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.
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.
Question #1
What types of questions do your clients
ask you about life insurance?

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.
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.
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.
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.
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.
Five Ways to Manage Risk
• Do nothing and hope for the best
• Risk avoidance
• Risk reduction
• Risk acceptance
• Risk transfer (insurance)

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.
Question #2
Do you have any other examples to
illustrate risk management methods?

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.
The Relationship Between
Severity and Frequency of Loss
Source: Garman & Forgue (2010). Personal Finance

14.
Common Types of Insurance
•Life
•Automobile and motorcycle
•Property (homeowners, renters)
•Health
•Disability
•Long-term care
•Umbrella

15.
How Insurance Works
Insurance Policy – Contract between a
person buying insurance (the insured)
and an insurance company (the insurer).

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.
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.
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.
Insurance is Regulated by States

20.
Insurance Information Institute
http://www.iii.org

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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Comparison of Premium
Dollars for Life Insurance
Source: Garman & Forgue (2010). Personal Finance

33.
Question #3
What type of life insurance do you have
and why?

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.
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.
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.
“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.
Life Insurance Worksheet #1

39.
Life Insurance Worksheet #2
https://www.hr.cornell.edu/benefits/insurance/worksheet.pdf

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.
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.
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.
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.
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.
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.
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.
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.
Question #4
What other factors do you tell people to
consider when buying life insurance?

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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Question #5
What else is important to tell service
members and their families about life
insurance?

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.
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.
Questions? Comments
Experiences?
Please complete the webinar evaluation and
follow the instructions to receive CEU credits.
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