RMI 3011 Exam 3 Study Guide STUDY FOR EXAM Section 3 Outline Management of Personal Risks o Life Insurance o Annuities o IRA s o Health Insurance and Related Coverages Employee Related Risks Employee Benefits Group Insurance Social Security Life Insurance Premature Death o Definition The death of a family head with outstanding unfulfilled financial obligations such as independents to support children to educate and a mortgage to pay off o Economic Justification for Life Insurance To protect your loved ones from the income loss and additional expenses related to your death Economically justified if the insured has earned income and others are dependent on those earnings for part of or all of their financial support If the family head dies prematurely with dependents to support and outstanding financial obligations the surviving family members are exposed to great economic insecurity Life insurance can be used to restore the family s share of the deceased breadwinner s earnings o Costs Premature death can cause serious financial problems for the surviving family members because of the following Deceased family head s future earnings are lost forever Additional expenses are incurred because of funeral expenses uninsured medical bills and estate settlement costs Because of insufficient income some families will experience a reduction in their standard of living Certain Non Economic Costs are incurred such as intense grief loss of a parental role model and counseling and guidance for children Financial Impact of Premature Death on Different Types of Families o Single People of singles has increased in recent years due to Younger adults are postponing marriage beyond age 30 Middle aged adults single again due to divorce Not likely to create a financial problem for others because No dependents to support or other financial obligations Needs A modest amount of life insurance for funeral insurance and uninsured medical bills Page 1 of 19 o Single Parent Families Needs o Two Income Earners Needs of single parent families with children under 18 has increased due to Large of children born outside of wed lock divorce legal separation and death Large amounts of life insurance for family heads Many single parents especially females have incomes below the poverty line and cannot afford to purchase large amounts of life insurance Families in which both spouses work have largely replaced the traditional family Both income earners need large amounts of life insurance if there are children o If there are no children need for large amounts of insurance are much less o Traditional Families Needs Families in which only one parent is in the labor force The working parent needs a large amount of life insurance The parent who does not work needs life insurance too o Blended Families Needs o Sandwiched Families Needs Families in which a divorced spouse with children remarries a new spouse who also already has children Both spouses are generally in the work force at the time of re marriage Both spouses need large amounts of life insurance Families in which a son or daughter with children provides financial support of other services to one or both parents A working spouse in a sandwiched family needs a large amount of life insurance Estimating the Amount of Life Insurance to Buy 3 Approaches Human Life Value Needs Capital Retention o Human Life Value Approach Looks at the present value of the family s share of the deceased breadwinner s future earnings Calculation Estimate the individual s average annual earnings over his her productive lifetime Deduct Federal and State Income taxes Social Security taxes Life and Health Insurance Premiums and the costs of Self Maintenance o The remaining amount is used to support the family Determine the number of years from the person s present age to the contemplated age of retirement Using a reasonable discount rate determine the present value of the family s share of earnings for the period determined Page 2 of 19 o Needs Approach Looks at the various family needs that must be met if the family head should die and the amount of money needed to meet these needs The total amount of existing life insurance and financial assets is then subtracted from the total amount needed The difference is if any the amount of new life insurance that should be purchased The Most Important Family Needs Estate Clearance Fund Needed immediately when the family head dies Includes cash needed for burial expenses uninsured medical bills installment debts estate administration expenses and estate inheritance and income taxes Income During The Readjustment Period For a period of 1 2 years after the death of the deceased the family should receive approximately the same amount of income re received while the family head was still alive The purpose of the readjustment period is to give the family time to adjust its standard of living Income During The Dependency Period Follows the readjustment period it is the period until the youngest child reaches the age of 18 Should be sufficient enough for the surviving spouse to stay home and care for the children Life Income To The Surviving Spouse o Blackout Period The period from the time that SS survivor benefits terminate when youngest child reaches age 16 to the time that the benefits are resumed when surviving spouse reaches age 60 Special Needs o Mortgage Redemption Fund Amount needed to pay off the mortgage o Educational Fund For kids to go to college o Emergency Fund For dental work home repairs or a new car o Mentally Of Physically Challenged Family Members For training education and caring for mentally or physically challenged family members Retirement Needs Lust in case current retirement income is inadequate o Capital Retention Approach Preserves the capital needed to provide income to the family The income producing assets are then available for distribution later to the heirs Calculation Prepare a personal balance sheet Determine the amount of income producing capital Determine the amount of additional capital needed if any Types of Life Insurance Methods of Providing Protection Page 3 of 19 o Temporary Method Term Insurance Protection is temporary 1 5 10 20 or 30 years Unless the policy is renewed the protection expires at the end of the period Most term insurance policies are Renewable The policy can be renewed for additional periods without evidence of insurability The premium is increased at each renewal date based on the insured s
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