Chapter 9
Life, Health and
Disability Insurance
Kapoor
 2004 McGraw-Hill Ryerson Ltd.
Dlabay
Hughes
Ahmad
Prepared by Cyndi Hornby, Fanshawe College
9-1
Learning Objectives - Chapter 9
1. Define life insurance and describe its
purpose and principle.
2. Determine your life insurance needs.
3. Distinguish between the two types of
life insurance policies and analyze
various types of life insurance.
4. Select important provisions in life
insurance contracts.
5. Create a plan to buy life insurance.
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Learning Objectives -
continued
6. Recognize how annuities provide
financial security.
7. Define health insurance and explain its
importance in financial planning.
8. Recognize the need for disability
income insurance.
9. Understand the value of supplemental
health and disability insurance.
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Learning Objective # 1
Define life insurance and
describe its purpose and
principle.
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An Introduction to Life Insurance
Life insurance is obtained by purchasing a
policy, with the insurance company
promising to pay a lump sum to the person
specified (beneficiary) at the time of the
insured’s death, or sometimes while they
are still alive.
In some policies money is paid to the policy
holder (the insured) if he/she is still alive at
a future date
Company makes promise to pay in
exchange for the payment of a premium 9-5
 2004 McGraw-Hill Ryerson Ltd.
The Purpose of Life Insurance
The purpose of life insurance is to protect
someone who depends on you from financial
loss related to your death. Proceeds may be
used to;
Make charitable bequests upon your death.
Provide a retirement income.
Provide an education or income for your
children
Set up an estate plan
Pay off a mortgage or debts at the time of
Establish regular income for survivors
Make estate and death tax payments 9-6
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The Principle of Life Insurance
Mortality tables provide
odds on your dying, based
on your age and sex.
Your premium is based on
your life expectancy and
the projections for the
payouts for persons who
die.
Adjustable for factors that
increase/decrease an
individual’s risk
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Learning Objective # 2
Determine your life insurance
needs.
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Determining Your Life Insurance
Needs
Do you need life insurance?
Do you have people you need
to protect financially?
Do you have a partner who works?
What are your objectives for life insurance?
How much money do you want to leave your
dependents should you die today?
When you retire what income do you need?
How much will you be able to pay for your
insurance program?
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Estimating Your
Life Insurance Requirements
The Easy Method.
Typically, you will need 70% of your salary for
seven years while family adjusts.
The DINK (dual income, no kids) Method.
The “Nonworking” Spouse Method.
Multiply the number of years until the youngest
child reaches 18 by $10,000.
The “Family Need” Method.
More thorough than the first three because it also
considers employer provided insurance, Social
Security benefits, and income and assets.
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Learning Objective # 3
Distinguish between the two
types of life insurance policies
and analyze various types of
life insurance.
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Types of Life Insurance Policies
Term Life Insurance
Protection for a specified period of time.
If you don’t pay premiums, coverage stops.
A renewability option means that at the end of the
term you can renew the policy without having a
physical.
Conversion option allows you to change your policy
from term to whole life without a physical.
With decreasing term insurance your premium stays
the same, but the amount of coverage decreases as
you age.
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Whole life Insurance
(continued)
Whole life insurance also called straight life.
You pay a premium as long as you live.
Amount of premium depends on your age
when you start the policy.
Provides death benefits and accumulates a
cash value.
You can borrow against the cash value or
draw it out at retirement.
Look carefully at the rate of return your
money earns.
 2004 McGraw-Hill Ryerson Ltd.
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Whole Life Policy Options
Limited payment policy.
Pay premiums for a stipulated period,
usually 20 or 30 years, or until you
reach a specified age (65).
Your policy then becomes “paid up” and
you remain insured for life.
Participating & Non-Participating Policies
participating policy requires higher
premiums but insurance company pays
dividends if profitable
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Universal Life Policy
Combines term insurance and investment
elements
Can pay variable premium amounts
Increased cash value reflects interest
earned; guaranteed not to be less than
specific amount
Uses current interest rates and can be
changed to reflect prevailing rate changes
Death benefits flexible
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Other Types of Life Insurance
Policies
Group life insurance
Term insurance often provided by the employer
No physical is required.
Endowment Life Insurance
coverage from beginning of contract to maturity
guarantees payment of specified sum even if
insured still alive
Credit life insurance
Debt is paid off if you die.
Protects the lender
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Learning Objective # 4
Select important provisions in
life insurance contracts.
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Life Insurance Contract Provisions
Naming your beneficiary, and contingent
beneficiaries.
Length of grace period for late payments.
Reinstatement of a lapsed policy if it has not
been turned in for cash.
Non-forfeiture clause prevents the forfeiture
of future benefits if you drop the policy
Incontestability clause stipulates that after
the policy has been in effect for a period of
time the company cannot dispute its validity
Suicide clause during first two years.
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Life Insurance Contract Provisions
Automatic Premium loan uses the cash value to
pay the premium if you do not pay it
Misstatement of age provision
Policy loan provision to borrow against cash value.
A rider to a policy modifies it coverage by adding or
excluding conditions or altering benefits.
Waiver of premium disability benefit.
