Chapter 16

Life Insurance

AGENDA

Premature Death

Types of Life Insurance

Term Life Insurance and Its Types

Whole Life Insurance and Its Types

PREMATURE DEATH

Premature death can be defined as the death of a family head with outstanding unfulfilled financial obligation.

Can cause serious financial problems for the surviving family members.

The deceased’s future earnings are lost forever.

Some families will experience a reduction in their standard of living.

Noneconomic costs are incurred, e.g., grief.

Additional expenses are incurred, e.g., funeral expenses and estate settlement costs.

THREE PARTIES OF LIFE INSURANCE CONTRACT

InsuredInsured

Beneficiary

Beneficiary

OwnerOwner

One person may be both insured and owner, or owner and beneficiary but a person cannot be both insured and beneficiary.

Example: You buy life insurance for yourself(both owner and

insured are one person). You buy a life insurance for your husband/wife (both owner and beneficiary are one person). If you are insured and anything happens to you,

you can not be the beneficiary of your own life insurance ( beneficiary and insured can no be the same person).

TYPES OF LIFE INSURANCE

Life insurance policies can be classified in two general categories:Term life insurance provide temporary

protection.

Whole life insurance or Cash-value life insurance has a savings component and builds cash values.

There are many variations of both types available today.

TERM LIFE INSURANCE Under a term insurance policy, protection is

temporary; protection expires at the end of the policy period, unless renewed.

Most term policies are renewable for additional periods Premiums increase at each renewalTo minimize adverse selection, many

insurers have an age limitation beyond which renewal is not allowed

TERM LIFE INSURANCE

Most term policies are convertible, which means the policy can be exchanged for a cash-value policy without evidence of insurability.

TYPES OF TERM LIFE INSURANCE Yearly-renewable term insurance is issued for

a one-year period

Term insurance can also be issued for 5 or more years

A term to age 65 policy provides protection to age 65, at which time the policy expires

USES AND LIMITATIONS OF TERM LIFE INSURANCE

Advantages of term life insurance Term life insurance is appropriate when:

The amount of income that can be spent on life insurance is limited.

The need for protection is temporary. The insured wants to guarantee future insurability.

Disadvantages of term life insurance Term insurance premiums increase with age at an

increasing rate and eventually reach prohibitive levels at age 65 or 70.

Term insurance is inappropriate if you wish to save money for a specific need

A QUESTION

Term life insurance does not provide the cash value or savings. What does it mean?

Term life insurance like auto insurance does not provide the cash value.

It means that if the death happens the insurer protects the family of insured and pays the death benefit.

HOWEVER, If the death does not happen,the insurer

does not pay back any thing to the insured who survives.

EXHIBIT 11.2 EXAMPLES OF TERM LIFE INSURANCE PREMIUMS

Which of the following $250,000 yearly renewable term (YRT) life policies would require the LOWEST premium?

a.YRT purchased by a man age 45. b.YRT purchased by a woman age 30.c. YRT purchased by a man age 35. d. YRT purchased by a woman age 60.

Answer: b

WHOLE LIFE INSURANCE OR CASH-VALUE POLICY

Whole life insurance is a lifetime protection(not temporary) and provides the coverage until age100.

The most important difference with term life insurance is that whole life insurance provides the cash value or savings, regardless of when the death occurs.

• It means that the insurer has obligation to pay back

regardless of the death occurrence.

TYPES OF WHOLE LIFE INSURANCE

• Ordinary life • Universal life Limited-payment

life• Variable universal life

• Endowment insurance

• Current assumption whole life

• Variable life • Indeterminate-premium whole life

LIMITED-PAYMENT LIFE INSURANCE

Under a limited-payment life insurance policy, the insured has lifetime protection, and premiums are fix payments, but they are paid only for a certain period. The most common limited-payment policies are

for 10, 20, 25, or 30 years.

A paid-up policy at age 65 or 70 is another form of limited-payment life insurance.

WHICH ONE IS MORE EXPENSIVE ? TERM LIFE INSURANCE OR WHOLE LIFE INSURANCE?

Whole life insurance is more expensive than term life insurance because the protection runs for the lifetime period.