Life insurance basics

Financial Services Industry Training

Life Insurance Basics

Date July 2012

Saunders Learning Group, LLC
Saunders Learning Group, LLC, Andover, KS

Training from Saunders Learning Group
Saunders Learning Group provides a variety
of training programs, workshops and
seminars targeted to the financial services
industry.

Programs are available in a wide range of
topics, and we are specialists in developing
custom programs that are targeted to your
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Contact the founder, Floyd Saunders at
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information.

1

Topics

1. Life Insurance Basics
2. Insurance Contract
3. Types of Life Insurance
4. Life Insurance Beneficiaries
5. Where to Buy Life Insurance

Saunders Learning Group, LLC, Andover, KS Slide 2


 Life insurance is an agreement between you
(the policy owner) and an insurer.
 Under the terms of a life insurance policy, the
insurer promises to pay a certain sum to a person you choose
(your beneficiary) upon your death, in exchange for your
premium payments.
 Proper life insurance coverage should provide you with peace
of mind, since you know that those you care about will be
financially protected after you die.


The many uses of life insurance

One of the most common reasons for buying life insurance is to
replace the loss of income that would occur in the event of
your death.
 When you die and your paychecks stop, your family may be
left with limited resources.
 Proceeds from a life insurance policy make cash available to
support your family almost immediately upon your death.


Uses for Life Insurance
 Life insurance can pay any debts
that you may leave behind.
 Life insurance can pay off
mortgages, car loans, and credit
card debts, leaving other
remaining assets intact for your
family.
 Life insurance proceeds can also
be used to pay for final expenses
and estate taxes.
 Finally, life insurance can create an
estate for your heirs.


How Much Life Insurance Do You Need

 Your life insurance needs will depend on a number of
factors, including:
• whether you're married
• the size of your family
• the nature of your financial obligations
• your career stage
• your goals.
 For example, when you're young, you may not have a great
need for life insurance.
 However, as you take on more responsibilities and your
family grows, your need for life insurance increases.


Determining Life Insurance Needs
 There are tools to help you determine how much coverage
you should have.
 Your best resource may be a financial professional.
 At the most basic level, the amount of life insurance
coverage that you need corresponds directly to your
answers to these questions:
1. What immediate financial expenses (e.g., debt repayment, funeral
expenses) would your family face upon your death?
2. How much of your salary is devoted to current expenses and future
needs?
3. How long would your dependents need support if you were to die
tomorrow?
4. How much money would you want to leave for special situations
upon your death, such as funding your children's education, gifts to
charities, or an inheritance for your children?
 Since your needs will change over time, you'll need to
continually re-evaluate your need for coverage.

How Much Life Insurance Can You Afford?

 How do you balance the cost of insurance coverage with the
amount of coverage that your family needs?
 Just as several variables determine the amount of coverage
that you need, many factors determine the cost of coverage.
 The type of policy that you choose, the amount of coverage,
your age, and your health all play a part.
 The amount of coverage you can afford is tied to your
current and expected future financial situation, as well. A
financial professional or insurance agent can be invaluable in
helping you select the right insurance plan.


Life Insurance Contract



 A life insurance contract is made
up:
 of legal provisions
 your application (which identifies
who you are and your medical
declarations)
 and a policy specifications page that describes the policy you
have selected, including any options and riders that you have
purchased in return for an additional premium.



 Provisions describe the conditions,
rights, and obligations of the parties
to the contract (e.g., the grace
period for payment of premiums,
suicide and incontestability clauses).

 The policy specifications page describes the amount to be
paid upon your death and the amount of premiums required
to keep the policy in effect.
 Also stated are any riders and options added to the standard
policy.



 Life insurance riders include:
 waiver of premium - allows you to skip premium payments
during periods of disability
 guaranteed insurability - permits you to raise the amount of
your insurance without a further medical exam
 accidental death benefits.
 The insurer may add an endorsement to the policy at the time
of issue to amend a provision of the standard contract.
 Each rider you add, increase the cost of coverage.


Types of Life Insurance


Types of life insurance policies

 The two basic types of life insurance are term life and permanent (cash value) life.

 Term policies provide life insurance protection for a specific period of time.
 If you die during the coverage period, your beneficiary receives the policy death benefit.
 If you live to the end of the term, the policy simply terminates, unless you renew for a
new period.


