What is Insurance?
Pooling of Risk
Lloyds of London
Contract – If you pay premiums the
insurance company will pay a benefit
Why Learn about Life Insurance?
‘MOST offered ‘investment’
Highest undisclosed commissions of
any investment – by far
Most Americans should have MORE
life insurance
LIFE INSURANCE
Parties to the Contract
Owner
Insured (example: Father)
82% husbands pass away
before wife
Beneficiary
Primary (example: Mother)
Secondary (example: the
children to share equally)
LIFE INSURANCE
Life Insurance Contract Provisions
Insurability
Preferred, Standard, Substandard
Pre-existing Conditions
Need to Take a Medical Examination
MIB – Medical Information Bureau
Insurable Interest – In a position to lose something of value
Indemnify – Pay for but not ‘profit’ from a loss
Non-Cancellable – Except for nonpayment of premiums
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No Waiting Period
Settlement Options – Ways to receive death benefits
Riders – Additonal coverage
Contract – Only the insurance company is ‘bound’ by contract
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
• Military Activity
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
• Military Activity
• Nuclear Related Activity
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
• Military Activity
• Nuclear Related Activity
• Riots or Insurrections
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
• Military Activity
• Nuclear Related Activity
• Riots or Insurrections
• Deaths as a result of illegal activities
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
• Military Activity
• Nuclear Related Activity
• Riots or Insurrections
• Deaths as a result of illegal activities
• Accidents occurring under the influence of alcohol or
drugs on other than a physician prescribed basis
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
• Military Activity
• Nuclear Related Activity
• Riots or Insurrections
• Deaths as a result of illegal activities
• Accidents occurring under the influence of alcohol or
drugs on other than a physician prescribed basis
• Suicide – for two years after policy inception
LIFE INSURANCE
Life Insurance Contract Provisions
Exclusions
• War, either declared or undeclared
• Military Activity
• Nuclear Related Activity
• Riots or Insurrections
• Deaths as a result of illegal activities
• Accidents occurring under the influence of alcohol or
drugs on other than a physician prescribed basis
• Suicide – for two years after policy inception
• Aviation Accidents
LIFE INSURANCE
Aviation Exclusion
A contract provision which specifies that the death
benefit is not payable if the insured dies because of
certain aviation activities
Policy only pays if:
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Fare paying passenger
Regularly Scheduled Commercial Airline
LIFE INSURANCE
Aviation Exclusion – Example A
Insurance Company claimed the man was ‘airborne’
-- no death benefit because of the Aviation Exclusion.
Court ruled the man never intended to be ‘airborne’
-- the insurance company had to pay the death claim.
LIFE INSURANCE
Aviation Exclusion – Example B
LIFE INSURANCE
Aviation Exclusion – Example C
Insurance company claimed they
didn’t need to pay because the
person had completed the
commercial air flight.
Court ruled
didn’t intend
to be in flight
LIFE INSURANCE
Riders
Waiver of Premium – requires no premium while disabled
Accelerated Death Benefit – some or all of benefit if terminally ill
Guaranteed Insurability – purchase future additional coverage without
medical
Family Income – income in addition to initial death benefit
Long-term Care – Long-term care benefits prior to death
Accidental Death & Dismemberment – additional benefit if death results
from an accident
Automatic Premium Loan – company loans money from cash value to pay
premiums
Disability Income – Disability income benefits prior to death
Mortgage Redemptions – Mortgage payoff in addition to death benefit
Child term insurance – term insurance coverage for children
LIFE INSURANCE
Types of Life Insurance
Group – Inexpensive if not a preferred risk
Individual (Ordinary) – If a preferred risk –
least expensive
LIFE INSURANCE
Individual (Ordinary)
Term = Death Benefit
Cash Value = Death Benefit + Investment
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Whole Life
Variable Life
Adjustable Life
Indexed Life
Universal Life
Variable Universal Life
Universal Adjustable Life
LIFE INSURANCE
Cash Value Chart
Age 100
Face Value
$ 1,000,000
Life Insurance
Death Benefit
Cash Value
‘Investment’
Year 5
LIFE INSURANCE
Time
Time
Endow
Cash Value Chart
Age 100
Face Value
$ 1,000,000
Life Insurance
Death Benefit
Cash Value
‘Investment’
Investment Surrender Penalty
Year 5
LIFE INSURANCE
Time
Time
Year 25
Endow
Individual (Ordinary)
Advantages of Investment Life Insurance
• Fixed premiums do not increase
• Permanent Coverage – Insurance for Life
• Investment
• Can be used to pay premiums
• Grows tax deferred
• Can be borrowed – no tax consequence
• Does not increase death benefit
LIFE INSURANCE
Why to Avoid Cash Value
1.
