Life Insurance: What PFMP
Staff and Military Families
Need to Know

Barbara O’Neill, Ph.D., CFP®, AFC, CHC
Rutgers Coopera...
Webinar Objectives
• Discuss basic insurance concepts
• Discuss basic life insurance concepts
• Describe different types o...
Question #1
What types of questions do your clients
ask you about life insurance?
What Is Insurance?
Third party risk protection
– Paying a company to share your large financial risks
– Requires a large p...
The Essence of Insurance
• Insurance consists of two basic elements:
– Reduction of risk
– Sharing of losses

• Law of Lar...
Why Is Insurance Important?
• Protects income and assets
• Death
• Disability
• Lawsuits

• May be required by lender – se...
Life is Full of Risks…Many
Have Financial Consequences
• Damage to car in accident
• Loss of home and/or possessions
• Los...
Common Types of Financial
Risks
• Personal Risks
– Loss of income or life
– Illness, disability, or unemployment

• Proper...
Five Ways to Manage Risk
• Do nothing and hope for the best
• Risk avoidance
• Risk reduction
• Risk acceptance
• Risk tra...
Risk
Avoidance

Risk
Shifting

Ways to
Manage
Risk

Risk
Reduction
Wear seatbelts

Buy Insurance
Self Insurance

Don’t sto...
Question #2
Do you have any other examples to
illustrate risk management methods?
Two Key Insurance Concepts
• Loss Frequency – The likely number of times
that a loss might occur over a period of time.
• ...
The Relationship Between
Severity and Frequency of Loss

Source: Garman & Forgue (2010). Personal Finance
Common Types of Insurance
• Life
• Automobile and motorcycle
• Property (homeowners, renters)
• Health
• Disability
• Long...
How Insurance Works
Insurance Policy – Contract between a
person buying insurance (the insured)
and an insurance company (...
An Insurable Interest Must
Exist to Buy Insurance
Insurable Interest – When a person or
organization stands to suffer a fi...
Basic Insurance Terms
• Coverage = What insurance contract pays for
• Term = Length of insurance contract
• Premium = Cost...
Insurance Cost Factors
• Choice = Level of risk you want to take
– e.g., Amount of insurance coverage, deductibles

• Chan...
Insurance is Regulated by States
Insurance Information Institute

http://www.iii.org
Life Insurance Basics
• Pays when the policy owner dies
• Generally purchased to financially help those
left behind
• Prov...
Financial Planning With Life
Insurance
• Protect those who depend on your income
from financial loss resulting from your d...
Other Reasons to Buy Life
Insurance
– Pay off a mortgage or debts
– Provide an education or income for children
– Accumula...
Key Life Insurance Terms
• Mortality Tables- Provide odds on your dying, based on
your age and sex.
– Premium is based on ...
Key Provisions in a Life
Insurance Policy
• Beneficiary and contingent beneficiaries (those who
will receive benefits upon...
More Key Policy Provisions
• Non-forfeiture clause allows you to keep accrued
benefits in a whole life policy if you drop ...
Common Life Insurance
Policy Riders
• Waiver of Premium for disability benefit
• Accidental Death Benefit – “double indemn...
Term (Temporary) Life Insurance
• Often provided as employee benefit (e.g., 1 to 5 x salary)
• Least expensive type of lif...
Common Types of Term Life
Insurance
– Renewable Term- Can renew; higher premium
charged
– Multiyear Level Term- Same premi...
Permanent Life Insurance
• Combines life insurance coverage and an
investment account (a.k.a., cash value)
• More expensiv...
Types of Permanent Insurance
Straight-Life or Whole-Life Insurance
– Pay the premium as long as you live
– Accumulates a c...
Comparison of Premium
Dollars for Life Insurance

