RMI3011 Test 3 Study Guide Life Insurance o Perils affecting income premature death disability old age poor health unemployment o Premature death death with unfulfilled financial obligations Costs families portion of earning s how much your family is relying on you additional expenses of death reduction of standard of living o Financial impact based on different families Single low need very little obligations besides outstanding debt Single parent very high need who will care for kids Where will the money come from to care for kids DINKS Dual Income No Kids moderate need for life insurance to uphold their standard of living Married with children If only one parent supplies income the one providing the income has a high need the one staying home has a replacement cost based on housecleaning daycare etc Two incomes higher need for life insurance than DINKS Blended families step children What s his goes to his kids what s hers goes to her kids Sandwich families mom and dad kids and grandparents o How much life insurance is needed Based on final expenses estate liquidity survivor s income needs mortgage education and legacy giving provides funds for organizations to perpetuate what you believe in Other sources of income OASDI social security savings and investments inheritance o Characteristics of life insurance Purpose is to replace income tax free ONLY unique figure of life insurance Not a contract of indemnity cash payment contract Claims of creditors protected Proceeds are income tax free ADB Advanced Death Benefit if you re going to die soon terminal illness you can receive up to half your money up front o Human Life Value Approach estimates the family s share of breadwinner s earnings Crude measurement of economic worth major defects are that it doesn t consider other sources of income and the discount rate chosen is crucial Based on the present value of all future earnings o Needs Approach measures existence and extent of need estate clearance readjustment period dependency period life income to surviving spouse special needs mortgage redemption education emergency fund retirement financial profiles software o Capital Retention Approach assumes the retention of capital prepare personal balance sheet determine income producing capital determine needs determine additional capital needed investment income interest income o Yearly Renewable Term there s a pure premium calculated at each attained age Early on there s a low cost because it s based on mortality tables High cost later on because there s adverse selection Premium exponentially increases over time o Level Premium financing plan to level mortality costs Probability of death increases with age term system produces adverse selection overpayment in early years but prepayments create policy reserves and supplement inadequate premiums in later years The purpose is for lifetime protection and the by product creates cash values Life Insurance Contract Provisions o Parties to a life insurance contract Owner applies for contract responsible for premiums exercises contractual rights names beneficiary must have insurable interest of insured at policy inception can be person company or trust Insured person whose death causes payment of the proceeds not necessarily the owner of the policy Beneficiary entity who receives the proceeds after death of insured interest is contingent until death o Types of beneficiaries Primary the beneficiary who is first entitled to receive the policy proceeds on the insured s death Contingent entitled to the proceeds if the primary beneficiary dies before the insured Revocable the policyowner reserves the right to change the beneficiary designation without the beneficiary s consent Irrevocable one that cannot be changed without the beneficiary s consent Specific the beneficiary is specifically named and identified Class a specific person is not named but is a member of a group designated as beneficiary such as children of the insured o Dealing with Ownership and Premiums Annual payment vs Modal Factors if premium is paid anything other than annually a carrying charge will be charged into the premium Grace period for late premiums is usually 30 days Reinstatement can occur if there s evidence of premiums paid and a 3 5 year window Policy loans borrow cash value from the contract Automatic premium loan beneficiary protection if cash value in contract and premium is not paid they ll take cash out and it ll be as if the premium was paid not in term insurance Entire contract clause the contract gets matched with application and the two become the entire contract Incontestable clause if anything is discovered up to 2 years after the contract starts the contract may be voided After 2 years the carrier must pay the claim regardless Exceptions beneficiary commits murder someone else takes the medical exam no insurable interest at policy inception Suicide clause 2 year period of time Misstatement of Age or Sex clause for age sex mistakes they ll recompute and make the adjustment to the premium Change of plan provision term to level premium Assignment clause s life insurance is payable to bank for loans Exclusions and Restrictions suicide clause war clause act of duty exclusion aviation exclusion a flight private passenger excluded activities o Life Insurance Companies Mutual vs Stock Insurance Company Mutual is owned by policyholders earns money by selling life insurance Stock companies have investors shares etc Participating vs non participating participating pays dividends Mutual funds are participating rarer for a stock company to pay dividends to policyholders they pay them to stockholders Dividend options level premium policy with participating company every year they pay dividends You can choose to receive them as cash pay taxes reduction of premium pay taxes accumulation at interest pay taxes paid up additions most popular and useful accumulates dividends as additional coverage no taxes one year term policy Nonforfeiture options if you don t want the policy anymore Can take the policy as cash value reduced paid up face amount is reduced and no more premium payments extended term keep face amount and bring the policy to term Settlement options paid as a one time lump sum can be set up to pay interest only with proceeds ultimately going to contingent beneficiary fixed dollar amount annuity Optional Contract Provisions Disability waiver of premium if the payment is not paid due to disability your
View Full Document
Unlocking...