RMI 3011 Test 3 Study Guide RMI 3011 Test 3 Study Guide Chapter 5 Life Insurance Perils obligations o Costs Premature Death death of a family head with outstanding unfulfilled financial The family s share of the deceased breadwinners earnings is lost forever Additional Expenses Funeral Uninsured medical bills Estate settlement costs Reduction in standard of living due to insufficient income o Chance of dying Economic Justification of life insurance Old Age Poor Health Unemployment Single People Single Parents Financial Impact for different types of families o Does not generally need large amounts of life insurance o The need for life insurance on the family head is great DINKs Dual Income No Kids o Both income earners need substantial amounts of life insurance incase something happens to the other Traditional Married w Children Dad at work mom stays home o The working parent in the labor force needs substantial life insurance o The non working spouse actually needs life insurance also You have to think about what needs to happen when you aren t home example taking care of kids Blended Family divorced spouse with children remarries and the new spouse also has children o The need for life insurance on both family heads is great Sandwiched Family Grandparents living with you o A working spouse in a sandwiched family needs a substantial amount of life insurance Must be able to provide for their children and aged parents 1 RMI 3011 Test 3 Study Guide How much is needed Adequate insurance covers the below listed o Final Expenses end of life costs i e funeral medical bills etc o Estate Liquidity the persons debts o Survivor s income needs provide enough money for the beneficiaries to live o Mortgages o Education for deceased s children o Legacy Giving Other Available income sources OASDI social security Savings Investment Inheritance How long available Focus on duration of the need Avoid all or nothing advice if you can t get what you need buy what you can afford Characteristics of Life Insurance Purpose is to replace income o Only unique feature to life insurance Not a contract of indemnity or is it o Cash payment contract Claims of creditors Protected o Annuities 401k plans IRAs o And in Florida the primary residence is protected Proceeds are usually income tax free How Much Human Life Value Approach o Estimates the family s share of the deceased Breadwinners Earnings Deduct the following which will be used to support the family FICA Federal Taxes Retirement Contributions Self Maintenance o Crude Measurement o Major Defects Only based on the persons economic worth Doesn t consider other sources of income 2 RMI 3011 Test 3 Study Guide Social security survivor benefits Work earnings are assumed constant and employee benefits are Discount rate chosen is crucial Human life value can be substantially increased by assuming a ignored lower rate Uses present value of all future earnings Needs Approach Measures Existence and Extent of need o Estate Clearance Fund or cleanup fund immediate cash needed for Installment Debts Burial Uninsured Medical Expenses Estate administration expenses Estate Inheritance Income taxes o Readjustment Period 1 2 years The family should receive the same amount of income as before the breadwinners death Gives them time to adjust to different standard of living o Dependency Period black out period Period until youngest child reaches 18 Family receives income during this period so surviving spouse can remain at home if necessary Substantially reduced if remaining spouse is already in work force o Life income to surviving spouse Income during the blackout period Income to supplement social security earnings after blackout period Blackout period period from the time that social security survivor benefits terminate to the time the benefits are resumed Survivor benefits terminate when youngest child reaches 16 and restart when surviving spouse reaches age 60 Special Needs Mortgage Redemption Fund Education Fund Emergency Fund Retirement Financial Profiles Software 3 o What can bring the family income after the breadwinners death o Extra capital needed based on income shortage for survivors after deducting RMI 3011 Test 3 Study Guide Capital Retention Approach Assumes the Retention of Capital hence the name Prepare a personal Balance Sheet o Lists all assets and liabilities o Include all death benefits from life insurance Determine amount of income producing capital Determine needs o Use the needs approach for this Determine Additional Capital needed Survivor benefits Income produced by capital o Investment Income Interest Income Yearly Renewable Term Pure premium o Calculated at each attained age Low cost early o Mortality tables High cost later o Some adverse selection Premium Exponentially Increases Level Premium Financing Plan to Level Mortality Costs o Probability of death increases with age o Term System produces adverse selection Overpayment in Early Years o Prepayments create policy reserves o Redundant premiums compound interest o Supplement inadequate premiums later Purpose Lifetime Protection By product Cash Values 4 RMI 3011 Test 3 Study Guide Chapters 8 9 part I Life Insurance Contract Provisions Parties to a life insurance contract Owner o Applies for contract o Responsible for premiums o Exercises contractual rights The policy owner not always the insured possesses all contractual rights while insured is living o Names the Beneficiary o Must have an insurable interest in the life of the insured at the policy s inception o Can be a person corporation or trust i e the insured s employer Insured o Person whose death causes payment of proceeds the face amount o May or may not be the owner Life insurance through ones job Beneficiary o Entity that receives proceeds at death of the insured o Interest is contingent until death Types of Beneficiaries insured s death Primary the beneficiary that is first entitled to receive the policy proceeds on the Contingent is entitled to the proceeds if the primary beneficiary dies before insured Revocable The policy owner reserves the right to change the beneficiary designation without the beneficiaries consent Irrevocable one that cannot be changed without beneficiaries consent o If irrevocable beneficiary dies before insured all rights to choose beneficiary go back to policy owner Specific beneficiary specifically named and identified Class part of a designated beneficiary group children of the insured Don t Do o name minor
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