Source: Garman & Forgue (2010). Personal Finance
Question #3
What type of life insurance do you have
and why?
Who Needs Life Insurance?
• Do you have people you need to protect financially? Will your
death cause them financial hards...
How Much Life Insurance?
• Funeral costs
• Mortgage/debt costs
• Needs of beneficiaries (e.g., number and age)
• Goals (e....
Estimating Life Insurance Needs
• The Easy Method
– 70% or 75% of your salary for seven to ten years while
your family adj...
“Family Need” Method Process
• Follow these steps:
– Estimate annual income needed by survivors
– Calculate # of years inc...
Life Insurance Worksheet #1
Life Insurance Worksheet #2
https://www.hr.cornell.edu/benefits/insurance/worksheet.pdf
Types of Life Insurance
Companies
2 Types of Life Insurance Companies
Type of Company

Owned by

Stock life Insurance

Sha...
Stock Life Insurance Companies
• Owned by shareholders
• Sell non-participating (non-par) policies
• Majority of life insu...
Mutual Life Insurance Companies
• Owned by policyholders
• 5% of policies are from this type
company

of

• Participating ...
Other Types of Life Insurance
• Group life insurance
– Term insurance
– Often provided by an employer
– No physical is req...
Buying Life Insurance
Consider:
– Present and future sources of income (self/spouse)
– Accumulated assets
– Outstanding de...
Buying Life Insurance
• Compare policy costs based on:
– Company’s cost of doing business
– Return on company’s investment...
Buying Life Insurance
• Research insurance company ratings by major rating
firms:
• A. M. Best
• Standard and Poor’s
• Duf...
Sample Online Life Insurance Quote
Male, born 1/1/1980; 190 lb; $400,000 term
Living in New York State
insurance – 10 year...
Question #4
What other factors do you tell people to
consider when buying life insurance?
Choosing an Insurance Agent
• Ask friends, family and/or other financial
advisors for recommendations.
• Does the agent be...
Obtaining and Examining a Policy
• First step: apply for policy
• Second step: provide medical history
– Usually no physic...
Life Insurance Evaluation Service
• Compares costs and benefits of cashing in
a policy or keeping it and buying different
...
Should You Switch Policies?
• Switch if benefits exceed costs of getting new
physical exam and paying policy set-up costs
...
Choosing Settlement Options
Settlement Options = choices of how the
insurance money is paid out
– Lump-Sum Payment = most ...
Life Insurance for Military Families
Servicemembers' Group Life Insurance (SGLI)
• Low cost group term life insurance auto...
More About Military Life Insurance
• Depending on family needs, SM may require more coverage,
but SGLI is a good base to b...
More About SGLI
• Premium ranges from $3.25/mo for minimum
$50,000 to $26/mo ($312/yr) for $400,000 (cost:
$3.25 per $50,0...
Veterans Group Life Insurance
(VGLI)
• After SM leaves military, SGLI can convert to VGLI
• See http://benefits.va.gov/ins...
Traumatic Injury Protection
Under SGLI (TSGLI)
• See http://benefits.va.gov/insurance/tsgli.asp
• Extra $1/mo premium ($26...
Family Servicemembers Group
Life Insurance (FSGLI)
• Automatic coverage to spouses and dependent children of an
active dut...
Question #5
What else is important to tell service
members and their families about life
insurance?
In Summary
• Life insurance is an important building block
for family financial security
• Life insurance policies can be ...
Recommended Action Steps
• Review your current life insurance policy (if any)
• Make a list of questions for your insuranc...
Questions? Comments
Experiences?
Please complete the webinar evaluation and
follow the instructions to receive CEU credits...
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Life Insurance Webinar Slides

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Webinar covers insurance basics, life insurance basics, and life insurance for service members and their families

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Life Insurance Webinar Slides

