Should you buy life insurance?

If someone would suffer a financial loss at your death Yes

What type of life insurance should you buy? If all you need is death protection Term life If you also want a tax-sheltered investment/saving plan Cash value life policy

What Type of Cash Value Life?

If you want guarantees - Traditional whole Life If you are willing to take investment risk -Variable or variable universal
If you want premium flexibility -Universal or variable universal

Lecture 3 Term Life Insurance and Endowment Insurance

Objective: understand the nature and types of term and endowment life insurance
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Outline

Overview of types of life insurance Term life insurance

Features Types Uses

and limitations

Endowment life insurance

Features

Ways life insurance is distributed

Group life Industrial life Individual life Credit life

Group life

typically purchased by employers for the benefit of their employees 40.0% of life insurance in force Group must be formed for some reason other than purchasing insurance.
Local schools, GE, professional associations, labor unions,

Characteristics:
Low cost (volume discount) No individual underwriting Many persons covered under one contract Employer may require employee contribution

Industrial life

issued to individuals in small amounts ($1,000, $2,000, etc) less than 1% (0.2%) today, compared with 10% at one time

Premiums collected weekly/monthly at the insureds home

The cost of industrial life is high:
Low-income workers life expectancy tends to be lower than the average member of society. High administrative expenses.

Individual life
Issued

to individuals with larger coverage than industrial life of insurance in force

58.8%

Credit life
Insurance

instruments issued through lending institutions to cover debt obligations if the borrower dies or becomes disabled 1.2% of insurance in force

about

Types of life insurance products

Traditional life insurance products

Term
Endowment Whole

New life insurance products

Universal Variable Variable

universal
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Term life

Death benefit is paid to the beneficiary upon the insureds death during the term of the policy
Term policies are purchased for a certain amount of time (5, 10, 15, 20 years, etc.). When this time expires, the policy and all coverage will end.

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Features of term life

Renewability

guarantees the insured the right to continue coverage for a number of additional periods, without further proof of insurability

Convertibility

guarantees the insured the right to exchange the policy for some type of permanent insurance, without further proof of insurability

Reentry

allows the possibility of paying a lower premium if the insured resubmits to the insurer evidence of satisfactory insurability.
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Types of term life

Increasing Premium Level Face Amount Level Premium

Term Life Non-level Face Amount

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Level face value term

Increasing premium
equivalent

to renewable term

Level premium
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year or 20 year term Term to age 65 Life expectancy term

--provides protection for the life expectancy of the insured given age and sex. The level premium generates a cash value which increases and then decreases to zero at policy expiration

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Level premium concept

Rationale for level premium

Increasing mortality produces increasing rates as the insured grows older Increasing premium eventually becomes unaffordable for person who wants to continue coverage. Insurers developed the principle of the level premium as a practical method of providing lifetime insurance.

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Decreasing face value term

Provides coverage for a specified period of time The death benefit decreases to zero at the expiration of the policy

The premium remains level during the entire term period

Appropriate for decreasing risks; for example, mortgage protection

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Types of decreasing face value term

Mortgage protection term

Decreasing

face amount . that matches the projected decreases in the principle amount owed under a mortgage loan

Payor benefit
The

decreasing death benefit is just sufficient to pay the premiums on the juvenile life contract, i.e., until the insured is 21

Family income policy

a

decreasing face amount that provides a monthly income to a surviving spouse until a certain age or for a certain period
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Benefits and limitations of term life

Benefits

provides greatest amount of protection for given dollar outlay Allows people with low incomes to buy adequate amounts of protection Flexible and transparent

Limitations

provides temporary protection only does not provide a savings instrument cost may become prohibited at later ages There is a renewal risk at term
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Uses of term life

For families with low incomes and high insurance needs For those whose have a career to establish or start a new business Indemnity for the death of a VIP Having a mortgage or other loans Buy-term-and-invest-the-difference (BTID)
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Endowment insurance

Nature of endowment insurance

Endowment policies provide the face value upon death OR the end of the term if the insured survives until term Endowment insurance is equivalent to term life plus a pure endowment The pure endowment policy would be the face value payment in the event of survival till term

Endowment insurance is equivalent to decreasing term with increasing savings

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