What Happens When…
1
12
CHAPTER 10 PROPERTY AND
MOTOR VEHICLE INSURANCE
WHAT IS INSURANCE?
 Insurance is protection against possible
financial loss; it gives you peace of mind
 An insurance company, or insurer, is a risksharing firm that assumes financial
responsibility for losses from an insured risk
 People purchase a policy. The firm assumes a
risk for a fee called the premium, which the
insured policyholder pays periodically
10-13
INSURANCE AND RISK
MANAGEMENT: AN INTRODUCTION
TYPES OF RISKS
 Risk: Uncertainty or lack of predictability, such
as to loss that a person or property, covered by
insurance, faces.
 Peril is the cause of a possible loss, such as
fire, windstorm, robbery, disease, or death.
 Hazard increases the likelihood of a loss, such
as driving drunk, or defective house wiring.
 Risk management: Organized, planned
strategy to protect your assets and family.
10-14
INSURANCE AND RISK MANAGEMENT:
AN INTRODUCTION
 Pure Risk
 Personal risks, property risks, and liability
risks are types of pure risk
 Insurable, chance of loss, not gain
 Accidental, unintentional
 Nature and financial loss of the risk can be
predicted
 Speculative Risk
 Chance of loss or gain, such as starting a
business
 Uninsurable
10-15
Risk
Avoidance
Risk
Shifting
Risk
Management
Techniques
Risk
Reduction
Risk
Assumption
16
INSURANCE AND RISK MANAGEMENT:
AN INTRODUCTION ( C O N T I N U E D )
PLANNING AN INSURANCE PROGRAM
To put your risk management plan to work
ask yourself…
 What should be insured?
 For how much?
 What kind of insurance?
 From whom?
10-17
SO MANY T YPES TO CHOOSE FROM…
Title Insurance
Mortgage Insurance
Pet Insurance
GAP Insurance
Business Insurance
Medical Insurance
Water Craft Insurance
Volcano Insurance
Travel Insurance
Professional Liability
Insurance
Earthquake Insurance
Kidnap & Ransom Insurance
Alien Abduction Insurance
Auto Insurance
Life Insurance
Health Insurance
Dental Insurance
Vision Insurance
Disability Insurance
Renter’s Insurance
Flood Insurance
Homeowners Insurance
Long-term Care Insurance
Cancer Insurance
Cell Phone Insurance
Umbrella Insurance
Wedding Disaster Insurance18
19
If you live in Hawaii..
20
INSURANCE AND RISK MANAGEMENT:
AN INTRODUCTION ( C O N T I N U E D )
PLANNING AN INSURANCE PROGRAM
Four step process:
1. Set your insurance goals and prioritize
them
2. Develop a plan to reach your goals
3. Put plan into action
4. Review results
10-21
PROPERTY AND LIABILITY
INSURANCE
***In recent years there have been major
losses due to natural disasters. Fires,
hurricanes, tornadoes and floods in various
areas of the United States have caused
billions of dollars worth of damage.
10-22
PROPERTY AND LIABILITY
INSURANCE ( C ON TI N UE D )
Potential Property Losses
 Home, automobiles, furniture, clothing,
and personal belongings
 Physical damage
 Hazards such as fire, wind, water and smoke. Destruction of
property or temporary loss of use
 Loss of Use
 Due to robbery, burglary, vandalism, or arson
10-23
PROPERTY AND LIABILITY
INSURANCE ( C O N T I N U E D )
LIABILITY PROTECTION
 Liability: Legal responsibility for cost of
another person’s losses or injuries
 Negligence
Failure to take ordinary, reasonable care, such
as failure to supervise children in a pool
 Strict Liability
 When a person is held responsible for intentional
and unintentional acts.
