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MTHEL 131 (111)
David Kohler (106)
Lecture 5

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Mathematics Electives
David Kohler

MTHEL131 week 5 Oct. 9, 2013 Term insurance: • Cheaper at the beginning • Renewable at every term • Health information only required only at the beginning • Policy will expire after old age if they don’t die • Nothing builds up Permanent insurance: • Doesn’t expire • More expensive at the beginning • Builds up cash surrender value o Allows you to borrow up to 90% of the cash value of your policy o Any policy holder who has built up cash surrender value can take out a loan o Not obliged to any specific repayment schedule o They will deduct the outstanding loan and any interest from the death benefit • Will be covered for the whole of life Permanent insurance vs. Whole of life insurance Permanent insurance: Name given to the group of insurance policies designed to be enforced for the whole of life (opposite of term insurance) Types: 1. Whole Life insurance – CSV (cash surrender value) a) Limited-pay whole life insurance (traditional) • Premiums are condensed over a shorter period (instead of your whole life) • Ex: limited-pay 20 • Premiums much more expensive • CSV is normally very low at the beginning of the policy (first few years) 2. Term-100 (T-100) • Enforced for your entire life • No CSV o No cash builds up o No flexibility • Lower premium, level for life • Least expensive form of permanent insurance (stripped down-no CSV) o Don’t miss a premium! MTHEL131 week 5 Oct. 9, 2013 3. Universal life insurance – (U-life) flexible • Premiums vs. deposits o Insurance calculates how much insurance policy is valued per day. o They have a reserve where the customer puts in lump sums or deposits, and the insurance company just takes out money when they need to charge the customer. Customer must make sure that there is money available to the insurance. • Coverage is very is flexible o If he needs more coverage for whatever reason, the insurance company simply raises the daily “premium” charge • Investments o Customer can oversea how his reserve is being invested and what it is generating. They can see the premium charge and the cost of insurance at any time. • Tax advantages – tax shelter o If the customer has investments earning interest or dividends outside of the insurance, then they are taxed. o Any money earned on interest or dividends inside the reserve is tax free until the money is removed (tax free earnings) • Choices in how the policy works 1. Death benefit: a) Level death benefit (Regular): If he dies, he gets the cash value of the coverage, not the reserve money. o Ex: if his coverage is $500K, and he has $100K in the reserve, they only charge him for $400K, which is why they would keep the reserve money b) Universal insurance PLUS: if he dies, he gets the cash value if the coverage, PLUS the reserve money. But the insurance is costing him more per premium. Policy owner can change his mind between these policies at any time, depending on insurability (amount of risk to the company) 2. Investment at reserve 3. Cost of Insurance: Two people the same age, have the same amount of money in the reserve a) YRT – yearly renewable term cost of premium rises exponentially over the years. More money in the at first, but later on the costs will be much more expensive b) LCOI – (level cost of insurance) MTHEL131 week 5 Oct. 9, 2013 the reserve will build up slower at beginning, but the premium will never go up. In other policies, if the investments don’t do as well as predicted, the insurance company is responsible for making up the difference. In universal insurance policies, the customer is
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