General Insurance 6

Chapter 11 & 12 Lecture Notes.html

FIN 3610 General Insurance

Chapter 11 – Life Insurance

Chapter 12 – Life Insurance Contractual Provisions

Lecture Overview – Comments from Dr. Zietz

 Life Insurance and Contractual Provisions

This module for week seven has some great information on life insurance! Chapter 11 specifically addresses the purpose and types of life insurance one should have. There are excellent statistics in this chapter that will hopefully get you to think about how life insurance can fit into a financial plan.

Life Insurance Basics

In chapter 11, we also address different types of life insurance available. Read through the first few slides, get an understanding of why one would need life insurance, and how much life insurance one would purchase.             Let me ask, how many of you have heard advertisers critique the use of one particular type of life insurance over another? Everyone has an opinion on the use of term versus whole life. Some organizations will even strongly advertise one type or the other, such as Dave Ramsey, who thinks whole life insurance is a complete waste of money. This argument goes back many decades. There will be also be other people who strongly argue in favor of whole life instead of term insurance.

I cannot thoroughly assess the advantages of one type of policy over the other without first knowing the reason someone is purchasing life insurance. If someone has a temporary or short-term need to have life insurance, they may need strong term insurance. If another insured wants to be assured that his family will be left with inheritance, they may want to consider whole life insurance. There are many interesting statistics on term and whole life insurance in this chapter, and I hope you will take time to read these statistics and see the true differences in how the policies are structured and how the cost varies between the two types. You may be very surprised to find you have some preconceived notions on the difference between term and whole life insurance that may not be correct.

Life Insurance Contractual Provisions

Let's continue to study about the use and need for life insurance by carefully reviewing the provisions and options you are able to purchase or choose in a life insurance contract. There are some provisions that allow the policy to adapt to varying circumstances. Other provisions involve withdrawing from the policy if you choose to do so at a later date.

One of my favorite things to talk about in this chapter is the non-forfeiture section. The non-forfeiture options allow you to get out of a whole life policy and avoid losing everything that you have put into it. Carefully examine the information on slides 15 and 16, specifically looking at Exhibit 12.1. The information outlined guarantees values on a policy if you wish to restructure the whole life policy at the end of a set date. For example, if you have a whole life policy for 10 years and decide that after the 10th year you no longer want to pay the premiums, your policy will still have some value. Specifically the end of your 10th year on a $100,000 policy, given the illustration of Exhibit 12.1. You could withdrawal $8,000 in cash value, stop paying the premiums, and tag $34,300 in whole life insurance. You also have the option of keeping the $100,000 in term insurance for the next 11 years and 50 days. This option is available to you on the whole life policy because you have been paying a level amount of premium over the last 10 years. Your premium could have been less, at the beginning, to pay only your actuarial cost. However, if you have a level premium, you will not be paying for the adverse selection of other insured to drop the coverage as they get older, and the premium will keep going up! Adverse selection implies people may be more likely to buy coverage if they anticipate a claim.

This chapter also has some very good settlement option information on how you can withdraw funds from the policy proceeds (refer to the list on page 241). There are some clear advantages to each of the settlement options.