 Vicarious Liability
 When you are held responsible for the actions of
another person, such as your child throwing a ball
through a neighbor’s window
10-24
ASSIGNMENT
25
HOME AND PROPERTY
INSURANCE
HOMEOWNER’S INSURANCE COVERAGES
 Damage to or destruction of your house
and other structures, plus trees, shrubs
and plants
 Additional living expenses
 Personal property in or away from home
 Personal property floater - high value
items
 Household inventory with documentation
10-26
HOME AND PROPERTY INSURANCE
(CONTINUED)
PERSONAL LIABILITY AND RELATED COVERAGES
 Medical payments coverage for minor injuries
caused by you, your family members, or pets,
occurring on your property or away from home
 Personal liability- $100,000 or more
 Umbrella policy - also called a personal catastrophe
policy-supplements basic personal liability coverage
 $1,000,000 or more in liability coverage
10-27
PROPERTY AND LIABILITY
INSURANCE ( C O N T I N U E D )
SPECIALIZED COVERAGE
Endorsements add coverage for things such
as earthquake damage, or damage from floods
EXCLUSIONS:
 Articles insured separately (jewelry & art)
 Animals, birds, fish, other pets
 Motorized land vehicles, (lawn mowers)
 Stereos, CD/DVD players in vehicles, cell
phones
 Aircraft
 Property of renters, or other tenants
 Business Property
10-28
PROPERTY AND LIABILITY
INSURANCE
RENTER’S INSURANCE
 Personal property loss or damage
 Additional living expenses
 Personal liability
 A building owner’s insurance usually
won’t cover renter’s personal property
 Many renters do not have insurance
10-29
HOME INSURANCE COST FACTORS
 Look for a policy with full coverage rather than a
coinsurance clause, where you have to pay for part
of a loss
 Which type of claim settlement method is used?
 Actual cash value
 cost less depreciation
 Replacement value
 Cost to repair or replace the damaged or lost item,
without considering depreciation of the item
 May limit replacement cost to 400% of actual cash
value of item
 Costs 10-20% more than actual cash value
coverage
10-30
HOW MUCH COVERAGE DO
YOU NEED?
10-31
HOME INSURANCE COST
FACTORS
FACTORS THAT AFFECT HOME
INSURANCE COSTS
 Location of home
 Type of structure
 Coverage amount and policy type
 Deductibles
10-32
HOME INSURANCE COST
FACTORS
REDUCING HOME INSURANCE
COSTS
 Home insurance discounts
 Alarm system, smoke detector, if you
insure your car with the same
company
 Company differences
 Compare costs and coverage at sites
such as http://www.insuremarket.com/
 Customer satisfaction index
information is available at
http://www.consumerreports.org/
10-33
Automobile Insurance
Coverage
Insurance 101 Video
 Financial responsibility law
 State legislation. Nearly all states have
compulsory automobile liability insurance
laws
 Requires drivers to prove their ability to
cover the cost of damage or injury caused
by them in an automobile accident
10-34
OHIO STATE MINIMUM COVERAGE
In Ohio, the required minimum limits for
Bodily Injury Liability Coverage is $25,000
per person injured in any one accident and
$25,000 for all persons injured in any one
accident.
The required minimum limits for Property
Damage Liability Coverage is $7,500 for
injury to or destruction of property of
others in any one accident .
In 2013 Ohio increased from 12,500/25,000 Bodily Injury and $7,500 Property
35
AUTOMOBILE LIABILITY
INSURANCE COVERAGES
100/300/50
$100,000 limit that
will be paid to one
person in an accident
$300,000 limit that
will be paid to all
persons in an accident
Bodily Injury Liability
$50,000 limit for
payment for damage
to property of others
Property Damage
Liability
10-36
37
AUTOMOBILE INSURANCE
COVERAGE ( C ON TIN UE D )
MOTOR VEHICLE BODILY INJURY
COVERAGES
 Bodily Injury Liability
 Bodily injury liability covers the risk of financial
loss due to legal expenses, medical expenses,
lost wages and other expenses associated with
injuries caused by an accident for which you were
responsible
 Medical Payments Coverage
 Medical payments covers the cost of health care
for persons injured in your automobile, including
10-38
AUTOMOBILE INSURANCE
COVERAGE ( C ON TI N UE D )
 Uninsured Motorist ’ s Protection
 Pays for the cost of injuries to you and your
family if your vehicle is hit by a person without
insurance, however, it does not cover
property damages
 No-Fault Insurance
 System is intended to provide fast, smooth
methods of paying for damages without taking
the legal action frequently necessary to
determine fault
10-39
AUTOMOBILE INSURANCE
COVERAGE ( C ON TI N UE D )
MOTOR VEHICLE PROPERTY DAMAGE COVERAGES
 Property damage liability
 covers damage to others person’s car when you are
at fault. It also includes damage to such things as
street signs and buildings
 Collision
 When your car is in an accident, collision coverage
pays for damage to your automobile, regardless of
who is at fault
 If you are not at fault, your insurer will try and collect
from the other driver’s property damage liability first
 Coverage is limited to the retail value of your vehicle
10-40
AUTOMOBILE INSURANCE
COVERAGE ( C ON TIN UE D )
 Comprehensive Physical Damage
Covers damage to your vehicle that is not
caused by a collision, such as...





