final wk 6
dfresh90
BS-MG353_Week4_Chapter81.ppt
PFIN
5
Insuring Your Life
8
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
BILLINGSLEY/ GITMAN/ JOEHNK/
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Explain the concept of risk and the basics of insurance underwriting
- Discuss the primary reasons for life insurance and identify those who need coverage
- Calculate how much life insurance you need
- Distinguish among the various types of life insurance policies and describe their advantages and disadvantages
- Choose the best life insurance policy for your needs at the lowest cost
- Become familiar with the key features of life insurance policies
LEARNING OBJECTIVES
PFIN5| CH8
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Basic Insurance Concepts
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Purpose of insurance
- Protect people from the financial consequences of losing assets or income when an accident, illness, or death occurs
- Strategies to prevent financial loss
- Risk avoidance: Avoiding an act that would create a risk
- Loss prevention: Any activity that reduces the probability that a loss will occur
PFIN5| CH8
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Basic Insurance Concepts
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Loss control: Any activity that lessens the severity of loss once it occurs
- Risk assumption: Choice to accept and bear the risk of loss
- Insurance policy: Insurer agrees to reimburse the insured for any losses suffered according to specified terms
PFIN5| CH8
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Underwriting
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Used by insurers to decide who can be insured and applicable rates for premiums
- Helps insurance companies to protect against adverse selection
- Practices and standards vary among insurance companies
PFIN5| CH8
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Benefits of Life Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PFIN5| CH8
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Methods to Estimate the Required Amount of Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PFIN5| CH8
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Exhibit 8.1
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PFIN5| CH8
How Much Life Insurance Do You Need?
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Term Life Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Provides death benefits for a specified period
- Does not provide for the accumulation of cash value
- Types
- Straight term policy: Coverage remains unchanged throughout the effective period
- Decreasing term policy: Premium remains unchanged while coverage decreases
PFIN5| CH8
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Whole Life Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Provides permanent insurance coverage during an individual’s entire life
- Cash value: Accumulated refundable value of an insurance policy
- Results from the investment earnings on paid-in insurance premiums
- Nonforfeiture right: Provides policyholder the assets allotted for future death claim, upon policy cancellation
PFIN5| CH8
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Types of Whole Life Policies
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Continuous premium
- Premiums should be paid until death or policy cancellation
- Limited payment
- Premiums should be paid for specified number of years
- Insurance is effective until death
- Single premium
- Lifetime coverage purchased with a single premium
PFIN5| CH8
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Universal Life Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Permanent cash-value insurance
- Combines term insurance with a tax-sheltered savings account
- Death protection and savings portion premiums are unbundled
PFIN5| CH8
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Other Types of Life Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Variable life insurance: Coverage amount varies with the profits generated in the investment account
- Group life insurance: Provides a master policy for a group
- Each eligible group member receives a certificate of insurance
PFIN4| CH8
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Other Types of Life Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PFIN5| CH8
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Exhibit 8.8
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PFIN5| CH8
Advantages and Disadvantages of the Most Popular Types of Life Insurance
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Strategies Involved in Buying Life Insurance
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PFIN5| CH8
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Life Insurance Contract Features
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Beneficiary clause - All life insurance policies should have one or more beneficiaries
- Settlement options
- Lump sum
- Interest only
- Fixed period
- Fixed amount
- Life income
- Policy loan: Advance secured by the cash value of a whole life insurance policy
PFIN5| CH8
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Life Insurance Contract Features
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Premium payments
- Grace period
- Nonforfeiture options
- Paid-up insurance
- Extended term insurance
- Policy reinstatement
- Change of policy
PFIN5| CH8
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Other Policy Features
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Multiple indemnity clause: Doubles or triples the policy’s face amount if the insured dies in an accident
- Disability clause: Includes a waiver-of-premium benefit alone or coupled with disability income
- Guaranteed purchase option: Right to purchase additional coverage without providing evidence of insurability
PFIN5| CH8
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Other Policy Features
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Suicide clause
- Exclusions
- Participation
- Living benefits
- Viatical settlement
PFIN5| CH8
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Life Insurance Policy Illustration
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Includes the important assumptions that the insurance company relies on when presenting the policy to a prospective client
- Consists of two parts
- Guaranteed illustration
- Current illustration
PFIN5| CH8
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Life Insurance Policy Illustration
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- Ensure the following sections are present in the narrative summary
- Policy description, terms, and features
- Underwriting discussion
- Column definitions and key terms
- Disclaimer
- Signature page
PFIN5| CH8
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- Risk avoidance
- Loss prevention
- Loss control
- Risk assumption
- Insurance policy
- Underwriting
- Multiple-of-earnings method
- Needs analysis method
- Social Security survivor’s benefits
- Term life insurance
- Straight term policy
- Decreasing term policy
- Renewability
- Convertibility
- Whole life insurance
- Cash value
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KEY TERMS
PFIN5| CH8
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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- Nonforfeiture right
- Universal life insurance
- Variable life insurance
- Group life insurance
- Credit life insurance
- Mortgage life insurance
- Industrial life insurance
- Beneficiary
- Policy loan
- Multiple indemnity clause
- Disability clause
- Guaranteed purchase option
- Participating policy
- Life insurance policy illustration
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KEY TERMS
PFIN5| CH8
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SUMMARY
- Insurance policies protect people from the financial consequences of losing assets
- Individuals must choose policies based on their economic needs and available financial resources
- Several insurance policies are available with specific set of features
- Each has its own advantages and disadvantages
PFIN5| CH8
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