Chapter 9
Managing Life, Health, and
Disability Risks
Chapter 9: Managing Life, Health,
and Disability Risks
2
Identifying Risks Associated
with Premature Death
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Inadequate financial resources
Estate preservation
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
3
Inadequate Financial Resources
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Income for the readjustment period
Financial support of dependents
Funds for specific goals
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
4
Estate Preservation
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Medical expenses prior to death
Disposal and ceremonial expenses
Probate expenses
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
5
Measuring Needs Related to
Premature Death
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Human Life Value Approach
Financial Needs Approach
Capital Retention Approach
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
6
Human Life Value Approach
1. Calculate the family’s share of
earnings (FSE).
2. Determine Work Life Expectancy.
3. Determine present value of
worker’s stream of expected
earnings.
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
7
Financial Needs Approach
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Lump-sum (cash) needs
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Final expenses and debts
Mortgage liquidation or payment fund
Education expenses
Emergency expenses
Income (cash flow) needs
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Readjustment period
Dependency period
Spousal life income (pre- and postretirement)
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
8
Capital Retention Approach
1. Prepare a personal balance sheet.
2. Calculate the capital available for
income.
3. Determine the amount of additional
capital required.
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
9
Individual Life Insurance
Policies
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Term insurance
Whole life insurance
Universal life insurance
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
10
Term Insurance (1 of 3)
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Affordable
Maximum Coverage/$ of premium
Fulfills temporary need
Ensures insurability
Cost Prohibitive at Older Ages
No Savings Feature
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
11
Term Insurance (2 of 3)
Types
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Annual Renewable Term (ART)
Level Premium
Term to age 65 or 70
Decreasing/Increasing
Reentry
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
12
Term Insurance (3 of 3)
Riders
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Waiver of Premium
Accidental Death Benefit
Accelerated Death Benefit
Return of Premium
Spouse Insurance
Child Insurance
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
13
Whole Life Insurance
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Permanent protection
Cash value build-up
Level premium (in general)
Mortality charges
Administrative costs and insurer profit
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
14
Whole Life Insurance (cont.)
Types
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Ordinary Life/Continuous Premium
Limited-Pay Policy
Modified Life
Single Premium/MEC
Current Assumption (Interest-Sensitive)
Variable Life
Joint Life
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
15
Dividend Options
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Cash
Paid-Up Additions
Accumulate at Interest
Reduce Premium
One-Year Term Insurance (5th Dividend
Option)
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
16
Nonforfeiture Options
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Cash Surrender Value
Reduced Paid-Up Insurance
Extended Term Insurance
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
17
Whole Life Riders
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Waiver of Premium
Accidental Death Benefit
Spouse and Children’s Riders
Term Insurance
Living Benefits
Option to Purchase Paid-Up Additions
Unemployment Rider
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
18
Universal Life Insurance
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Premium Flexibility
Ability to Change Death Benefit Amount
Current Assumptions
Fewer Guarantees
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
19
Structure of a Universal Life
Policy
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
20
Universal Life Death Benefit
Options
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Option A (Option 1)
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Level Death Benefit
Net Amount at Risk equals Death Benefit
less Cash Value
Option B (Option 2)
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Increasing Death Benefit
Net Amount at Risk Remains Level
Throughout the Policy
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
21
Variable Universal Life
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Combines investment direction of variable
life, and the premium death benefit and cash
value flexibility of universal life
Policyowner directs investment and bears
investment risk
Cash value maintained in one or more
separate accounts
Must be approved by SEC
Agents/brokers who sell VUL must have
license for insurance and securities
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
22
Modified Endowment Contracts
(MECs)
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“7-pay” Test
Material Change
LIFO Treatment
10% Penalty (< age 59½)
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
23
Universal Life Riders and
Optional Benefits
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Waiver of Premium
Accidental Death Benefit
Other Insured
Living Benefits
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
24
Group Life Insurance
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Group term
Group whole life insurance
Group universal life
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
25
Policy Replacement
Belth price of protection model:
CPT = (P + CV0)(1 + i) – (CV1 + D)
(DB – CV1) (0.001)
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
26
Life Insurance Policy Provisions
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Grace Period
Incontestability
Entire Contract Clause
Misstatement of Age or Gender
Assignment
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Absolute
Collateral
Suicide
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
27
Life Insurance Policy Provisions
(cont.)
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Reinstatement
Policy Loans
Beneficiary Designations
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Revocable and Irrevocable
Primary and Contingent
Survivorship Clause
War Exclusion
Simultaneous Death
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
28
Life Insurance Settlement
Options
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Interest Only
Fixed Amount
Fixed Period
Life Income
Life Income and Period Certain
Life Income with Refund
Joint and Survivor Income
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
29
Life Annuity Contracts
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What is an annuity?
Types of annuities
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Immediate/Deferred
Flexible/Single Premium
Fixed/Variable
Timing of annuity payments
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Straight Life
Life with Period Certain
Installment Refund
Joint & Survivor
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
30
Taxation of Life Insurance
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Dividends as return of principal
Withdrawals
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LIFO – MEC/1st 15 years
FIFO – After 15 years
Death benefit excluded from beneficiary’s gross
income
Proceeds lose tax-free status if transfer is not a gift,
transfer to insured, or transfer to insured’s business
Premiums are not tax deductible except to employer
for group life
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
31
Taxation of Viatical Agreements
and Annuities
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Viatical Agreements
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Tax free to insured
Proceeds taxable to purchaser
Annuities
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Inclusion/Exclusion ratio
100% taxable if exceed original life
expectancy
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
32
Individual Health Insurance
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Purpose
Cost concerns
Eligibility
Medical expense insurance
Major medical insurance
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
33
Long-Term Care Insurance
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Types of Care
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Skilled Nursing Care
Custodial Care
Home Health Care
Assisted Living
Adult Day Care
Hospice Care
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
34
Long-Term Care Insurance (cont.)
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Eligibility
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Chronically Ill
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2 of 6 ADLs
Substantial Cognitive Impairment
Tax deductible premiums and tax-free
benefits
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
35
Disability Income Insurance
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Definition of disability
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Any occupation
Own occupation
Split definition
Social Security
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Characteristics
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Chapter 9: Managing Life, Health,
and Disability Risks
Benefit period
Elimination period
Partial disability
Waiver of premium
Cost of living rider
Future increase option
Automatic increase rider
 2005 Kaplan Financial
36
Disability Income Insurance (cont.)
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Taxation of benefits
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Tax free if insured pays premium
Taxable if employer pays premium
Integration with Social Security
Termination of beneifts
Residual benefits
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
37
Group Health Insurance
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Eligibility
Characteristics
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
38
Group Health Insurance (cont.)
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Basic and major medical
Dental and vision
Disability income
Managed care
Coordination of benefits
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial
39
Group Health Insurance (cont.)
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Termination of benefits
COBRA
Coverage for elderly employees
Coverage for retirees
Taxation of group health benefits
HIPAA
Chapter 9: Managing Life, Health,
and Disability Risks
 2005 Kaplan Financial