  1. 1. Life Insurance: What PFMP Staff and Military Families Need to Know Barbara O’Neill, Ph.D., CFP®, AFC, CHC Rutgers Cooperative Extension oneill@aesop.rutgers.edu
  2. 2. Webinar Objectives • Discuss basic insurance concepts • Discuss basic life insurance concepts • Describe different types of life insurance policies • Discuss how to calculate life insurance needs • Discuss life insurance information resources • Discuss military life insurance options
  3. 3. Question #1 What types of questions do your clients ask you about life insurance?
  4. 4. What Is Insurance? Third party risk protection – Paying a company to share your large financial risks – Requires a large pool of people pooling the same risk
  5. 5. The Essence of Insurance • Insurance consists of two basic elements: – Reduction of risk – Sharing of losses • Law of Large Numbers – As the number of members in a group increases, predictions about the group’s behavior become increasingly more accurate
  6. 6. Why Is Insurance Important? • Protects income and assets • Death • Disability • Lawsuits • May be required by lender – secured loans • May be required by law • For licensing (i.e., driving, medical practice) • As employee benefit (health, disability)
  7. 7. Life is Full of Risks…Many Have Financial Consequences • Damage to car in accident • Loss of home and/or possessions • Loss of income due to disability • Loss of a household earner’s income due to death • Loss of a homemaker’s services • Large medical bills for disease or injury • A court judgment of liability for damages
  8. 8. Common Types of Financial Risks • Personal Risks – Loss of income or life – Illness, disability, or unemployment • Property Risks – Losses to property – Damages by fire, theft, tornado, etc. • Liability Risks – Losses caused by negligence – Injury or property damage to others
  9. 9. Five Ways to Manage Risk • Do nothing and hope for the best • Risk avoidance • Risk reduction • Risk acceptance • Risk transfer (insurance)
  10. 10. Risk Avoidance Risk Shifting Ways to Manage Risk Risk Reduction Wear seatbelts Buy Insurance Self Insurance Don’t stop at a convenience store in a bad part of town after midnight Risk Assumption Source: Garman & Forgue (2010). Personal Finance Install an alarm system
  11. 11. Question #2 Do you have any other examples to illustrate risk management methods?
  12. 12. Two Key Insurance Concepts • Loss Frequency – The likely number of times that a loss might occur over a period of time. • Loss Severity – The potential magnitude of the loss(es) that may occur.
  13. 13. The Relationship Between Severity and Frequency of Loss Source: Garman & Forgue (2010). Personal Finance
  14. 14. Common Types of Insurance • Life • Automobile and motorcycle • Property (homeowners, renters) • Health • Disability • Long-term care • Umbrella
  15. 15. How Insurance Works Insurance Policy – Contract between a person buying insurance (the insured) and an insurance company (the insurer).
  16. 16. An Insurable Interest Must Exist to Buy Insurance Insurable Interest – When a person or organization stands to suffer a financial loss from a specific risk. • Example #1: A person who lives in an house that is insured • Example #2: The spouse of person who is covered by life insurance
  17. 17. Basic Insurance Terms • Coverage = What insurance contract pays for • Term = Length of insurance contract • Premium = Cost of insurance contract • Claim = Request for insurance benefit payment
  18. 18. Insurance Cost Factors • Choice = Level of risk you want to take – e.g., Amount of insurance coverage, deductibles • Chance = Possible risks you have; statistics – e.g., Age, density of area where you live • Control = Lifestyle and behavior – e.g., Driving habits, health habits
  19. 19. Insurance is Regulated by States
  20. 20. Insurance Information Institute http://www.iii.org
  21. 21. Life Insurance Basics • Pays when the policy owner dies • Generally purchased to financially help those left behind • Provides money to beneficiary(s) • Can be temporary or permanent coverage
  22. 22. Financial Planning With Life Insurance • Protect those who depend on your income from financial loss resulting from your death – Reduces financial burdens of survivors • Obtained by purchasing a policy – The insurance company promises to pay a lump sum (death benefit) to a named beneficiary at the time of the policy holder’s death (or sometimes while they are still alive) 10-22
  23. 23. Other Reasons to Buy Life Insurance – Pay off a mortgage or debts – Provide an education or income for children – Accumulate savings – Continue a business after key personnel die – Set up an estate plan (e.g., fund trusts with life insurance) – Pay estate taxes (e.g., farmers and business owners) 10-23
