What does life insurance provide protection against
The premature death of a family head/bread winner of the family
Pre-mature death
the death of a family head with outstanding unfufilled financial obligation
Single person need for life insurance
little: only enough to cover funeral expenses
Single parent families
The need for large amounts of life insurance on the family head is great
Two income earners with children
Both income earners need substantial amount of life insurance
Traditional families
The working parent in the labor force needs substantial amounts of life isnurance
What is a blended family?
one in which a divorced spouse with children re-marries and the new spouse also has children
Blended families
the need for life inusrance on both family heads is great
What is a sandwhich family?
one in which a son or daughter provides for both the parents and the children
Sandwhich family
the working spouse needs a substantial amount of life insurance
What is the human life value approach to determining the amount of life inusrance to own?
Can be defined as the present value of the family's share of the deceased breadwinners future earnings that are used for taking care of the family
How do you calculate human life value?
You multiply the discount rate by the amount that the breadwinner can contribute to the family income
Limitations of the human life value approach
1) ignores other sources of income
2) occupations not considered
3) amount of money can change quickly
Needs approach to determining how much life insurance is needed
the needs approach analyzes the various family needs that should be met if the family head should die such as the estate clearance fund, income during the readjustment period, income during the dependancy period, life income to the surviing spouse, retire
Capital retention approach to determining life insurance amount
preserves the capital needed to provide income to the family
The Steps for the capital retention approach
1) prepare a balance sheet
2) determine the amount of income producing capital
3) determine the amount of additonal capital needed (if any)
What are the two major types of insurance
Term and whole life
What is term insurance and when is it useful
Term insurance is a type of insurance with a temporary period of coverage where the policy expires at the end of the period as long as it is not renewed. However most term policies are renewable and convertible. convertible meaning that you can swap them
attained age method of conversion
premium charged is based on age at time of conversion
original age method of conversion
premium charged is based on original age at time of conversion
Does term insurance have a cash value or savings element?
NO
When is term insurance useful?
1) if the amount of income that can be spent on life insurance is limited, term insurance is effectively used.
2) If the need for protection is temporary
3) term insurance can be used to ensure future insurability
Limitations of Term insurance
Premiums increase with age at an increasing rate
inappropriate if you wish to save money for a specific need
Whole life insurance
Cash value policy that provides lifetime protection. The main differences between whole life and term is that whole life policies are cash value, have a savings element, and give lifetime protection while term policies do not have a cash value, do not hav
Ordinary Life insurance
Ordinary life insurance is a whole life policy that provides level premiums, cash values, and lifetime protection until age 121. In an ordinary life insurance policy the overpaying of premiums in the early years is used to supplement the underpayment of p
Net amount at Risk
Difference between the legal reserve and the face amount of the policy
cash-surrender values
characteristic of ordiniary life insurance policies which are whole life insurance poliies which the is accumulation of an amount paid to a polich holder who surrenders the policy
Limited payment whole life policy
another type of traditional whole life inusrance
What are the uses of ordinary life insurance?
An ordinary life insurance policy is appropriate when lifetime protection is needed and when you want to save money.
What is a limitation of ordinary life insurance?
Some people are still underinsured after the policy is purchased
limited-payment policy
another type of traditional whole life insurance like ordinary life insurance except that limited payment policies can be "paid up" and you wont have to pay any more premiums after this occurs. The premiums are level in a limited payment policy; but only
single payment wohle life insurance
provides lifetime protection with a single premium
endowment insurance
pays the face amount if the insured dies within a specific period or if the insured survives until the end of the period
Variations in whole life insurance
1) variable life insurance
2) Universal life insurance
3) Indexed universal life iinsurance
4) variable universal life insurance
5) Current assumption whole life insurance
What is variable life insurance?
Variable life insurance is a fixed premium whole life policy in which the death benefit and cash values vary according to a separate investment account maintained by the insurer
Are cash surrender values garunteed in variable life insurance?
No
Universal Life insurance
Flexible premium policy that provides protection under a contract that unbundles the protection and savings components.
Are there minimum cash values in variable life insurance?
no
What are the benefits of universal life insurance?
1) considerable flexibility
2) cash withdrawels are permitted
3) favorable income tax treatment
The two forms of universal life insurance
Level death benefit
Increasing death benefit
limitations of universal life insurance
Universal life insurance has misealding rates of return, a decline in interest rates, right to increase the mortality charge , lack of firm commitment to pay premoums
Indexed universal life insurance
indexed universal life insurance is a type of universal insurance where the minimum interest rates are garunteed and change based on investment gains in the stock market.
Which type of insurance often has considerable consumer misunderstanding and unrealistic expectations about it?
indexed universal life insurance
variable universal life insurance
it is similar to universal and variable but the policy holder determines how the investments are invested and is on the hook for the returns that they have
which type of insurnace has high risk?
variable universal
Which type of insurance has relatively high expense charges?
variable universal
Current assumption whole life insurance ("interest sensitive whole life insurance")
non-participating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience
What type of insurance has a formula for determining the amount of enchanced interest credited to the policy?
indexed universal
What type of insurance adds aditionaal insurance based on the investment gains of a specifc stock market index
indexed universal life insurance