Fire, theft or vandalism
Glass breakage
Hail, sand, or wind storm
Falling objects or hitting an animal
Some things in your car, like some radios and stereo equipment
are not covered
10-41
AUTOMOBILE INSURANCE
COVERAGE ( C ON TIN UE D )
OTHER AUTOMOBILE INSURANCE
COVERAGES
Wage loss insurance
 Reimburse you for any salary or income lost due to injury in an
automobile accident
Towing and Emergency Road Service
 Pays for the breakdowns and mechanical assistance
10-42
AUTOMOBILE INSURANCE
COSTS
AMOUNT OF COVERAGE
 Legal concerns include having enough
coverage if you were sued
 $100,000/$300,000 is recommended for
bodily injury liability, with an additional
$1,000,000 or more umbrella liability policy
recommended
 Property values of vehicles have gone up
 $50,000-$100,000 is usually suggested for
property damage liability
10-43
AUTOMOBILE INSURANCE
COSTS (CONTINUED)
AUTOMOBILE INSURANCE PREMIUM
FACTORS
 Automobile type
 Year, make, model, and theft rate
 Rating territory
 Accident, auto theft, and vandalism rates in the
area where you live
 Driver classification
 Age, sex, marital status, credit history, driving
record, and driving habits
 Assigned risk pool for people who are unable
to obtain insurance
10-44
AUTOMOBILE INSURANCE
COSTS ( CONTINUED)
REDUCING AUTOMOBILE INSURANCE PREMIUMS
 Compare companies - http://www.insuremarket.com/
 Have larger deductibles
 Premium discounts
 Establish and maintain a good driving record
 Non-smoker
 Install security devices such as a car alarm
 If you have more than one vehicle, insure them both with
the same company
 Drive less than 5k miles per year
 High School student with at least a B average
10-45
QUESTION?
 Erica and Juan, both 17 years old, find it difficult to
get car insurance in their own names. Many
companies will not accept them as risks. Their
insurance has to be a part of their parents ’ policies.
Both sets of parents have the same insurance
company and similar makes and models of cars.
They also have the same insurance coverages, and
each pays an annual premium of about $600 a year.
When the parents ask about adding their children to
the policies, they learn that the annual cost for Erica
will be $967, and the cost for Juan will be $1,400.
Why do you think there is such a big difference
between the premiums for Erica and Juan, and why 46
are their premiums so much higher than their
 Insurance representatives will tell you that
insurance premiums decline considerably at
age 25 for both males and females. Why do
you think this is true?
 Do you think it is fair that younger people
pay higher premiums than people in the 25 to-74 age range? Do you think it is fair that
men pay more than women for car
insurance?
47
CHAPTER 11
HEALTH INSURANCE
 The US has the highest per capita medical
expenditures of any industrialized country in the
world
 $13,375 health care costs per person in 2009
 This amount is twice as much spent on health care as the
average for the 24 industrialized countries in Europe and
North America
 Medical expenditures were 6% of the GDP in 1965, but
rose to 13.6 of our GDP in 1997 and further increased to
17.3 in 2008. This is expected to continue growing to
20% in the next 6 years.
 High administrative costs
 11% of health care dollar vs. 1% in Canada
11-48
HEALTH CARE REFORM
 Patient Protection and Affordable Care Act -3/23/10
 Health Care and Education Reconciliation Act 3/30/10
 The Obama Administration believe that the health care
reform provided in the above Act’s will:
 Reduce long-term growth of health care costs
 Protect families from bankruptcy or debt due to health care
costs
 Guarantee choice of doctors and health plans
 Invest in prevention and wellness
 Improve patient safety and quality of care
 Assure affordable, quality health coverage for all Americans
 Maintain coverage upon losing or changing jobs.