  24. 24. Key Life Insurance Terms • Mortality Tables- Provide odds on your dying, based on your age and sex. – Premium is based on life expectancy and projections for payouts for persons who die (called actuarial tables) – Older people pay higher premiums because they will die sooner • Face Amount- The dollar value of protection listed in the policy and amount used to calculate the premium (e.g., $100,000) • Group Term Insurance- Issued to people as members of a group rather than as individuals 10-24
  25. 25. Key Provisions in a Life Insurance Policy • Beneficiary and contingent beneficiaries (those who will receive benefits upon the insured’s death) • Incontestability clause  After the policy has been in force for a specified period, the company can’t dispute its validity for any reason (usually 2 years) • Length of grace period for late payments • Reinstatement of a lapsed policy if it has not been turned in for cash (must qualify again and pay overdue premiums) 10-25
  26. 26. More Key Policy Provisions • Non-forfeiture clause allows you to keep accrued benefits in a whole life policy if you drop the policy • Policy loan provision to borrow against cash value • Suicide clause during first two years (only get back premiums in the event of suicide) • Policy rider modifies the coverage by adding or excluding conditions or altering benefits
  27. 27. Common Life Insurance Policy Riders • Waiver of Premium for disability benefit • Accidental Death Benefit – “double indemnity” • Guaranteed Insurability Option (can buy additional insurance at specified intervals without a medical exam) • Cost of Living Protection (helps maintain purchasing power) • Accelerated Benefits, also called living benefits (make payments to those who are terminally ill before they die) 10-27
  28. 28. Term (Temporary) Life Insurance • Often provided as employee benefit (e.g., 1 to 5 x salary) • Least expensive type of life insurance coverage • Lasts for specific time period (e.g., 1 to 30 years) • Provides protection during its term; like “renting insurance” • No cash value • Gets more expensive with age • May not be able to get after age 65
  29. 29. Common Types of Term Life Insurance – Renewable Term- Can renew; higher premium charged – Multiyear Level Term- Same premium for set period (e.g. 15 or 20 years) – Conversion Term- Allows change to a permanent policy – Decreasing Term- Face value decreases over time (frequently used for mortgages) 10-29
  30. 30. Permanent Life Insurance • Combines life insurance coverage and an investment account (a.k.a., cash value) • More expensive than term life insurance • Amount of premium based on age when you buy the policy • Can borrow against the cash value • Generally need to hold policy a long time for a good investment return
  31. 31. Types of Permanent Insurance Straight-Life or Whole-Life Insurance – Pay the premium as long as you live – Accumulates a cash value you can borrow against – Look carefully at the rate of return Limited Payment Policy – Pay premiums for a stipulated period – Policy then “paid up” and you remain insured for life Variable Life Policy- Fixed premiums; cash put into investment accounts Adjustable Life Policy- Can change coverage with needs Universal Life- Can change premium, time period, benefit There are many variations of these policy types; read the fine print! 10-31
  32. 32. Comparison of Premium Dollars for Life Insurance Source: Garman & Forgue (2010). Personal Finance
  33. 33. Question #3 What type of life insurance do you have and why?
  34. 34. Who Needs Life Insurance? • Do you have people you need to protect financially? Will your death cause them financial hardship? – Common Scenario: joint debt with a surviving spouse • Are you single and have a lot of debt? – Common Scenario: student loans cosigned by parents • Do you have parents, relatives, or a charity that you want to support? – Common Scenario: divorced parent with children Avoid being persuaded to buy unnecessary life insurance! 10-34
  35. 35. How Much Life Insurance? • Funeral costs • Mortgage/debt costs • Needs of beneficiaries (e.g., number and age) • Goals (e.g., college costs for children) • Care expenses for children • Ability/income of spouse or guardian • Other financial assets Online Life Insurance Calculators: www.lifehappens.org/life-insurance-needs-calculator/ http://www.bankrate.com/calculators/insurance/life-insurancecalculator.aspx