Term Life Insurance

 Term life insurance is , you get "pure" life insurance coverage.
 Term insurance provides a death benefit for only a specific period of
time.
 If you die during the coverage period, your beneficiary (the person you
named to collect the insurance proceeds) receives the death benefit (the
face amount of the policy).
 If you live past the term period, your coverage ends, and you get nothing
back.
 Term policies are available for periods of 1 to 30 years or more and may,
in some cases, be renewed until you reach age 95.
 Premium payments may be increasing, as with annually renewable 1-
year (period) term, or level (equal) for up to 30-year term periods.


Term Insurance Costs
 You may be able to renew the policy for a new
term without regard to your health, but at a
higher rate.
 Your premium goes toward administrative
expenses, company profit, and a reserve
account that pays claims to those who die
during the term period.
 As you get older, the chance that you will die increases. To cover this
increasing risk, premiums will rise at regular intervals.
 Premiums that were quite inexpensive at the time you initially
purchased your term policy become much more expensive as you get
older.
 Most term insurance also has a conversion feature that allows you to
switch your coverage to some type of permanent insurance without
answering health questions.


Permanent Life Insurance
 Permanent insurance policies provide
protection for your entire life, provided
you pay the premium to keep the policy
in force.
 Premium payments are greater than necessary to provide a life
insurance benefit in the beginning of the policy, so that a cash reserve
can be accumulated to make up the shortfall in premiums necessary to
provide the insurance in the later years.
 Should the you discontinue the policy, this reserve, known as the cash
value, is returned to you.


Whole Life Insurance
 Whole life insurance is a type of cash value
insurance.
 Unlike term insurance, which provides coverage
for a particular period of time, permanent
insurance provides coverage for your entire life.
 You generally make level (equal) premium payments for life.
 The death benefit & cash value are predetermined and guaranteed.
 The policy owner's only action after purchase of the policy is to pay the
fixed premium.


Whole Life Premiums

 When you make premium payments,
you pay more than is needed to pay
for the current costs of insurance
coverage and expenses.
 The excess payment is credited to a
cash value account.
 This cash value account allows the insurance company to:
 charge a level, guaranteed premium*
 provide a death benefit
 Provide cash value throughout the life of the policy.


Life Insurance Cash Values
 As you make payments, the cash value account With permanent life
grows. insurance, when you die, the
amount of coverage is
 With traditional whole life insurance, the cash value
subtracted from your cash
account is guaranteed and held in the insurance
value before the death
company's general portfolio--you don't get to choose
benefit is paid.
how the cash value account is invested.
For example:
 The cash value can grow beyond its guaranteed If you have a $500,000 policy
amount through the payment of dividends. and your cash value is at
 The cash value grows tax deferred and can be used $100,000, your family would
as: only receive the $400,000 +
 collateral to borrow from the insurance company $100,000 from the life
 be directly accessed through a partial or insurance company
complete surrender of the policy. NOT $600,000. In other
 It is important to note, that a policy loan or partial
words, at some point, you
surrender will reduce the policy's death benefit, and a may be paying for your own
complete surrender will terminate coverage altogether. death benefit!!!


Conversion of a Whole Life Policy

If you live to the policy's maturity
date, the policy will "endow," and
the insurance company will pay
the accumulated cash value (equal
at maturity to the death benefit) to
you.


Universal Life Insurance
 Universal life provides a death benefit
and a cash value account.
 Like whole life insurance, the cash value
is held in the insurance company's Another feature of universal life is the
general portfolio--you don't get to option to add the cash value to the face
choose how the account is invested. amount when the death benefit is paid.
For example:
 Universal life insurance allows you
Say you die when you have $200,000 of
flexibility in making premium payments. cash value within your $1 million policy.
 You may pay premiums at any time, in • If you chose the enhanced benefit
any amount (subject to certain limits), option, your beneficiary receives
as long as policy expenses and the cost $1.2 million.
of insurance coverage are met. • The increased benefit is reflected in
 The amount of insurance coverage can premium calculations.
be decreased.
 The cash value will grow at a declared
interest rate, which may vary over time.


