Life InsurancePerils Affecting IncomePremature death: outstanding financial obligationsDisability: Work related = workers compensation, Non Occupational = life insuranceOld agePoor HealthUnemploymentKJ: Life insurance was sold on emotion in the beginning; by convincing people they would want their loved ones to have money in the event they died. Over the past 3 decades it has changed some and not sold as much on emotion.People are income producing thingsPremature DeathMeaning: death w unfulfilled obligationsCosts: families portion (share) of earningsAdditional expenses: cutting grass if poppa bear diesReduction in standard of livingChance of dyingEconomic Justification: of life insurance100% probability of death: IT WILL HAPPENFinancial Impact for different familiesSingle: LOWSingle parent: HIGHDINKS (Double Income No Kids): MEDIUM (high standard of living and expenses that come with that life style, Ex: club memberships, car payments)Married with children: HIGHTraditional: dad works / mom stays at home. High need for dad, and relatively high need for mom also. If mom dies would need a baby sitter, cook, chauffer.Two-income: both working, relatively HIGH needBlended Families: Divorced families, how assets are dispersed (KJ: wants ashes spread at half time)Sandwich Families: when grandparent(s) come into home with kids & grandkidsNot only are the kids dependents but most likely grandparent(s) are also so need is relatively HIGHLife Insurance PlanningHow much is needed?Financial expense: funeral expensesEstate liquidity: credit card debitSurvivor income needs: to maintain standards of living, etc..Mortgage: will the survivor be able to pay the mortgage?Education: grandparents wanting grandkids to go to college, even if grandparents die, how much Life insurance is needed?Legacy giving: Jim Moran Entrepreneurship Institute, Seminole athletics, and death gifts. Ex; KJ’s life insurance policy to FSU foundation for a scholarship upon his death.What other income sources are available?OASDI (Old Age? Disability Insurance)(social security)Savings and InvestmentsInheritanceHow long are they available?Focus on the duration of the needResists “all or nothing idea”Ex: If you need 2 million of Life insurance but can only afford 1 million you should buy the 1 million and then add more when/if you can.Characteristics of Life InsurancePurpose of life insurance is to replace incomeOnly unique feature of Life insuranceNot a contract of Indemnity….or is it? (discussed later)Cash payment contractClaims of creditors…protected from creditorsAnnuities, 401k plan, IRA (are Protected in FL so is a home as long as payments/ mortgage is paid. An Ex: OJ Simpson used assets to purchase a house in Vero to avoid losing his assets in lawsuits)In FL Principal residence protectedProceeds from Life Insurance Income is TAX FREE (usually)SarbanesOxley- CEO’s can be liable for false documents, so they put cash into houses in FL because it is protected from creditorsHow Much?Human Life Value ApproachEstimates the families share of bread winners (primary income) earningsSubtract FICA, Fed Taxes, Retirement contributions, self maintenance…. (Things that would be consumed if the person was alive)Often viewed as a crude measurement….economic worthMajor defectsDoesn’t consider other sources of incomeDiscount rate chosen is crucial=Present value of all future earningsNeeds Approach = works relatively wellMeasures Existence and Extent of needEstate clearanceReadjustment periodDependency period: 4 yr old= 14 years of dependence leftBlackout period: no dependent children/spouse not retirement ageLife income to surviving spouseSpecial needsMortgage redemption, Education, Emergency fundRetirementFinancial profiles software helps in planning for retirement financial needsCapital Retention ApproachAssumes the retention of capitalPrepare personal balance sheetDetermine Income- producing capitalDetermine NeedsNeeds approach works well hereDetermine Additional Capital NeedsInvestment income/ Interest incomeMethodology: Yearly renewable termPure Premium: calculated at each attained ageLow Cost Early: Use mortality tables, Ex: 80 yr old= expensiveHigh Cost Later: Some adverse selection***Premiums Exponentially Increase***Level Premium: Financial Plan to level mortality costsProbability of death increase with ageTerm system produces adverse selectionOverpayment in early yearsPrepayments create policy reserves for later yearsRedundant premiums + compound interestSupplement inadequate premiums laterThe purpose is *lifetime protection*By product= cash valueLife Insurance Contract Provisions 3-29OwnerApplies to the contractResponsible for the premiumExercises contractual rightsNames beneficiaryMust have an insurable interest in the life of the insured at policy INCEPTIONCan be any person, corporation or trustKJ: doesn’t have to be a natural personInsuredPerson whose death causes payment of the proceeds (face amount)May or may not be the ownerBeneficiary doesn’t have to be a natural personEntity who receives proceeds at death of the insuredInterest is contingent until deathKJ: beneficiary has no say in policy until deathCan be argued that the Insurance company is a 4th party in these agreementsTypes of beneficiaryPrimary and contingent=KJ: Kathy and KJ are both killed, contingent gets the money because the primary is deadIf KJ dies immediately and Kathy dies 3 weeks later simultaneous death act states that it can be within 180 days in FLWithout a contingent: the money would go to estate and have to go through probate (no fun)If Kathy is alive at time of KJ’s death, Kathy gets the money, she can die and then her estate would get it (KJ’s kids wouldn’t get any according to Kathy’s will)Revocable and Irrevocable- can be changed, owner controls. All beneficiaries are considered revocable.If Irrevocable, owner can only change with permission from the beneficiary.Specific and Class: actually named someone, Class: class of people, Ex: “all children of Keith Jones”, acceptable but not advisable. When naming a class be specific.Ex: Bobby Bowden could say any and all off spring of his childrenDon’t Do’s….Name a minor as a beneficiaryEstate of Insured: has to go into probate then money is dispersedEx: could take foreverrrrrrrLife Insurance Contract Provisions 3-29Dealing with ownership and premiumsAnnual payments vs. Modal Factors: .09, monthlyPayment on $1000= $1080 because your payments were made monthly.
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