  36. 36. Estimating Life Insurance Needs • The Easy Method – 70% or 75% of your salary for seven to ten years while your family adjusts – Assumes typical family without special needs • The DINK Method – Dual income, no kids – Assumes spouse earnings will continue – Cover funeral + ½ debts • The “Family Need” Method – More thorough than the first three methods – Considers employer provided insurance, Social Security benefits, income, and assets 10-36
  37. 37. “Family Need” Method Process • Follow these steps: – Estimate annual income needed by survivors – Calculate # of years income is needed – Add expenses (e.g., funeral, debt, other) – Subtract income, such as government benefits and survivor’s income, and existing assets • Review periodically as needs change
  38. 38. Life Insurance Worksheet #1
  39. 39. Life Insurance Worksheet #2 https://www.hr.cornell.edu/benefits/insurance/worksheet.pdf
  40. 40. Types of Life Insurance Companies 2 Types of Life Insurance Companies Type of Company Owned by Stock life Insurance Shareholders Mutual life insurance Policyholders 10-40
  41. 41. Stock Life Insurance Companies • Owned by shareholders • Sell non-participating (non-par) policies • Majority of life insurance companies • Consider the financial stability of the insurance company 10-41
  42. 42. Mutual Life Insurance Companies • Owned by policyholders • 5% of policies are from this type company of • Participating policy premiums are higher than non-participating policies – Part of the participating premium is refunded to the policyholders annually in the form of a policy dividend 10-42
  43. 43. Other Types of Life Insurance • Group life insurance – Term insurance – Often provided by an employer – No physical is required • Credit life insurance – Debt paid off if you die • Mortgage, car, furniture – Expensive protection (usually overpriced) • Endowment Life Insurance- pays policyholder a lump sum if still living at end of the endowment period 10-43
  44. 44. Buying Life Insurance Consider: – Present and future sources of income (self/spouse) – Accumulated assets – Outstanding debts – Group life insurance benefits (if any) – Special needs of family members – Available Social Security benefits – Financial strength of insurance companies 10-44
  45. 45. Buying Life Insurance • Compare policy costs based on: – Company’s cost of doing business – Return on company’s investments – Policy features • Interest-adjusted index – Used to compare policy costs – Lower index = lower cost policy – Like an APR for credit or APY for bank products 10-45
  46. 46. Buying Life Insurance • Research insurance company ratings by major rating firms: • A. M. Best • Standard and Poor’s • Duff & Phelps • Moody’s • Weiss Research • Talk to knowledgeable friends/family or advisors • Check out online premium quote services • Visit sites such as www.quotesmith.com
  47. 47. Sample Online Life Insurance Quote Male, born 1/1/1980; 190 lb; $400,000 term Living in New York State insurance – 10 years Preferred (best health), never smoked $55+ per quarter ($220/yr) Standard, current smoker $155+ per quarter ($620/yr) Source: www.directquote.com
  48. 48. Question #4 What other factors do you tell people to consider when buying life insurance?
  49. 49. Choosing an Insurance Agent • Ask friends, family and/or other financial advisors for recommendations. • Does the agent belong to insurance industry professional associations • Is the agent a Chartered Life Underwriter (CLU)? • Is the agent willing to take the time to answer questions and find a policy that is right for you? • Do you feel pressured? 10-49
  50. 50. Obtaining and Examining a Policy • First step: apply for policy • Second step: provide medical history – Usually no physical for a group policy • Read the contract carefully • Use the “free-look” period to change your mind, if necessary • Give beneficiaries and executor(s) of your will a photocopy of the policy (or key data about it) • Review periodically; revise as needed 10-50
  51. 51. Life Insurance Evaluation Service • Compares costs and benefits of cashing in a policy or keeping it and buying different forms of coverage • By Consumer Federation of America, a national consumer advocacy group • Costs about $100 for the evaluation www.evaluatelifeinsurance.org/#two
  52. 52. Should You Switch Policies? • Switch if benefits exceed costs of getting new physical exam and paying policy set-up costs • The older you are, the higher the premium • Are you still insurable? • Can you get all the provisions you want? • NEVER cancel an old policy until new policy is in hand 10-52
