Today s Lecture 14 Life Insurance How Life Insurance Works Traditional Types of Life Insurance How Life Insurance Works Establishing a pool of funds Calculating the probability of death Mortality Table Appendix F Gender as a classification factor Level premium plans Mortality Table Example Based on the Commissioners 1980 Standard Ordinary Mortality Table how much longer is the life expectancy at birth of a female compared to a male A 0 years B 2 89 years C 4 18 years D 5 00 years E None of the above Life Insurance vs Annuities Life insurance pays when you die Annuities make periodic payments as long as you live Current problem area Reverse mortgages pays an elderly homeowner periodic payments while they live with the home serving as collateral Potentially a good concept but many abuses Life Insurance Contracts Traditional Term Life Whole Life Endowment Life Newer Types Universal Current Assumption Whole Life Variable Life Variable Universal Life Term Life Temporary Protection Renewability Convertibility Death Benefit Pattern Premium Pattern Term Life Policies Yearly Renewable Term 5 Year Level Term Decreasing Term Reentry Term Front end loaded term Term Life Example Which form of term life insurance for the same amount of coverage would tend to be the most expensive in the first year A Yearly renewable term B 5 Year Level Term C Decreasing Term D Reentry Term E Cannot tell based on the information given Whole Life Insurance Permanent Protection as long as premiums are paid when due Straight Life a k a Ordinary Life Limited Payment Life 20 payment whole life Life paid up at 65 Single Premium Life Tax advantaged investment Whole Life Insurance Example Which form of whole life insurance for the same amount of coverage would tend to be the least expensive in the first year for a 30 year old A Ordinary life B Whole life paid up at 90 C Whole life paid up at 65 D 20 payment whole life E Cannot tell based on the information given Tax Treatment of Life Insurance Investment Earnings Investment income on a life insurance policy is not taxed when it is earned Death Benefits Are not subject to income tax May be included in owner s estate for estate tax purposes Tax Treatment of Life Insurance Surrender Values If you cancel a policy the difference between what you receive and what you paid for the policy in total is subject to income taxation at that time Example Pay 1 000 per year for 20 years Receive 5 000 in dividends Surrender the policy for 25 000 Taxable income 25 000 20x 1000 5000 10 000 Tax Treatment Example A 30 year old purchases a 100 000 whole life policy for an annual premium of 2 000 The dividends total 5 000 After 10 years the policyholder dies and the insurer pays 100 000 How much of the policy proceeds are taxable income A 0 B 15 000 C 80 000 D 85 000 E None of the above Endowment Life Insurance Pays if the insured dies during the specified period Also pays if the insured survives until the end of the period Possible use College accumulation fund Insurance Policy Example Which of the following policies generates a cash value that would provide funds if the policy were surrendered prior to the death of the policyholder I Yearly renewable term II Variable life III Straight life IV Endowment A II and III B III and IV C II and IV D II III and IV E I II III and IV
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