LIFE INSURANCE

LIFE INSURANCE

• Pooling of Risk• Lloyds of London

What is Insurance?

• Contract – If you pay premiums the insurance company will pay a benefit

• Why Learn about Life Insurance?• ‘MOST offered ‘investment’• Highest commissions of any investment – by far• Most Americans should have MORE life insurance

LIFE INSURANCE

Parties to the Contract

• Owner• Insured (example: Father)

• 82% husbands pass away before wife• Beneficiary

• Primary (example: Mother)• Secondary (example: the children to share equally)

LIFE INSURANCE

Life Insurance Contract Provisions• Insurability

• Preferred, Standard, Substandard• Pre-existing Conditions• Need to Take a Medical Examination• MIB – Medical Information Bureau

• Insurable Interest – In a position to lose something of value• Indemnify – Pay for but not ‘profit’ from a loss• Non-Cancellable – Except for nonpayment of premiums• No Waiting Period• Settlement Options – Ways to receive death benefits• Riders – Add coverage• Contract – Only the insurance company is ‘bound’ by contract

LIFE INSURANCE

Life Insurance Contract Provisions• Exclusions

• War, either declared or undeclared• Military Activity• Nuclear Related Activity• Riots or Insurrections• Deaths as a result of illegal activities• Accidents occurring under the influence of alcohol or drugs on other

than a physician prescribed basis• Suicide – for two years after policy inception• Aviation Accidents

LIFE INSURANCE

Aviation Exclusion• A contract provision which specifies that the death benefit is

not payable if the insured dies because of certain aviation activities

• Policy only pays if:• Fare paying passenger• Regularly Scheduled Commercial Airline

LIFE INSURANCE

Aviation Exclusion – Example A

Insurance Company claimed the man was ‘airborne’

-- no death benefit because of the Aviation Exclusion.Court ruled the man never intended to be ‘airborne’

-- the insurance company had to pay the death claim.

LIFE INSURANCE

Aviation Exclusion – Example B

LIFE INSURANCE

Aviation Exclusion – Example CInsurance company claimed they didn’t need to pay because the person had completed the commercial air flight.Court ruled didn’t intend to be in flight

LIFE INSURANCE

Riders

• Waiver of Premium• Accidental Death & Dismemberment• Disability Income• Automatic Premium Loan• Family Income• Mortgage Redemption• Guaranteed Insurability

LIFE INSURANCE

Types of Life Insurance

• Group – Inexpensive if not a preferred risk• Individual (Ordinary) – If a preferred risk – least expensive

LIFE INSURANCE

Individual (Ordinary)• Term = Death Benefit• Cash Value = Death Benefit + Investment

• Whole Life• Variable Life• Adjustable Life• Indexed Life• Universal Life• Variable Universal Life• Universal Adjustable Life

LIFE INSURANCE

Cash Value Chart

Time Endow

Age 100Face V

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Life Insurance

Death Benefit

Cash Value‘Investmen

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LIFE INSURANCE

Why to Avoid Cash Value

1. Large Lapse Rates – Behaviorally InefficientA. 80% Cancelled in the first 5 YearsB. A cancelled policy loses generally all ‘investment’ value if

cancelled within 3 years of purchase

2. 20-25 Year Surrender Penalties3. Affordability – High Cost

A. Most Americans are underinsured

4. Objective Advisors AvoidA. Clark Howard, Jonathon Pond, Jane Bryant Quinn

LIFE INSURANCE

Why to Avoid Cash Value – Cont.

5. High Expenses – Life insurance investments tend to grow at a slower rate than an equivalent mutual fund investment

6. Rarely does actual investment experience match projected investment values

7. Very Confusing Language

8. Highest commissions relative to dollars invested – by far

LIFE INSURANCE

Why to Avoid Cash Value – Cont."As already intimated, it is believed to be a fact, now causing quite general complaint, that there are too many complicated schemes or plans of insuring, and conducting companies, as well as too many and too elaborate forms of contract or policy. Each new company announces some new feature in its business, which is to enure greatly to the advantage of the insured, and thus, with some seventy different companies, each urging their superiority over all others, he who seeks insurance, if he stops to hear all the arguments, and deliberately determine which is really the best company,. . . is likely to die before he reaches a conclusion.“

New York State Insurance CommissionerApril 1, 1870

LIFE INSURANCE

Insurance to Avoid

• Accidental Death and Dismemberment

LIFE INSURANCE

CAUSES OF DEATH, USA 2002 National Vital Statistics Report

FORMAL NAME INFORMAL NAME % ALL DEATHS

• (1) Diseases of the heart heart attack (mainly) 28.5%• (2) Malignant neoplasms cancer 22.8%• (3) Cerebrovascular disease stroke 6.7%• (4) Chronic lower respiratory disease emphysema, chronic bronchitis 5.1%• (5) Unintentional injuries accidents 4.4%• (6) Diabetes mellitus diabetes 3.0%• (7) Influenza and pneumonia flu & pneumonia 2.7%• (8) Alzheimer's Disease Alzheimer's senility 2.4%• (9) Nephritis and Nephrosis kidney disease 1.7%• (10) Septicemia systemic infection 1.4%• (11) Intentional self-harm suicide 1.3%• (12) Chronic Liver/Cirrhosis liver disease 1.1%• (13) Essential Hypertension high blood pressure 0.8%• (14) Assault homicide 0.7%• (15) All other causes other 17.4%

LIFE INSURANCE

Insurance to Avoid

• Accidental Death and Dismemberment• Example• No suicide coverage

• Trip Insurance• Cancer Coverage• Pre-Need Funeral Expenses• Credit Life

• Very expensive per $1,000 of coverage• 66% of deaths go unreported

LIFE INSURANCE

How Much Face Value

2 ways to calculate

1. 14 times primary breadwinner’s income (easiest)

2. Point of ChoiceTM

• Required Assets / Immediate Death• Generally $1,250,000 per $50,000 income• Required POC Assets - Existing Net Financial Assets

LIFE INSURANCE