what is premature death?
the death of a family head outstanding unfulfilled financial obligations
what are the costs of premature death?
- future earnings are lost forever
- additional expenses incurred
- possible reduction in standard of living for survivors
how much life insurance is needed?
IT DEPENDS; on family size, income levels, existing financial assets and financial goals
what are the approaches to estimate the amount needed?
- human life value approach
- needs approach
what is the human life value approach?
present value of the family’s share of the deceased breadwinner’s future earnings
what are the disadvantages of the human life value approach ?
- ignores assets and other sources of income (social security, retirement plans)
- earnings and expenses assumed to be constant (most people get a raise each year)
- based on income rather than need
- effects of inflation on earning and expenses are ignored
what does the human life value approach do?
- estimate the individuals average annual earnings over his/ her productive life time
- deduct taxes and self maintenance costs
- using a discount rate, determine the present value of the family’s share of earnings for the number of years until retirement
what are the disadvantages of the needs approach?
- difficult to estimate the cost of future needs
- assumptions can be construed in different ways causing a large range of values
- needs may be different
what are reasons why someone will not purchase life insurance?
- too expensive
- difficulty in make the right decisions
- procrastination
- do not understand importance
- opportunity costs
what are the general types of life insurance?
- term insurance
- whole life insurance
what are the characteristics of term insurance ?
- death benefit only
- temporary protection
- premiums paid during the policy term are level
- most policies are renewable
- most policies are convertible
what does renewable mean?
the policy can be renewed without evidence of insurability
what does convertible mean?
term policy can be exchanged for a cash value policy without evidence of insurability
when is term life insurance appropriate?
the amount of income that can be spent on life insurance premiums is limited
the need for protection is temporary
the insured wants to guarantee future insurability
what are limitations to term insurance?
- premiums increase with age at an increasing rate and reach prohibitive levels
- inappropriate if you wish to save money for a specific need by accumulating cash value via life insurance
what are the characteristics of whole life insurance?
- death benefit plus savings component (cash value)
- policy period is lifetime of insured (doesn’t expire)
- generic term
- stated amount is paid to a designated beneficiary when the insured dies, regardless of when death occurs
what are the types of whole life insurance?
- ordinary life
- limited payment life
what is ordinary life ?
level premium policy that accumulates cash values and provides lifetime protection to age 121
what does the ordinary life policy accumulate?
cash surrender value, which is the amount paid to a policy holder who surrenders the policy early
who has the right to borrow during an ordinary life policy?
the policyholder
what is limited payment life policy?
very similar to ordinary life, insured has lifetime protection and premiums are level but they are only paid for 10, 20 , 30 years
what are the advantages to whole life insurance?
- maintain coverage for your entire life
- accumulate savings
what are the disadvantages to whole life insurance?
- do you need life insurance when you are 70?
- premiums are higher than term insurance
what are the variations of whole life insurance?
- variable life
- universal life