 Eliminate barriers due to pre-existing medical conditions
11-49
HEALTH CARE COSTS
(CONTINUED)
WHY DOES HEALTH CARE COST SO MUCH?
 Use of sophisticated, expensive technologies
 Duplication of tests and technologies
 Increases in the variety and frequency of
treatments
 Increasing number and longevity of elderly people
 Regulations that result in cost shifting rather than
cost reduction
 Increasing number of accidents, crimes that require
emergency services
 Limited competition, restrictive work rules in the
health care delivery system
 Labor intensiveness, rapid earnings growth for
health care professionals
 Innovative treatments for AIDS, cancer
 Built in inflation in health care delivery system
 Malpractice Insurance
 Aging baby boomers
11-50
HEALTH CARE COSTS
(CONTINUED)
WHAT IS BEING DONE ABOUT THE HIGH
COSTS OF HEALTH CARE?
 Careful review of fees and charges
 Establish incentives for...
 Preventive care
 Services provided out of the hospital where
medically acceptable
 Involve community in balancing health care
needs, health care resources
 Encourage prepaid group practices
 Support community health education
programs so people take better care of
themselves
11-51
HEALTH CARE COSTS
(CONTINUED)
WHAT CAN YOU DO TO REDUCE PERSONAL
HEALTH CARE COSTS?










Consider participating in a flexible spending account.
Consider a high-deductible health plan
Ask for less expensive generic drugs
Use a mail-order or on-line pharmacy for long term drugs
Review free or low-cost coverage for uninsured children
Review state plans for prescription drug assistance
Review follow-up procedures with doctor
Investigate non-urgent procedure
Review billing statements for errors
Appeal unfair decisions by your health plan
11-52
HEALTH CARE COSTS
(CONTINUED)
WHAT CAN YOU DO TO REDUCE
PERSONAL HEALTH CARE COSTS?
(continued)
 Stay well - focus on prevention
 Eat a balanced diet, keep your weight under
control
 Avoid smoking, don’t drink to excess
 Get enough rest, relaxation, and exercise
 Drive carefully, watch out for accident and fire
hazards in the home
11-53
HEALTH INSURANCE AND
FINANCIAL PLANNING
 Over 45 million Americans have no health
insurance
 An older student population is not covered by
their family’s policy. 40% are older than age 25
 Health insurance limits the financial burdens
people suffer due to illness or injury
 It’s part of your overall risk management plan
to safeguard your family’s economic security
 Disability income insurance protects your most
valuable asset - your ability to earn an income
11-54
HEALTH INSURANCE AND
FINANCIAL PLANNING (CONTINUED)
GROUP HEALTH INSURANCE
 Group plans comprise more than 90% of all
health insurance
 Most group plans are employer sponsored;
employer pays part or most of the cost
 1996 Health Insurance Portability and
Accountability Act provides federal portability
standards, nondiscrimination in health
insurance, and guaranteed renewability
 If you changes jobs you need not lose your
health insurance
 Individual insurance is also available
11-55
HEALTH INSURANCE AND
FINANCIAL PLANNING (CONTINUED)
 COBRA requires many employers to offer
employees and dependents the option to continue
their group coverage for a set period of time
following a divorce
 The American Recovery and Reinvestment Act of
2009 (part of the government ’ s economic
stimulus package)
 Requires employers to provide health insurance
to employees terminated between 9/1/08 and
12/31/09.
 Employees pay 35% of the premium.
 Employer subsidizes 65% of the premium for up
to 9 months in exchange for a tax credit.
11-56
A GOOD HEALTH INSURANCE
PLAN SHOULD...
 Offer basic coverage for hospital and doctor
bills.
 Cover at least 120 days hospital room and
board.
 Provide at least $1,000,000 lifetime maximum for
each family member.
 Pay at least 80% of out-of-hospital expenses
after yearly deductible of $500-$1,000/person is
met .
 Impose no unreasonable exclusions.
 Limit your out-of-pocket expenses to no more
than $3,000 to $5,000 in a year, excluding
dental, optical, and prescription costs.
11-57
TYPES OF HEALTH
INSURANCE COVERAGE
TYPES OF MEDICAL COVERAGE
• Hospital expense insurance
- Hospital room and board and other charges
• Surgical expense insurance
- Surgeon's fee for an operation
• Physician expense insurance
- Pays for physician’s care such as office
visits, lab tests and X-rays. It does not
include surgery.
