Today’s Lecture - #15
Interest Sensitive and Variable Life
Why buy life insurance?
Offset the financial loss of death
Tax sheltered investment program
New types of life insurance for investment
Universal life
Current assumption whole life
Variable life
Variable universal life
Universal Life
Combination of:
Tax advantage of whole life
Low cost of protection of term
Flexible premiums
Straightforward expenses
Current mortality charges
Current interest rates
Universal Life Features
Death benefit options
Type A - Level death benefit
Type B - Increasing death benefit
Premium payments
Maximum based on IRS rules
Minimum to keep coverage in force
Mortality charges
Current
Maximum
Universal Life Features
Expense charges
Front-end
Surrender
Investment returns
Current
Indexed
New money rate
Portfolio rate
Guaranteed level
Universal Life Flow of Funds
Premium
+ Cash value from prior period
- Expenses
- Mortality charges
- Withdrawals or loans
= Amount subject to investment
+ Investment return
= Cash value at end of period
Universal Life Flow of Funds Example
A 30 year old policyholder has had a Type B
(Increasing Death Benefit) Universal Life
policy for $100,000 in force for 5 years. The
mortality charge is $1.30 per $1000 of
coverage. Expenses are 10% of premiums.
The policy earns a 7% rate of return this year.
The cash value at the beginning of the period
is $3000. The policyholder pays a $500
premium this year.
Universal Life Flow of Funds Example
500
+ 3000
50
- 130
0
= 3320
+ 232
= 3552
Premiums
Prior cash value
Expenses (.10x500)
Mortality charge (100x1.30)
Withdrawals or loans
Amount subject to investment
Investment return (3320x.07)
Ending cash value
Current Assumption Whole Life
Cross between whole life and universal
Regular premium payments
Premiums can change based on:
Mortality experience
Investment experience
Expenses
Vanishing premium provisions
Variable Life
Level premiums
Cash value invested in separate account
Stocks
Bonds
Real Estate
If investment performance exceeds assumed
return, cash value and death benefit increase
If investment performance is below assumed
return, cash value decreases
No guaranteed return
Minimum death benefit
Variable Universal Life
All the features of universal life except the
guaranteed minimum return
Variety of investment choices
Stocks
Bonds
Real Estate
Gold
International funds
Life Insurance - Example
Which of the following life insurance policies
have flexible premiums?
I
Universal life
II
Current assumption whole life
III Variable life
IV Variable universal life
A)
C)
E)
I and III
I, III and IV
None of the above
B)
D)
I and IV
I, II, III and IV
Summary
Should you buy life insurance?
If someone would suffer a financial loss at
your death - Yes
What type of life insurance should you buy?
If all you need is death protection - Term
If you want a tax sheltered investment plan
- Cash value life
What Type of Cash Value Life?
If you want guarantees - Whole Life
If you will accept some risk Current assumption whole life
If you are willing to take investment risk Variable or variable universal
If you want premium flexibility Universal or variable universal
Buying Life Insurance – Example 1
Which type of life insurance would be best for a
young couple with a newborn baby who are on
a limited budget but need a lot of protection
during her childhood?
A) Yearly renewable term
B) 20 year level term
C) 20 pay whole life
D) Straight life
E) Decreasing term
Buying Life Insurance – Example 2
Which type of life insurance would be best for a
35 year old single person without any
dependents who wants to save for retirement?
A) Universal life
B) Variable life
C) Whole life paid up at 65
D) 30 year endowment
E) None of the above
Buying Life Insurance – Example 3
Which type of life insurance would be best for a
50 year old couple without any children who
want a life insurance policy that offers tax
sheltered savings?
A) Front-end-loaded term
B) 20 year level term
C) Current assumption whole life
D) Variable life
E) None of the above