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Chapter 13

Chapter 13 BU353.docx

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Heather Graham

BU353 Chapter 13 – Individual Life Insurance Products & Annuities Week 9 Life Insurance Overview -A legal agreement that pays an amount of cash, referred to as the death benefit, upon the death of an insured life The Need for Life Insurance -Imagine what would change in family’s day-to-day lifestyle if the primary income earner died -If life insurance is needed, the next step is to determine whether the need for protection is of a temporary or permanent nature -Face amount – stated amount of overage purchased by the policyholder How Much Life Insurance Coverage Should be Purchased? -Many models to help decide -Some are a simple rule of thumb – Ex. 6% of annual earnings – and some are complicated formulas Life Insurance Products -Two broad types: temporary and permanent Term Insurance -Provides a death benefit over a fixed term such as 1, 5, or 10 years -Typically provides pure death protection -The policy can be renewed at a predetermined premium at the end of the term without having to gain provide evidence of insurability, up to an advantaged age (typically 75-100) -An insured can covert a current term insurance policy for a similar amount of permanent insurance at a later date Endowment Insurance -Pays the face amount of the policy is the insured dies, but it also pays the face amount of the policy if the insured survives the policy term Permanent Insurance -Provides both death protection and some savings/investment accumulation Whole Life Insurance -The policyholder’s entire life -All important financial features of the product are set from the beginning of the policy -The savings accumulate under whole life insurance policies because the premium payment schedule requires the policyholder to prepay the expected costs of future death protection -With conventional whole life policies, the beneficiaries do not receive the cash value in addition to the face amount if the insured dies -When a death occurs, the insurance company pays out the death benefit which is made up of the cash value plus enough to reach the amount of the death benefit -Traditional whole life policies are structured so that the policy’s cash value grows each year and the amount of net death protection declines -Whole life insurance policies commonly use a level premium schedule over a fixed number of years -The savings accumulate under whole life insurance policies because the premium payment schedule requires the policyholder to prepay the expected costs of future death protection -Cash surrender value – exactly equals the predetermined cash values account for the recovery of the policy loading expenses and result in significantly lower cash values during the early years of a policy -Paid-up insurance – the cash surrender value is used as a lump sum to purchase a whole life policy BU353 Chapter 13 – Individual Life Insurance Products & Annuities Week 9 -Extended term insurance – the cash value is used to purchase a single premium term policy with the same face amount as the original policy -Insurers generally front-end load expense charges with whole life policies -Participating policies – the policy can and usually does pay annual dividends -Illustrated dividends – reflect what the insurer is currently paying on comparable policies -Policy loan – allows the policyholder to obtain a large portion of the cash value of the policy without surrendering the policy by borrowing against the cash value Universal Life Insurance -These policies provide permanent death protection and savings accumulation -They offer greater flexibility with respect to premium payments -The cash value varies explicitly over time based on premium payments, expense and mortality charges and credited interest -A fixed premium schedule is not used -The policyholder has flexibility in the payment of premiums, often subject to annual minimum and maximum amounts -The cash values can vary with current interest rates, the return earned on the insurer’s entire asset portfolio, or the return on specific portfolios of investments, such as mutual funds, which the policyholder may have some limited choice in defining -Additional premium payments or higher interest credits cause the cash value to increase, holding mortality and expense charges constant -When selling universal life policies, agents present projections of future premiums and cash values -With a universal life policy, the policyholder generally has a choice between two death benefit options: -Have total death benefit equal to a level amount over time -Have the death benefit increase as the cash value of the policy increases -Under the level death benefit option, the
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