 Major medical expense insurance
 Covers expenses for a serious injury or long-term
illness. Has a deductible, coinsurance, and a stoploss provision
11-58
Types of Health Insurance Coverage
(continued)
 Comprehensive major medical insurance
 Low deductible offered without a separate,
basic plan. Covers hospital, surgical, and
other bills
 Dread disease and cancer insurance
policies
 Focus on unrealistic fears, and only pays out
for very specific conditions. Often sold by
people working on commission, and poor
value
11-59
TYPES OF HEALTH CARE
COVERAGE (CONTINUED)
 Hospital indemnity
 Pays a fixed amount for each day you are in
a hospital. Best for people in high-risk
groups
 Dental expense insurance
 Covers exams, cleaning, x-rays, fillings, root
canals, and oral surgery
 Vision care
 Exams, contact lenses, and glasses
11-60
TYPES OF HEALTH CARE
COVERAGE (CONTINUED)
 Long term care insurance
 Virtually unknown 35 years ago
 Growing faster than any other form of insurance
 In 2010, estimated that 9 million men and women
over 65 years old will need long term care
insurance
 Long term care insurance can be very expensive
 National Average: 1 year in nursing home=$72,000
 Premiums $1,000 to $16,000 per year
11-61
TYPES OF HEALTH CARE
COVERAGE (CONTINUED)
MAJOR PROVISIONS IN A HEALTH INSURANCE
POLICY
 Eligibility
 Varies with age, marital status, and
dependency
 Assigned benefits
 Insurance pays your doctor or hospital directly
 Internal limits
 Fixed amount per day for a hospital room
 Co-payment
 Cost sharing in the form of a flat dollar amount
you pay, such as $15.00-$30.00 per office visit
or $10.00-$25.00 per prescription
 Service benefits vs. fixed $ amount
11-62
PATIENT PROTECTION AND
AFFORDABLE CARE ACT OF 2010
 Process: set aside $635 Billion over the next 10 years for
reform.
 Key provisions of the Act are:
 Offering tax credits for small businesses to make coverage more affordable
 To prohibit denying coverage due to pre -existing medical conditions for children
 To provide access to affordable insurance for those with pre -existing medical
conditions
 Prohibiting insurance companies from dropping coverage when people are sick.
 Eliminating co-payments for preventive services
 Requiring new health plans to allow persons up to age 26 to remain on their
parent’s insurance policy
 Prohibiting health insurance from placing lifetime caps on coverage
 Restricting the use of annual limits
 Ensuring consumers have appeal options with the plan
 Providing funds to states to set up consumer assistance offices
 Increasing money for community health centers
 Increasing investment for increases the number of health care workers
 Requiring health insurance companies to justify all premium increases
11-63
DISABILITY INCOME
INSURANCE
 Disability is more likely than death at any age
 Young, healthy people don ’t think about risks related to
all their future earning potential
 Provides regular cash income lost as the result of an
accident, illness or pregnancy
 If you become disabled your income drops but your
expenses go up
 Carefully read a policy’s definition of disability
 May only pay if you can’t work at any job
 Look for a policy that pays if you are unable to work at your
regular job
 Aim for a benefit that when added to your other income
will equal 60-70% of your gross pay
 How long do benefits last? To age 65? For life?
 How long is the waiting period? 30 days? 90 days?
 Look for a policy that is both non -cancelable and
guaranteed renewable.
11-64
DISABILITY INCOME INSURANCE
(CONTINUED)
SOURCES OF DISABILITY INCOME
 Employer
 Group disability policy may be short or long term
 Social Security
 Covers total disability that lasts more than twelve
months
 Workman’s Compensation
 If you are injured at work or your injury is a result of
your type of employment
 Disability insurance
 Benefits limited to 70-80% of your take home pay
11-65
CHAPTER 12
LIFE INSURANCE
WHAT IS LIFE INSURANCE?
Life insurance - Purchase policy; insurance
company promises to pay a lump sum at the
time of the policy holder ’ s death, or
sometimes while they are still alive
12-66
Life Insurance Pretest
1. People should buy life insurance primarily to pay for
their funerals.
2. Policyholders can take loans against some life-insurance
policies.
