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MTHEL 131 (111)
David Kohler (106)
Lecture 6

MTHEL 131 Class Note Lecture 6

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Mathematics Electives
David Kohler

[Oct. 26, lecture 6] 1 4 type permanent insurance → Common: for whole life (never expire) → If you don’t pay the premium, no longer have the coverage 1. Whole life (pay for whole life) 2. Limit pay whole life (common: limited pay 10 or 20 years) 3. Universal life (comparison to whole life): Deposit  Flexibility of deposit/premium - It has flexibility over how much you pay - Make deposit into your universal life account -As long as the insurer turn on the tap and take out the money, and money comes out, the policy stays enforce $1,000 - If the deposit is dried up, or used up, the policy could lapse Universal Life → Beer Keg - With the universal life, if you have built up a sufficient amount in policy, you can take a certain period premium “holiday” or add $10,000  Flexibility (of the amount of coverage) - If you have a traditional whole life policy, and now you need $300,000 more, you need to buy another policy - If you have universal life, no need to buy a new policy, just let the keg last longer and tap open longer for every day ($500,000 → $800,000)  Tax favor status - Investment earnings are taxable: if you have an investment, and earn $1,000 in interest income (has $20,000 capital at 5%), that $1,000 would be taxable - In universal life policy, any earnings on the money/funds in reserve are tax free or tax shelter - Rate of return on universal life reserve (depends on the type of investment the client wants) for a conservative client maybe 3% - This return can be tied to any type of Index  2 main types of tax shelter (tax free)  Tax-Free SavingsAccount (TFSA)  Registered Retirement Savings Plan (RRSP) -As long as they stay inside the policy  Limit on how much a person can deposit in universal life account  MTAR: Maximum TaxActuarial Reserve  MTAR limit: the maximum you could deposit into universal life without screwing up [Oct. 26, lecture 6] 2 its prefer tax status - The earning make inside the reserve are tax free, until they are taking out; so, simple rule, never take them out, keep them in there and use them to pay future premium - Since life insurance process is tax free, if their earning stay long enough, they can come out tax free when they die  When the applicant decides to choose a universal life policy, he also given a choice that how do you want dead benefit calculated - Ex. Reserve (deposit + saving): $100,000; Coverage: $800,000  Level Death Benefit: when the policy owner dies, the beneficiary will get the face value (regular U-life: $800,000) - Given that the insurer upon the death of life insurer is going to keep $100,000, at this moment in time, they are $700,000 at risk  “U-life plus”/LevelAmount at Risk: when the policy owner dies, the beneficiary will receive $900,000 - The insurer is always at risk the same amount ($800,000 at risk) - The premium of  is higher than, because in situation, $800,000 death benefit, but $100,000 in the reserve, when the insurer opens up the tap, and takes the premium out, would only takes out enough to cover how much at risk ($700,000), so the insurer only charge for $700,000 of the insurance 4. Term to 100 (T-100) - Unlike its 3 other products, it has no cash value or reserve associate with T-100 - Does not build up any cash value - No experience dividend - No cash surrender value → no non-forfeiture value - The least expensive form of permanent life insurance - It has high lapse rate - By the law, every policy has 30 days of grace, where by the insurer will continue provide the coverage even though the premium is due - If after the30 days of grace period and still no premium have been paid, the policy will lapse Policy riders/Options: additional options can add to the policy Ex. $250,000 death benefit  Wavier of Premium (WP) - If the policy holder become disable, and unable to work, and this disability continues, on [Oct. 26, lecture 6] 3 the 6 months point of this disability, the insurer would begin to pay the premium on behalf of the policy owner - When the WP kicks in at 6 months point, the insurer would also refund to the policy holder those 6-months worth of premium that have been paid during the time of disability - If the policy holder is disable and but recovers at the 5 months point, WP never kicks in  Guaranteed Insurability Option (GIO) (or refer to Guarantee Insurability Benefit-GIB) - It guarantees that the insured will be able to purchase additional insurance at regular intervals without providing evidence of insurability up to a specified age limit - This option typically allows the insured to purchase additional amounts of insurance up to the face value of the original policy every 3 years - On average the amount of life insurance coverage a person should have is relation to their income; it is about 10 times (ex. If you earn $60,000, your coverage ultimately should be $600,000) - The person is disqualify to purchase an insurance ($600,000) because of his health - But he has started with a small policy (ex. $50,000 policy), and he is health today and qualify for the $600,000 policy but cannot afford it, insurer would add to that small policy guaranteed insurability option for $150,000 GIO option - The insurer has specific future intervals promises to issue you (if you wanted) additional insurance of $150,000 of additional coverage - If he took this policy at age 21, between ages of 20-25, will issue another $150,000; between ages of 25-30, will issue another $150,000; between ages of 30-35, will issue another $150,000; between ages of 35-40, will issue another $150,000; between ages of 40-45, will issue another $150,000  Disability Income Rider (DIR) - If you add a DIR $1,000/month, and when you become disable at least 6 months, you will receive $1,000/month from the insurer until retirement age - There are 2 riders pertain to a person’s disability: WP & DIR  Term Rider (TR) - If you want to buy a separate tem insurance policy, you could buy a term insurance rider that would be attached to the whole life policy - It save few dollars a month compare to buying a separate new term policy  Child Term Rider (CTR) - It is the coverage for the policy holder’s children - It is inexpensive (ex. $20,000 coverage for each child) [Oct. 26, lecture 6] 4 - When the kids reach a certain age, then it just falls off Accidental Death Benefit (ADB) - If we have $250,000 plan here, we add ADB rider, and then if this person dies by accident, the insurer pays double - Refer as double indemnity  2 reasons why it exists at all: 1. It is cheap, inexpensive to t
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