Life Insurance: The Basics
Life Insurance: The Basics
What is the one guarantee in life?
You buy health insurance in case you get sick
You buy automobile insurance in case you have an
accident
You buy homeowners insurance in case your
property gets damaged
You don’t buy life insurance to plan for your death
Life Insurance: The Basics
Life Insurance is to protect the people who depend
on you and would suffer a financial loss when you die
A beneficiary is the person or legal entity, such as a
charity, designated to receive the death benefit
The death benefit is the sum paid to the beneficiary
by the insurance company
Life Insurance: The Basics
Usually people buy life insurance to protect their
children, a surviving spouse, a disabled relative, or
elderly parents
It ensures that the dependent family members will be
able to afford and maintain their lifestyle or receive
the care they had before the death
Life Insurance: The Basics
Reasons to Buy Life Insurance
•To provide immediate cash to pay for a funeral, any other costs
arising from the death, or pressing debts
•To provide funds that are income tax-free
•To pay off a mortgage or other loans
•To provide housekeeping and child care services so that the
surviving spouse can enter the workforce
•To provide the surviving spouse sufficient funds to stay at home
or reduce work hours
•To provide dependents with an emergency fund
How Life Insurance Works
Legally binding contract between an insurance
company (insurer) and an individual (insured)
In exchange for payment of premiums, the insurer
agrees to pay a specified death benefit
The premiums collected from all policy holders are
placed in an insurance pool
The Insurance Company can invest the money in the
pool but must have enough on hand to pay out a
large number of claims
Life Insurance: The Basics
Underwriting Life Insurance
Underwriting is the process of assessing applicants
to determine whether they are good risks
An underwriter’s job is to minimize the risk the
company takes
Factors in underwriting:
•Present health
•Medical history
•Family medical history
•Lifestyle
•Occupation
Life Insurance: The Basics
Mortality Tables
Sophisticated statistical averages of how long a person of a
certain age, gender, ethnic background and so on can be
expected to live
Tables also consider your health, medical history, occupation
Premium Class
Insureds are placed into classes based on results from
underwriting
The better the class the lower the premiums
Life Insurance: The Basics
How much life insurance should a person have?
Factors:
•Number of dependents
•Ages and needs of dependents
•Balance on mortgage or monthly rent payments
•Balance of loans
•Health insurance
•Tuition
•Basic necessities
Life Insurance: Basic Policy Types
Two Basic Types
Term Insurance
Permanent Insurance
Life Insurance: Basic Policy Types
Term Insurance
•Simplest
•Usually most inexpensive
•A policy that is limited to a specific length of
time, or term
•Does not accumulate cash value
•Usually term is 1,5,10,15,20,25,or 30 years
Life Insurance: Basic Policy Types
Term Insurance
Term Policy Options
•Renewability Option
•After the term has expired you can
choose to renew your policy
•Don’t have to prove insurability
•Will pay a higher premium
Life Insurance: Basic Policy Types
Permanent Life Insurance
Covers the insured for a lifetime or until age 100
If you live to 100 insurer pays individual the
death benefit
Three types of Permanent Insurance:
•Whole life
•Universal life
•Variable life
Life Insurance: Basic Policy Types
Permanent Life Insurance
Cash Value
•Cash reserves accumulate in the policy
•You can take a loan out on the policy
•You can cash in your policy
Dividends
•The proportion of a company’s profit that it
pays to its policyholders
Life Insurance: Basic Policy Types
Permanent Life Insurance
Whole Life Insurance
•Policyholder pays the same premium amount for a
certain number of years
•Annual premiums are initially higher than term, but
in the long run they may become less since they
stay level
•If you plan on having insurance for more than 20
years it is usually more advantageous to have whole
life insurance
Life Insurance: Basic Policy Types
Permanent Life Insurance
Whole Life Insurance
Advantages:
•Absolutely predictable with zero risk
•Return is guaranteed
Disadvantage:
•Relatively inflexible
Life Insurance: Basic Policy Types
Permanent Life Insurance
Universal Life
•Functions like an investment account
•When a premium is paid funds are deposited into an account. Interest is
credited to the account, usually monthly, and a deduction is made, called
a mortality charge or term cost, to cover the cost of the insurance.
•Takes advantage of high interest rates and yields
higher returns on the cash value
•You can adjust the premiums you pay and the death
benefit amount
Life Insurance: Basic Policy Types
Permanent Life Insurance
Universal Life
Advantages:
•Flexibility
•You can increase the amount of money you put in
Disadvantages:
•Risks of investment market are transferred to the policyholder
•You may end up having to pay more in premiums than
expected
Annual Premiums per $1,000 of
Life Insurance
Annual Premium for a Policy
• To find the annual premium for a policy,
divide the face amount by $1,000 and then
multiply the result by the cost per $1,000
in the table.
Face of Policy
Annual Premium =
× Cost per $1,000
$1,000
Life Insurance Cash Values
• Cash value is the money that you get if
you cancel the policy.
• If you cancel a term policy, you get
nothing.
• Whole life policies build cash value after
premiums have been paid for a few years.
• The cash values of universal life insurance
policies will vary with the current value of
the investments that have been made.
Whole Life Cash Values
• The policy may give you a choice of taking the
cash, or using it to buy a small amount of whole
life insurance that is totally paid up, or to buy
term insurance.
• The policy may also allow you to borrow up to
the total amount of the cash value, often at a
lower interest rate than that offered by other
lenders.
• If you don’t pay back the loan, it will be
subtracted from the amount paid to your
beneficiaries.