3. Some life-insurance policies have a savings/investment
feature.
4. Some life-insurance policies allow the insured person to
get the full amount of the policy before he or she dies.
5. Most experts in personal finance say that almost
everyone should have life insurance.
6. Generally, the wage earner in a family with small
children should have more life insurance than a wage
earner without any children to support.
7. A young working parent can get the most inexpensive
life-insurance coverage with a term -life instead of a
cash-value policy.
8. When you shop for life insurance, you should consider
only the cost or premium you will pay.
67
Life Insurance Pretest Answers
1. People should buy life insurance primarily to pay for their
funerals. FALSE
2. Policyholders can take loans against some life -insurance
policies. TRUE
3. Some life-insurance policies have a savings/investment
feature. TRUE
4. Some life-insurance policies allow the insured person to get
the full amount of the policy before he or she dies. TRUE
5. Most experts in personal finance say that almost everyone
should have life insurance. FALSE
6. Generally, the wage earner in a family with small children
should have more life insurance than a wage earner without
any children to support . TRUE
7. A young working parent can get the most inexpensive life insurance coverage with a term -life instead of a cash -value
policy. TRUE
8. When you shop for life insurance, you should consider only
68
the cost or premium you will pay . FALSE
LIFE INSURANCE: AN
INTRODUCTION (CONTINUED)
 Purpose of life insurance: Protect someone
who depends on you from financial loss
related to your death.
 Other reasons are:
 Pay off a home mortgage or other debts at the
time of death
 To leave as part of your estate
 To save money for retirement or for income or
education for children
 To cover medical expenses and funeral costs
12-69
LIFE INSURANCE: AN
INTRODUCTION (CONTINUED)
THE PRINCIPLE OF LIFE INSURANCE
 Mortality tables provide odds on your dying,
based on your age and sex
HOW LONG WILL YOU LIVE?
 Your premium is based on your life
expectancy and the projections for the
payouts for persons who die
12-70
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?
 How much money do you want to leave your
dependents should you die today?
 When do you want to retire, and what income do
you think you’ll need?
 How much will you be able to pay for your
insurance program?
12-71
Question
 Who is in the most need of having life
insurance?
 A. Single working person with no dependents
 B. Student in high school who are saving for
college
 C. Single parent with two elementary school
children
 D. A family with two parents, one of whom is a
wage earner, and two elementary school children
72
 C. Single parent with two
elementary school children
Answer
73
DETERMINING YOUR LIFE
INSURANCE NEEDS (CONTINUED)
ESTIMATING YOUR LIFE INSURANCE NEEDS
 The Easy Method
 You will need 70% of your salary for seven years
while your family adjusts
 The DINK (dual income, no kids) Method
 ½ debts + funeral expenses
• 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
12-74
TYPES OF LIFE INSURANCE
COMPANIES AND POLICIES
 Stock life insurance companies are owned by the
shareholders
 75% are of this type.
 Sell non-participating policies
 If you want to pay the same premium each year, choose a
non-participating policy with its guaranteed premiums
 Mutual life insurance companies
 25% are of this type
 Owned by the policyholders
 With participating policies the premiums are higher than
non-participating policies
 Part of the premium is refunded to the policyholders
annually. This is called the policy dividend
12-75
TYPES OF LIFE INSURANCE COMPANIES
AND POLICIES (CONTINUED)
TYPES OF LIFE INSURANCE POLICIES
 Term life insurance
 Protection for a specified period of time
 If you stop paying premiums, coverage stops
 Renewability: You can renew the policy without
having a physical at the end of the term
12-76
TYPES OF LIFE INSURANCE POLICIES
(CONTINUED)
 Term life insurance
 Multiyear level term: Most popular form of term
insurance
 Conversion option: Can exchange term policy
for whole life policy without having a physical
 Decreasing term insurance: Premium stays the
same, but the amount of coverage decreases as
you age – mortgage insurance
 Return on Premium: Policy refunds every penny
of the premiums if one outlives the defined term
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TYPES OF LIFE INSURANCE
POLICIES (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
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TYPES OF LIFE INSURANCE
POLICIES (CONTINUED)
 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
 Variable life policy
 Minimum death benefit guaranteed, but the
death benefit can be greater than the minimum
depending on earnings of the dollars invested in
a separate stock or bond fund
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TYPES OF LIFE INSURANCE
POLICIES (CONTINUED)
 Adjustable life policy
 Whole life insurance policy, but you can change your
policy as your needs change. You can change your
premium payments to increase or decrease
coverage.