Features of Universal Life
 Generally provide broad premium
guidelines (i.e., minimum and maximum
premium payments)
 You can choose how much and when you
pay premiums.
 Reducing or increasing premiums will
impact the growth of the cash value and
possibly the death benefit.
 You can change the policy's death benefit.
 If you want to raise the amount of
coverage, you'll need a new medical
exam, and your premiums will increase.
 Universal life policies reveal all aspects of
the policy's cost structure, including the
cost of insurance (the portion set aside to
pay claims) and expenses.


Variable Life Insurance
 As with whole life, you pay a level premium
for life.
 Like other types of permanent life insurance,
variable life insurance has a cash value
account.
 The death benefit and cash value fluctuate
depending on the performance of
investments in what are known as
subaccounts, that are professionally
managed to pursue a stated investment
objective.
 A variable life insurance policy, however,
allows you to choose how your cash value
account is invested.


Variable Life Investment Subaccounts
 Choices can range from a fixed
interest subaccount to a highly
volatile international growth
subaccount.
 Require a fixed annual premium for
the life of the policy and may
provide a minimum guaranteed
death benefit*.
 If the cash value account exceeds a
certain amount, the death benefit
will increase.


Variable Universal Life
 Combines all of the options and flexibility of universal life with the
investment choices of a variable policy.


Policy Loans and Riders for VUL

 Your policy's face amount is reduced by the amount of a policy
withdrawal, and withdrawals may be taxable.
 You have the option of choosing a fixed or enhanced death benefit.
 Most variable universal life policies offer a rider that guarantees the
death benefit at a certain level regardless of the performance of the
subaccounts, provided that a stated minimum premium is paid for a
predetermined number of years*.
*Any guarantees associated with payment of death benefits, income options, or
rates of return are subject to the claims-paying ability of the insurer.


Universal Variable Life Insurance

 A combination of universal and
variable life. You may pay
premiums at any time, in any
amount (subject to limits), as long as policy expenses and
the cost of insurance coverage are met.
 The amount of insurance coverage can be decreased, and
the cash value goes up or down based on the performance
of investments in the subaccounts.
 A subaccount is a pool of investor funds professionally
managed to pursue a stated investment objective.
 The policy owner selects the subaccounts in which the cash
value should be invested.


Summary of Policy Types


Life Insurance Beneficiaries


Choosing Beneficiaries

 You must name a primary beneficiary to
receive the proceeds of your
insurance policy.
 Your beneficiary may be a person, corporation, or other legal
entity.
 You may name multiple beneficiaries and specify what
percentage of the net death benefit each is to receive.
 If you name your minor child as a beneficiary, be sure to
designate an adult as the child's guardian in your will.


Irrevocable Beneficiary

Generally, you can change your beneficiary at any time.
Changing your beneficiary usually requires nothing more than signing a new
designation form and sending it to your insurance company.
If you have named someone as an irrevocable (permanent) beneficiary you
will need that person's permission to adjust any of the policy's provisions.


Joint or Survivorship Life

 Some married couples
choose to buy insurance together
within the same policy.
 These policies take the form of
either a joint first-to-die or a joint second-to-die
(survivorship) design.
 With first-to-die, the death benefit is paid at the
death of the spouse who dies first.
 With second-to-die, no death benefit is paid until
both spouses are deceased.


Life Insurance in Estate Planning

 Second-to-die policies are commonly
used in estate planning to create a
pool of funds to pay estate taxes and
other expenses due at the death of the second spouse.
 Joint and survivorship policies are generally available with
any type of permanent life insurance.
 Other policy characteristics remain the same.


Where to Buy Life Insurance


Where can you buy life insurance?

 A group life insurance plan
offered thru your employer.
 Through an association
(which may offer group life insurance)
 You can also buy insurance
through a licensed life
insurance agent or broker.
 Online directly from an
insurance company.


Combining Group and Individual Policies

Term Life

Whole Life

Universal Life

Variable Universal Life


Life Insurance Company Ratings

 Any policy that you buy is only as good as the company that
issues it, so investigate the company offering you the
insurance.
 Ratings services, such as A. M. Best, Moody's, and Standard
& Poor's, evaluate an insurer's financial strength.
 The company offering you coverage should provide you with
this information.


Questions


Thank You !


Life insurance basics