Accidental death benefit - double indemnity.
Guaranteed insurability option.
Critical Illness
Joint, Last to die
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Learning Objective # 5
Create a plan to buy life
insurance.
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Buying Life Insurance
Look at your present and future sources of
income, savings, group life insurance, group
annuities and government benefits.
Determine from whom to buy your policy.
Examine both private and public sources.
Look up the company’s rating.
Agent and direct insurer v. broker
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Buying Life Insurance
(continued)
Compare policy costs which are affected by...
Company’s cost of doing business.
Return on their investments.
Mortality rate among policyholders.
Features policy contains
Competition among companies
Use interest-adjusted index to compare policies.
Takes into account the time value of money.
Helps you make cost comparisons among insurance
companies.
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Obtaining and Examining a Policy
Submit application to company
personal information, type of policy and limits of
coverage
medical history (may require examination)
Before purchase
read every word of contract
get full explanation of terms and provisions
After purchase
can cancel policy within 10 days without penalty
make copies for lawyers & beneficiaries
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Choosing Settlement Options
Options are the choices for how you want
the money paid out.
Lump-sum payment is most common.
Limited installment plan.
In equal installments for a specific
number of years after your death.
Life income option.
Payments to the beneficiary for life.
Proceeds left with the company.
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Pays interest to the beneficiary.
 2004 McGraw-Hill Ryerson Ltd.
Should You Switch Policies?
Consumers lose millions because
they don’t hold cash life policies
long enough or they purchase
the wrong policy
Switch if benefits exceed costs of
getting another physical, and
paying policy set up costs.
Are you still insurable?
Can you get all the provisions
you want?
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Learning Objective # 6
Recognize how annuities
provide financial security.
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Financial Planning with Annuities
An annuity is a retirement income option that
provides you with pre-set installment payments
for an agreed upon period of time
Issuer invests funds
Contracts to repay you , with interest, in
predetermined installments over set period of
time
agreed number of years
for life
Size of installment depends on amount invested,
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length of payments and interest
 2004 McGraw-Hill Ryerson Ltd.
Financial Planning with Annuities
Advantages
good post retirement income, especially if
interest rates are high
defer taxes on proceeds
predictable stream of income
tailored to suit needs and preferences
Guaranteed Annuities; payments continue
after death to your beneficiaries
Disadvantages
no flexibility, cannot change income amount
for inflation, major purchases or to reinvest 9-28
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Learning Objective # 7
Define health insurance and
explain its importance in
financial planning.
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Health Insurance & Financial
Planning
Most basic medical procedures are
provided under provincial government
health care plans
Canadians need additional coverage for;
semi private/private hospital rooms
prescription drugs
vision and dental care
Health care costs outside of Canada can
be very high and may not be covered
by provincial plans
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Supplemental Health Insurance
Group Health Insurance
60% of all health insurance is sold as
group plans
employer sponsored, employee may pay
part of cost
covers you and immediate family
seldom requires medical
Individual Health Insurance
covers one person or family
can be tailored to your particular needs
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Learning Objective # 8
Recognize the need for
disability income insurance.
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Disability Income Insurance
Protects your most valuable asset - your
ability to earn an income
provides payments to replace income
when an insured person is unable to
work (due to accident or illness)
Disability defined;
inability to do your regular work
unable to do any job
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Disability Insurance Trade-offs
Waiting or Elimination Period
the longer the waiting period the lower the
premium
Duration of Benefits
Amount of Benefits
Accident and Sickness Coverage
Guaranteed Renewability
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Sources of Disability Income
Employer
Private
Public
Employment Insurance
Canada /Quebec Pension Plans
Worker’s Compensation
Short term or Long Term Welfare
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Determining Your Needs
Disability Income Requirements
determine benefits from public/private
sources
determine short fall based on 70-80% of
your after-tax income
consider waiting period and benefit period
Critical Illness Insurance
Provides money for care if you are
diagnosed with a serious illness or
condition
Pays while you are alive
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Learning Objective # 9
Understand the value of
supplemental health and
disability insurance.
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Supplemental Health Insurance
After considering health and disability
coverage available from government,
employer or other policies you may decide to
seek further coverage
Dental Expenses
Reimbursement of dental services & supplies
Encourages preventative dental care
Vision Care Insurance
Long term care insurance
Provides day-in, day-out care for long term illness
or disability
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Major Provisions in a Health
Insurance Policy
Eligibility
age, marital status & dependency requirements
Assigned Benefits
Internal Limits
Co-Payment
the amount the patient pays after deductible
Benefits limits
Exclusions & Limitations
Co-ordination of Benefits
Guaranteed Renewable
Cancellation and Termination
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Health Insurance Trade-offs
Reimbursement vs. Indemnity
reimbursement policy provides benefits based on
actual expenses your incur
indemnity policy provides specified benefits
Internal Limits vs. Aggregate Limits
internal limits specifies maximum benefits for specific
expenses
aggregate policies limit total amount of coverage
Deductible and Co-Insurance
affects cost of policy
Out-of-Pocket Limit
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 2004 McGraw-Hill Ryerson Ltd.