Today’s Lecture - #14 Life InsuranceHow Life Insurance WorksMortality Table - ExampleLife Insurance vs. AnnuitiesLife Insurance ContractsTerm LifeTerm Life PoliciesTerm Life - ExampleWhole Life InsuranceWhole Life Insurance - ExampleTax Treatment of Life InsuranceSlide 12Tax Treatment - ExampleEndowment Life InsuranceInsurance Policy - ExampleToday’s Lecture - #14Life InsuranceHow Life Insurance WorksTraditional Types of Life InsuranceHow Life Insurance WorksEstablishing a pool of fundsCalculating the probability of deathMortality Table - Appendix FGender as a classification factorLevel premium plansMortality Table - ExampleBased 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 yearsB) 2.89 yearsC) 4.18 yearsD) 5.00 yearsE) None of the aboveLife Insurance vs. AnnuitiesLife insurance pays when you dieAnnuities make periodic payments as long as you liveCurrent problem area:Reverse mortgages - pays an elderly homeowner periodic payments while they live, with the home serving as collateralPotentially a good concept, but many abusesLife Insurance ContractsTraditionalTerm LifeWhole LifeEndowment LifeNewer TypesUniversalCurrent Assumption Whole LifeVariable LifeVariable Universal LifeTerm LifeTemporary ProtectionRenewabilityConvertibilityDeath Benefit PatternPremium PatternTerm Life PoliciesYearly Renewable Term5 Year Level TermDecreasing TermReentry TermFront-end-loaded termTerm Life - ExampleWhich 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 termB) 5 Year Level TermC) Decreasing TermD) Reentry TermE) Cannot tell based on the information givenWhole Life Insurance“Permanent” Protection(as long as premiums are paid when due)Straight Life (a.k.a. Ordinary Life)Limited-Payment Life20 payment whole lifeLife paid up at 65Single-Premium LifeTax advantaged investmentWhole Life Insurance - ExampleWhich 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 lifeB) Whole life paid up at 90C) Whole life paid up at 65D) 20 payment whole life E) Cannot tell based on the information givenTax Treatment of Life InsuranceInvestment EarningsInvestment income on a life insurance policy is not taxed when it is earnedDeath BenefitsAre not subject to income taxMay be included in owner’s estate for estate tax purposesTax Treatment of Life InsuranceSurrender ValuesIf 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 timeExamplePay $1,000 per year for 20 yearsReceive $5,000 in dividendsSurrender the policy for $25,000Taxable income$25,000 - [(20x$1000) - $5000] = $10,000Tax Treatment - ExampleA 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) 0B) $15,000C) $80,000D) $85,000E) None of the aboveEndowment Life InsurancePays if the insured dies during the specified periodAlso pays if the insured survives until the end of the periodPossible useCollege accumulation fundInsurance Policy - ExampleWhich 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 termII Variable lifeIII Straight lifeIV EndowmentA) II and III B) III and IVC) II and IV D) II, III and IVE) I, II, III and
View Full Document
Unlocking...