RMI3011 Section 3 Life Insurance Outline Premature Death Financial impact Estimating the amount of life insurance Methods of providing life insurance Types of life insurance Tax treatment Life insurance and contract provisions Options Premature Death o o o o o o o o o o o o Definition dying too soon with financial impact Economic justification for life Insurance Costs funeral expense unpaid medical bills any costs incurred in settling estate loss of income for household loss of services that results in additional costs ex stay at home mom dies and husband has to pay for daycare Financial Impact varies depending on family structure Single People don t have anyone else depending on you Have lowest need for life insurance concern is only funeral expense Single parent families has one or more dependent children Have greatest need for life insurance whoever person named as guardian will have to have enough insurance to cover daily living expenses to raise kid without burdening guardian also if you want your kids to go to college Two income earners Traditional families Don t need life insurance as much o Working dad and stay at home mom Blended families Brady bunch Sandwiched families Estimating the amount 3 methods Human life value approach Result of increase in life expectancy when you care for your parents and your kids so your death would hurt kids and parents because you re paying for both Tries to determine present value PV of the family share of breadwinners future earnings Age 37 Retire 67 Have 30 more years working and contributing to household If making 75k and only 50k goes towards maintaining family unit because of taxes 50k X 30yrs 1 5 Mill you only need 50k a year don t do this because your earn interest on 50k If you invest 50k today and earn 5 interest you need 768 622 today it would generate 50k a year and last 30 yrs PROBLEMS its assuming they earn same amount of income over course of lifetime so insurance alter numbers doesn t consider any other sources of income ex investments it will cause you to overestimate 50k income 8k SS 12k invest 30k so you only need this insurance Needs approach states what you need to survive Cash needs money that has to be paid out upon death all final expenses funeral estate etc Income needs try to estimate lost income family will need to replace Ex take home pay 6k combined household income Need 75 to live comfortable 4500 take home needs Spouses income who s still alive 2500 SS 1k Equals 100 4500 2500 1000 Adjustment period 1 to 2 yrs if remaining spouse can get a raise don t need as much from insurance Dependency period youngest child age to reach 18 yrs old EX kid 2 yrs old 16 yrs dependency pd yrs your taking care of kid Special needs removes big expense like mortgage states how much you need to pay that off EX mortgage emergency fund college education states you need this money set aside to cover this Add all of these needs up additional income is subtracted from total needs investments etc so additional amount of life insurance needed will be less Capital retention approach create personal Balance Sheet Looks at all assets of household car personal property Next look at liabilities of home car loan mortgage Assets liabilities also subtract non income producing things assets house car personal property assets this is the amount you get to help pay things off Subtract earnings on income producing assets from total assets this will give you income from other sources Methods of providing protection Temporary method Pure premium High cost at advanced age o o o Mortality charge this varies because based on your mortality of your young expect you to live longer when you get older this charge goes up Expense charge stays the same Addition to surplus profit Increases at increasing rate so at some point temp protection won t be affordable At advanced age it won t it be affordable permanent method remains in for whole lifetime doesn t expire you pay excess for this it gets put away for later yrs so you re paying out less when your older it can be substantially more expensive EX Temporary Male 130 Permanent Male 998 Female 119 Female 941 This is the reason why temp protection is popular Use of legal reserves Cash values o o o o o o o o o o o o o o o o o Term Insurance short Characteristics o o Types o o o Renewable you don t have to fill out paper your just renewed premium will only increase based on age not health status Convertible allows you to change policy from temporary to permanent without proving insurability 1 yr term policies one yr or longer 5 to 10 yrs Term to 65 goes into effect at current age until age 65 Decreasing term policy made to cover payoff on mortgage basically says when you die insurance will pay off certain amount of mortgage as time goes on they will have to pay less o With constant they will pay same amount even as time goes by o o Specialized terms term to 65 and decreasing term policy Uses enable insurance for future Whole life Insurance provide lifetime protection at constant premium If live past 100 they pay you death benefit and policy is over Now the age is 121 they will pay you if make it to 121 Characteristics o o Types o Whole life o Variations of Whole Life Universal life Limited payment option insurance decreases expense during retirement you can have your life insurance paid up by retirement you only pay into policy for fixed amount of time and then policy remains in force EX stop paying at 60 yrs old if die at 68 you still get insurance be sure you can afford premium during payment period Uses use if want lifetime protection and if able to pay premium costs o Characteristics flexible policy insurance company invests and picks for you Premium mortality charge expenses surplus cash value money that s invested and earns interest If can t pay premium have need for cash you can Borrow against cash value at prestated interest rate 1 2 U can start paying off paying certain level of premium and if not able to pay you can use cash value to pay premium to keep policy in force If decide at future point you don t want policy you can surrender policy and end it and they will pay you your cash value has tax charges o Types Option A cash value won t exceed death benefits since cash value grows it forces death benefit to grow Option B death benefit increases over entire life of policy option B has higher premium Variable life not flexible o o o You get to control how your cash value is invested because you control
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