 Universal life
 Gives you more direct control
 Can pay premiums at any time in almost any
amount. Amount of insurance can be changed more
easily than a traditional policy
 The increase in the cash value of the policy reflects
the interest earned on short-term investments
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TYPES OF LIFE INSURANCE
POLICIES (CONTINUED)
OTHER TYPES OF LIFE INSURANCE POLICIES
 Group life insurance
 Term insurance
 Often provided by an employer
 No physical is required
 Endowment life Insurance
 Provides coverage from the beginning of the
contract to maturity and guarantees payment of
a specified sum to the insured
 Credit life insurance
 Debts such as car loan is paid off if you die
 Also protects lenders
 Expensive protection
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IMPORTANT PROVISIONS IN A
LIFE INSURANCE CONTRACT
 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
 Nonforfeiture: Keep accrued benefits if you drop
the policy
 Incontestability clause: After the policy has been in
force for awhile (2 years), the company can’t
dispute its validity for any reason
 Suicide clause during first two years
 Automatic premium loans
 Uses the accumulated cash value to pay the
premium if you do not pay it during the grace period
 Misstatement of age provision
 Policy loan provision to borrow against cash value
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IMPORTANT PROVISIONS IN A LIFE
INSURANCE CONTRACT (CONTINUED)
 A rider to a policy modifies the coverage by adding or
excluding conditions or altering benefits
 Waiver of premium disability benefit
 Accidental death benefit - double indemnity
 Guaranteed insurability option
 Cost of living protection
 Accelerated benefits, also called living benefits, pay
to those who are terminally ill before they die
 Second-to-die option, also called survivorship,
insures two lives
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BUYING LIFE INSURANCE
FROM WHOM TO BUY?
 SOURCES
 Examine both private and public sources
 Look up the company’s rating,
in A. M. Best or other rating agencies
 Talk to friends or colleagues
 RATING INSURANCE COMPANIES
 Research ratings on the web,
http://www.standardandpoors.com/.
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BUYING LIFE INSURANCE
(CONTINUED)
CHOOSING YOUR INSURANCE AGENT?
 Can friends or parents make
recommendations?
 Does the agent have professional
designations such as Chartered Life
Underwriter (CLU)?
 Is the agent willing to find a policy that is right
for you or does he push a certain type of
policy?
 Do they ask about your financial plan?
 Do you feel pressured?
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BUYING LIFE INSURANCE
(CONTINUED)
COMPARING POLICY COSTS
 Compare policy costs which are affected by:
 How selective they are in whom they insure
 Their cost of doing business
 Return on their investments
 Mortality rate among policyholders
 Policy features and competition from other firms
 Use interest-adjusted index to compare policies
 Takes into account the time value of money
 Helps you make cost comparisons among
insurance companies
 See sites such as www.quotesmith.com.
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BUYING LIFE INSURANCE
(CONTINUED)
OBTAINING A POLICY
1. Apply
2. Provide medical history
3. Usually no physical for a group policy
4. Read every word of the contract
5. After you buy it, you have ten days to change
your mind
6. Give your beneficiaries and lawyer a
photocopy
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BUYING LIFE INSURANCE
(CONTINUED)
CHOOSING SETTLEMENT OPTIONS
 Lump-sum payment is most common
 Limited installment payment
 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
 Pays interest to the beneficiary
SWITCHING POLICIES
 Switch if benefits exceed costs of getting another physical,
and paying policy set -up costs
 The older you are the higher the premium will be
 Are you still insurable?
 Can you get all the provisions you want?
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FINANCIAL PLANNING
WITH ANNUITIES
 Annuity: Financial contract written by an
insurance company that provides you with a
regular income
 People buy annuities to supplement
retirement income and to shelter income
from taxes. Annuities are tax-deferred
investment plans.
 The Health Care and Education Reconciliation Act of
2010 imposes a 3.8% income tax on high income
individuals starting in 2013. The tax will be applied
on interest, dividends, and capital gains.
 Those who expect to live longer than
average benefit most from annuities
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