Large Lapse Rates – Behaviorally Inefficient
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2.
3.
80% Cancelled in the first 5 Years
A cancelled policy loses generally all ‘investment’
value if cancelled within 3 years of purchase
20-25 Year Surrender Penalties
Affordability – High Cost
Most Americans are underinsured – and it’s getting
worse
4.
Objective Advisors Avoid
Clark Howard, Jonathon Pond, Jane Bryant Quinn
www.smartmoney.com/plan/insurance/term-or-whole-life-8011
LIFE INSURANCE
Why to Avoid Cash Value – Cont.
5.
6.
7.
8.
High Expenses – Life insurance investments tend
to grow at a slower rate than an equivalent mutual
fund investment
Rarely does actual investment experience match
projected investment values
Very Confusing Language
Highest undisclosed commissions relative to
dollars invested – by far
LIFE INSURANCE
Why to Avoid Cash Value – Cont.
"As already intimated, it is believed to be a fact, now causing quite
general complaint, that there are too many complicated schemes or
plans of insuring, and conducting companies, as well as too many
and too elaborate forms of contract or policy. Each new company
announces some new feature in its business, which is to enure greatly
to the advantage of the insured, and thus, with some seventy different
companies, each urging their superiority over all others, he who
seeks insurance, if he stops to hear all the arguments, and
deliberately determine which is really the best company,
. . . is likely to die before he reaches a conclusion.“
New York State Insurance Commissioner
April 1, 1870
LIFE INSURANCE
Life Insurance Purchase Solution
1.
2.
3.
4.
Purchase full coverage Term Life
Purchase enough for pre-mature ‘Point-of-Choice’
Invest additional money in 401(k)
Invest taxes saved
How Much Face Value
2 ways to calculate
1. 14 times primary breadwinner’s income (easiest)
2. Point of ChoiceTM
Required Assets / Immediate Death
Generally $1,250,000 per $50,000 income
Required POC Assets - Existing Net Financial Assets
LIFE INSURANCE
Insurance to Avoid
Accidental Death and Dismemberment
Example
$100 per month for $500,000 coverage for any death
$ 40 per month for $500,000 coverage for accidental death
4.4% of all deaths occur by accident
Insurance premium should be $ 4.40 for deaths that occur by accident
You pay
952% too much for premiums
LIFE INSURANCE
CAUSES OF DEATH, USA 2002
National Vital Statistics Report
FORMAL NAME
(1) Diseases of the heart
(2) Malignant neoplasms
(3) Cerebrovascular disease
(4) Chronic lower respiratory disease
(5) Unintentional injuries
(6) Diabetes mellitus
(7) Influenza and pneumonia
(8) Alzheimer's Disease
(9) Nephritis and Nephrosis
(10) Septicemia
(11) Intentional self-harm
(12) Chronic Liver/Cirrhosis
(13) Essential Hypertension
(14) Assault
(15) All other causes
LIFE INSURANCE
INFORMAL NAME
% ALL DEATHS
heart attack (mainly)
cancer
stroke
emphysema, chronic bronchitis
accidents
diabetes
flu & pneumonia
Alzheimer's senility
kidney disease
systemic infection
suicide
liver disease
high blood pressure
homicide
other
28.5%
22.8%
6.7%
5.1%
4.4%
3.0%
2.7%
2.4%
1.7%
1.4%
1.3%
1.1%
0.8%
0.7%
17.4%
Insurance to Avoid
Accidental Death and Dismemberment
Example
No suicide coverage
Trip Insurance
Cancer Coverage
Pre-Need Funeral Expenses
www.consumersunion.org/other/funeral/life.htm
Kathryn Anderson of Dallas
$ 6,120 premiums for a $ 2,400 funeral
$ 10,447 with 10% interest
LIFE INSURANCE
Insurance to Avoid
Accidental Death and Dismemberment
Example
No suicide coverage
Trip Insurance
Cancer Coverage http://www.consumersunion.org/other/funeral/life.htm
Pre-Need Funeral Expenses
Credit Life http://abcnews.go.com/Business/PersonalFinance/story?id=6256535
Very expensive per $1,000 of coverage
66% of deaths go unreported
Consumers often told purchase is a condition of loan
Children Life Insurance
LIFE INSURANCE