  53. 53. Choosing Settlement Options Settlement Options = choices of how the insurance money is paid out – Lump-Sum Payment = most common method – Limited Installment Plan • In equal installments to beneficiary for a specific number of years after your death (e.g., 10-years) – Life Income Option • Payments to the beneficiary for life – Proceeds Left with the Company • Pays interest to the beneficiary 10-53
  54. 54. Life Insurance for Military Families Servicemembers' Group Life Insurance (SGLI) • Low cost group term life insurance automatically available to all active service members • Automatically activated for $400,000; SM can elect lower coverage or no coverage • Coverage in effect for 120 days after discharge • Dependent children automatically insured for $10,000 at no additional cost to SM; generally until child is 18 – Unless child is a full time student or totally disabled • Can convert to Veterans Group Life Insurance when released from service
  55. 55. More About Military Life Insurance • Depending on family needs, SM may require more coverage, but SGLI is a good base to build on • Key form for all transactions related to SGLI: Form SGLV 8286, Servicemembers’ Group Life Insurance Election and Certificate • Benefits for beneficiaries do NOT pass through a will; beneficiaries must be listed on SM’s SGLI documents • When life events happen, it is important for SMs to keep their life insurance beneficiaries current – Two types of beneficiaries: Primary and Contingent – Beneficiary Designation Worksheet: http://njaes.rutgers.edu/money/pdfs/beneficiarydesignations.pdf
  56. 56. More About SGLI • Premium ranges from $3.25/mo for minimum $50,000 to $26/mo ($312/yr) for $400,000 (cost: $3.25 per $50,000 of coverage) • Coverage can be extended for up to two years if the Servicemember is totally disabled at separation • Part-time coverage is provided to Reserve members who do not qualify for full-time coverage • Because SGLI is term insurance, there is no cash value; it also does not pay dividends • Web site: http://benefits.va.gov/insurance/sgli.asp
  57. 57. Veterans Group Life Insurance (VGLI) • After SM leaves military, SGLI can convert to VGLI • See http://benefits.va.gov/insurance/vgli.asp • SM should compare VGLI premiums and features with individual policies to determine the best deal • SM have 120 days from military separation to apply for VGLI • VGLI is renewable term life insurance with no cash value • SM may purchase in multiples of $10,000 up to $400,000 – Coverage cannot exceed what SM had under SGLI at the time of separation from service
  58. 58. Traumatic Injury Protection Under SGLI (TSGLI) • See http://benefits.va.gov/insurance/tsgli.asp • Extra $1/mo premium ($26 + $1 = $27 total monthly) • Provides payment for SM suffering a traumatic loss: loss of sight, hearing, speech, or limbs (on or off duty) • Rider attached to SGLI policy • Only covers SM; spouse/children are not eligible • Pays a benefit between $25k-$100k (depending on injury) • Cannot be declined if SM is insured; can only be declined if SM also declines SGLI
  59. 59. Family Servicemembers Group Life Insurance (FSGLI) • Automatic coverage to spouses and dependent children of an active duty SM covered by SGLI • Spouse insured for $100k or amount of SM’s coverage, whichever is less; SM spouse must apply for spouse coverage • Maximum spouse coverage is issued automatically but can be declined or reduced in writing by a SM • Coverage is issued in increments of $10,000 • Premium increases as spouse ages • SM is always the beneficiary of FSGLI policy • Premiums deducted from service pay (shown on LES) • See http://benefits.va.gov/insurance/fsgli.asp
  60. 60. Question #5 What else is important to tell service members and their families about life insurance?
  61. 61. In Summary • Life insurance is an important building block for family financial security • Life insurance policies can be temporary (term) or permanent with cash value • The best way to calculate family life insurance needs is with a personalized analysis • Resources exist to calculate insurance needs • Check insurance company ratings
  62. 62. Recommended Action Steps • Review your current life insurance policy (if any) • Make a list of questions for your insurance agent • Review some life insurance calculators or worksheets (to become familiar with them) • Do a personal life insurance needs analysis • Visit the Web site of your state insurance regulator • Explore available group life insurance options through your employer or a professional association
  63. 63. Questions? Comments Experiences? Please complete the webinar evaluation and follow the instructions to receive CEU credits. Follow me on Twitter at @moneytalk1

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