decreasing, Return-of-Premium
• Permanent (cash-value)
  • Whole (straight/ordinary): fixed premium, builds cash value
  • Limited Payment: premiums for set years; lifetime coverage
  • Variable: cash value invested in separate accounts; death benefit fixed, cash value fluctuates
  • Adjustable: flexible death benefit & premium
  • Universal: term insurance + investment account; flexible premium & death benefit
• Other
  • Group life (through employers/associations)
  • Credit life (pays specific debts)
  • Endowment (pays at end of period or at death)

Key Contract Provisions & Clauses (LO11.3)

• Grace Period: $28\text{–}31$ days to pay overdue premium
• Automatic Premium Loan: unpaid premium deducted from cash value
• Guaranteed Insurability: buy extra coverage without new exam
• Nonforfeiture: keep some benefit/cash value if policy lapsed
• Incontestability: after $2$ years, insurer can’t void policy
• Suicide: within first $2$ years, refund premiums only
• Misstatement-of-Age: benefit adjusted to correct age
• Policy Loan: borrow up to cash value (reduces death benefit if unpaid)
• Joint Life: first-to-die or second-to-die (survivorship)

Common Riders

• Waiver of Premium (disability)
• Accidental Death (double indemnity)
• Cost-of-Living (inflation adjustment)
• Accelerated Benefits/Living Benefits (advance on death benefit for terminal illness)

Buying Life Insurance (LO11.4)

• Evaluate: current/future income, savings, employer plans, Social Security, company strength
• Company Ratings: choose $A$ or better (A.M. Best, S&P, Moody’s, Weiss)
• Agent Checklist: accessibility, planning focus, no pressure, ongoing education, clear explanations
• Factors affecting premium: operating costs, investment returns, expected mortality, policy features, competition
• Settlement Options: Lump-Sum, Limited Installments, Life Income, Interest-Only (proceeds left with company)
• Free-look period: $10$ days to cancel for full refund

Quick Rules of Thumb

1. Reassess needs regularly (marriage, kids, debts, retirement plans)
2. Buy only what you need and can afford; term is cheapest for large protection
3. Non-smoker discounts lower premiums
4. Keep policy documents safe; inform beneficiaries
5. Understand policy before purchase; never replace existing coverage without full analysis