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

Buy Insurance
Self Insurance

Risk
Assumption

Source: Garman & Forgue...
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-term ...
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 (except SM married to SM)
and dependent...
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: What PFMP Staff and Military Families Need to Know

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Given the hazards of military service, especially deployment to a combat zone, life insurance is an important financial risk reduction tool for many military families. Yet, studies have found that life insurance is not well understood by consumers in general. Many people do not purchase an appropriate amount or type of coverage. This webinar will begin with a basic overview of life insurance including its purpose, types of policies, how to calculate a family's life insurance need, and life insurance resources. It will conclude with a discussion of military life insurance programs such as SGLI and VGLI. Join this session 12/10 at 11 a.m. ET. More information: https://learn.extension.org/events/1304

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

  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 Buy Insurance Self Insurance Risk Assumption Source: Garman & Forgue (2010). Personal Finance Don’t stop at a convenience store in a bad part of town after midnight Risk Reduction Wear seatbelts 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 a 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 decline 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 (except SM married to SM) 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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