RMI FINAL REVIEW A Premature Death a Means that a family head dies with outstanding unfulfilled financial obligations such as dependents to support children to educate or a mortgage to pay off b At least 4 costs are associated with premature death i There is a loss of the human life value ii Additional expenses may be incurred such as funeral expenses uninsured medical bills and estate settlement costs iii Because of insufficient income some families may experience a reduction in their standard of living iv Noneconomic costs are incurred such as emotional grief of the surviving dependents and the loss of a role model and guidance for children a The purchase of life insurance can be economically justified if a person has an earning capacity and someone is dependent on those earnings for at least part of his or her financial support a The human life value is defined as the present value of the family s share of the deceased breadwinner s future earnings This approach crudely measures the economic value of a human life a The needs approach can be used to determine the amount of life insurance to B Life Insurance C Human Life Value D Needs Approach purchase b After considering other sources of income and financial assets the various family needs are converted into specific amounts of life insurance c The most important family needs Income during the readjustment period Income during the dependency period i Estate clearance fund ii iii iv Life income to the surviving spouse v Special Needs mortgage redemption fund education fund emergency fund vi Retirement needs E Capital Retention Approach a The capital retention approach is for estimating the amount of life insurance to purchase is based on the assumption that income producing capital will be preserved and not liquidated F Term Insurance a Term insurance provides temporary protection and is typically renewable and convertible without evidence of insurability b Term insurance is appropriate when income is limited or when there are temporary c Because term insurance has no cash value it cannot be used for retirement or needs savings purposes i Term Life Level or decreasing death benefit 1 2 No cash value 3 Premiums paid increase each renewal 4 No investments 5 No policy loans cannot borrow against 6 No partial withdrawal of cash value G Whole Life Insurance a There are several traditional forms of whole life insurance i Ordinary Life Insurance a Is a form of whole life insurance that provides lifetime protection b Appropriate when lifetime protection is desired or additional savings are desired Level premiums and payable for life 2 3 Guaranteed cash value 4 Fixed premiums paid 5 Investments directed by insurer 6 Policy loans can borrow against 7 No partial withdrawal of cash value b Limited payment policy Is another traditional form of whole life insurance i ii The insured also has lifetime protection but the premiums are paid only for a limited period Example 10 20 30 years or until age 65 c Endowment insurance i Pays the face amount of insurance if the insured dies within a specified ii period If insured survives to the end of the endowment period the face amount of insurance is paid to the policy owner at that time d Variable Life Insurance i Death benefit is guaranteed minimum plus increase from favorable investments ii Cash value depends on investments iii Fixed premiums paid iv Investments directed by insured v Policy loans can borrow against vi No partial withdrawal of cash value e Universal Life Insurance f Variable Universal Life Insurance i Death benefit is level or increasing depends on investments ii Cash value is guaranteed minimum plus excess if applicable iii Flexible premiums paid Investments directed by insurer iv v Policy loans can borrow against vi Partial withdrawal of cash value allowed i Death benefit is level or increasing depends on investments ii Cash value depends on investments iii Flexible premiums paid iv Investments directed by insured v Policy loans can borrow against vi Partial withdrawal of cash value allowed g Other types of Life Insurance i Modified Life policy 1 Is a whole life policy in which premiums are lower for the first 3 5 years and are higher thereafter ii Preferred Risks 1 Sells policies at lower rates to certain individuals H Parts of a Contract a Endorsement Rider i An endorsement or rider is a written provision that adds to deletes from or modifies the provisions in the original contract ii An endorsement or rider normally takes precedence over any conflicting terms in the contract to which the endorsement is attached b Deductable i Requires the insured to pay part of the loss ii A specified amount is subtracted from the total loss payment that otherwise would be payable iii Deductibles are used to eliminate small claims to reduce premiums and to reduce moral hazard and attitudinal morale hazard c Coinsurance clause i A coinsurance clause in property insurance requires the insured to insure the property for a stated percentage of its insurable value at the time of loss If the coinsurance requirement is not met at the time of the loss the insured must share in the loss as a coinsurer ii iii The fundamental purpose of coinsurance is to achieve equity in rating d Ownership clause e Entire Contract clause i The ownership clause states that the policy owner possesses all contractual rights in the policy while the insured is living i The entire contract clause states that the life insurance policy and attached application constitute the entire contract between the parties f Incontestable clause i The incontestable clause states that a life insurer cannot contest the policy after it has been in force 2 years during the insured s lifetime g Suicide clause h Grace period i The suicide clause states that if the insured commits suicide within 2 years after the policy is issued the face amount is not paid ii There is only a refund of the premiums paid i The grace period allows the policy owner a period of 31 days to pay an ii Universal life and other flexible premium policies have longer grace periods iii The insurance remains in force during the grace period overdue premium such as 61 days i Beneficiaries i Primary beneficiary 1 The party who is first entitled to receive the policy proceeds upon the insured s death ii Contingent beneficiary 1 Is entitled to the proceeds if the primary beneficiary dies before the insured or dies before receiving the guaranteed number of payments under an
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