RMI Test 3 Life Insurance Perils Affecting Income 04 15 2012 Premature death outstanding financial obligations Disability Work related workers compensation Non Occupational life insurance Old age Poor Health Unemployment KJ 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 things Premature Death Meaning death w unfulfilled obligations Costs families portion share of earnings Additional expenses cutting grass if poppa bear dies Reduction in standard of living Chance of dying Economic Justification of life insurance 100 probability of death IT WILL HAPPEN Financial Impact for different families Single LOW Single parent HIGH DINKS 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 HIGH Traditional 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 need Blended Families Divorced families how assets are dispersed KJ wants ashes spread at half time Sandwich Families when grandparent s come into home with kids grandkids Not only are the kids dependents but most likely grandparent s are also so need is relatively HIGH Life Insurance Planning How much is needed Financial expense funeral expenses Estate liquidity credit card debit Survivor 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 Investments Inheritance How long are they available Focus on the duration of the need Resists all or nothing idea o 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 Insurance Purpose of life insurance is to replace income unique feature of Life insurance Only Not a contract of Indemnity or is it discussed later Cash payment contract Claims of creditors protected from creditors Annuities 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 protected Proceeds from Life Insurance Income is TAX FREE usually Sarbanes Oxley CEO s can be liable for false documents so they put cash into houses in FL because it is protected from creditors How Much Human Life Value Approach Estimates the families share of bread winners primary income earnings Subtract FICA Fed Taxes Retirement contributions self maintenance Things that would be consumed if the person was alive Often viewed as a crude measurement economic worth Major defects o Doesn t consider other sources of income o Discount rate chosen is crucial Present value of all future earnings Needs Approach works relatively well Measures Existence and Extent of need Estate clearance Readjustment period o Dependency period 4 yr old 14 years of dependence left o Blackout period no dependent children spouse not retirement age Life income to surviving spouse Special needs o Mortgage redemption Education Emergency fund Retirement o Financial profiles software helps in planning for retirement financial needs Capital Retention Approach Assumes the retention of capital Prepare personal balance sheet Determine Income producing capital Determine Needs Needs approach works well here Determine Additional Capital Needs Investment income Interest income Methodology Yearly renewable term Pure Premium calculated at each attained age Low Cost Early Use mortality tables Ex 80 yr old expensive High Cost Later Some adverse selection o Premiums Exponentially Increase Level Premium Financial Plan to level mortality costs Probability of death increase with age Term system produces adverse selection Overpayment in early years Prepayments create policy reserves for later years Redundant premiums compound interest Supplement inadequate premiums later The purpose is lifetime protection o By product cash value Life Insurance Contract Provisions 3 29 Owner Insured Applies to the contract Responsible for the premium Exercises contractual rights Names beneficiary Must have an insurable interest in the life of the insured at policy INCEPTION Can be any person corporation or trust KJ doesn t have to be a natural person Person whose death causes payment of the proceeds face amount May or may not be the owner Beneficiary doesn t have to be a natural person Entity who receives proceeds at death of the insured KJ beneficiary has no say in policy until death Interest is contingent until death Can be argued that the Insurance company is a 4th party in these agreements Types of beneficiary Primary and contingent KJ Kathy and KJ are both killed contingent gets the money because the primary is dead If KJ dies immediately and Kathy dies 3 weeks later simultaneous death act states that it can be within 180 days in FL Without 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 children Don t Do s Name a minor as a beneficiary Estate of Insured has to go into probate then money is dispersed Ex could take foreverrrrrrr Life Insurance Contract Provisions 3 29 Dealing with ownership and premiums Annual payments vs Modal Factors 09 monthly Payment on 1000 1080 because your payments were made monthly Simple Interest 80 8 KJ paying annual will save you
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