Chapter 10
Life Insurance
• Reasons People Purchase Life Insurance
1.
2.
3.
4.
Cash for immediate needs
Readjustment funds
Replacement income
Special situations
Chapter 10
Life Insurance
• How Much Life Insurance Do You Need?
Two theories for determining life insurance
needs:
– Human value approach.
• Attempts to forecast the value of income the
person would have earned had they lived an
average number of years
• Inexact science at best
Chapter 10
Life Insurance
• How Much Life Insurance Do You Need?
– Multiple earnings approach
• Sufficient earnings must be available to
replace earnings for certain number of
years
– Multiply the number of years left to replace
income by factor from the multiple earnings
table
Chapter 10
Life Insurance
• Types of Life Insurance Policies
Life insurance policies can be classified into
three broad categories:
 Term insurance
 Whole-life insurance
 Universal life insurance
Chapter 10
Life Insurance
• Term Insurance
– “Term” is a specified period of time in the life of the
insured.
– It is pure insurance because it offers nothing more
than financial protection if you die
– Once policy expires, the insurance company has no
further obligation to you
– The least expensive option. For the same premium,
you can purchase 5 to 10 times as much term
insurance as any other type of life insurance.
Chapter 10
Life Insurance
• Level Term
Commonly issued for periods of one year, five
years, or 10 years
–Offers a fixed amount of insurance coverage
with premiums that are constant over length of
the term
–However, when term insurance is renewed,
the premiums increase to reflect greater risk of
dying associated with older age.
Chapter 10
Life Insurance
• Decreasing Term
– Designed for people whose need for
insurance diminishes as they get older (i.e.
the mortgage is paid off, the children have
finished college)
– While premiums remain constant over time,
insurance coverage automatically decreases
as you get older
Chapter 10
Life Insurance
• Renewable Feature Available With Term
Insurance
Renewable -- gives policy holder option of renewing
insurance for at least one additional period without
having to pass another physical
Usually additional period is same length as the original
term. Many companies allow renewals an unlimited
number of times until certain age, 65 or 70.
Chapter 10
Life Insurance
• Deposit Term Insurance
– Designed to reward policyholders who keep
insurance in force for a long term (time)
– Has savings component as well as an
insurance component so it is not true term
insurance
Chapter 10
Life Insurance
• Deposit Term Insurance
– During first year, you pay deposit as well as
regular premium. Deposit placed in interest
bearing account which you receive back with
interest after end of term insurance.
– If policy lapses before end of term, you
forfeit the deposit and the interest earned
Chapter 10
Life Insurance
• Whole-Life Insurance
Two basic differences between term and
whole-life insurance:
1. Whole-life purchased for entire life whereas
term is only for specified number of years
2. Savings component in whole-life which is
not present in term
• Allows flexibility
• Increases the cost of the insurance
Chapter 10
Life Insurance
• Straight Life Insurance
– Also termed continuous-premium whole-life or
ordinary whole-life insurance
– Premiums remain same throughout life of policy
(determined by age and health at time of
enrollment)
– Premiums build cash value (accumulated savings) in
the early years and help pay for the increased risk of
death in later years
– Majority of whole-life policies are straight life
Chapter 10
Life Insurance
• Borrowing From a Whole-Life Policy
– Can borrow all or part of cash value in form
of policy loan
– Loans do not have to be paid back; Unpaid
portion plus interest deducted from death
benefit when paid
Chapter 10
Life Insurance
• Other Life Insurance Options
• Group Life Insurance
• Variable Life Insurance
• Credit Life Insurance
Chapter 10
Life Insurance
• The Life Insurance Contract
Contracts (legally binding you and the
company) contain various type of provisions:
1. The Beneficiary Clause
The beneficiary is the individual or
organization who receives proceeds upon the
policyholder’s death. Life insurance proceeds
are NOT TAXABLE to the individual, but may
be subject to estate taxes.
Chapter 10
Life Insurance
• 1. The Beneficiary Clause
The primary beneficiary receives payment
first (more than one may be named.)
A contingent beneficiary should be named if
primary beneficiary is no longer living.
An irrevocable beneficiary cannot be changed
without his consent; otherwise you can
change beneficiaries as often as you wish
Chapter 10
Life Insurance
• The Life Insurance Contract
2. Settlement Options
The settlement option specifies how death
benefits will be paid:
• Lump sum -- beneficiary receives entire amount
at once (98% choose this method)
• Life income -- beneficiary receives monthly
payments for rest of life (size of payment
determined by age of beneficiary)
Chapter 10
Life Insurance
• 2. Settlement Options, cont.
– Fixed income -- beneficiary receives fixed
monthly payment depending on face value of
policy
– Interest only -- beneficiary receives interest
only paid at guaranteed rate; principal is
received at a later date
Chapter 10
Life Insurance
• The Life Insurance Contract
3. Premium Payment Clause
The policy states how much premiums are, where
they are paid, to whom they are paid, and how often.
annually
semiannually
quarterly
monthly
Usually small discount offered for annual premium payment.
Chapter 10
Life Insurance
• The Life Insurance Contract
4. The Dividend Clause
This clause only applies to those policies issued by
mutual life insurance companies.
It may specify how dividends are paid or it may give
policyholder options for payments of dividends
Receiving the dividends in cash
Using them to reduce premiums
Using them to purchase additional life insurance
Chapter 10
Life Insurance
• The Life Insurance Contract
5. The Accidental Death Clause
This clause guarantees an additional amount of
insurance if policyholder dies as a result of an
accident.
Usually doubles or triples the face amount so it is
referred to as double or triple indemnity. Some
accidental deaths are excluded:
•
•
•
•
a suicide
a riot or insurrection
an airplane disaster
commission of a felony
Chapter 10
Life Insurance
• The Life Insurance Contract
6. The Suicide Clause
This clause limits the company’s liability in the
event of suicide.
Since suicide is not accidental, if suicide occurs
within two years of policy’s issue date, the
company is only liable for the amount the
policyholder has already paid in premiums.
Chapter 10
Life Insurance
• The Life Insurance Contract
7. Waiver-of-Premium Clause
This clause commits the insurance company to
pay your premiums if an illness or accident
prevents you from working.
The clause usually takes effect six months after
policyholder is totally disabled. Some
companies are now offering the same type of
protection if you lose your job.
Chapter 10
Life Insurance
• The Life Insurance Contract
8. Guaranteed Insurability Clause
This clause allows you to increase amounts
of insurance at certain dates and by certain
amounts without undergoing a physical
examination.
Chapter 10
Life Insurance
• The Life Insurance Contract
9. Nonforfeiture Option
This clause protects the cash value of your policy if
your premiums are unpaid. Policyholder may
choose to:
Surrender the policy for cash accumulated
Purchase term insurance for as long as the single premium
will allow
Use the cash as a single premium and purchase a reduced
amount of paid-up life insurance
Chapter 10
Life Insurance
• The Life Insurance Contract
10. Policy Reinstatement
This provision allows policyholders to put
lapsed policy back into effect. Typically
requires:
Furnished proof of continued insurability
Payment of accumulated premiums, plus interest
Application for reinstatement must take place
within a specified time period, usually a year