Life insurance is a contract between an insurer and a policy owner where the insurer agrees to pay a designated beneficiary a death benefit upon the insured's death. In return, the policy owner pays regular premiums. There are several types of life insurance policies, including term life (temporary coverage for a set period), whole life (permanent coverage for life), and universal life (permanent coverage with a savings component). The type of policy chosen depends on an individual's needs and objectives. Key features of life insurance contracts include beneficiary designation, settlement options, grace periods, and policy loans.

2. Life Insurance
 Life insurance or life assurance is a contract between a
policy owner and an insurer, where the insurer agrees to
pay an insured’s designated beneficiary a benefit upon the
occurrence of the insured individual’s death or other
event, covered by the policy such as terminal or critical
illness occurs. In return, the policy owner agrees to pay a
stipulated amount called premium, at regular intervals or
in lump sums.

3. Concept of risk
 Risk avoidance – avoiding
an act that would create a
risk.
 Loss prevention – any
activity that reduces the
probability that a loss will
occur.
 Loss control – any activity
that lessens the severity of
loss once it occurs.
 Risk assumption – the
choice to accept and bear
the risk of loss.
Insurance Policy
 An insurance policy is a
contract between you (the
insured) and an insurance
company (the insurer) under
which the insurance
company agrees to
reimburse you for any losses
you suffer according to
specified terms. From your
perspective, you are
transferring your risk of loss
to the insurance company.

4. Benefits of Life Insurance
 Financial protection for dependents – if
your family or love ones depends on your
income, will they be able to maintain
their current lifestyle, stay in their
home, or afford a college education after
you die? The most important benefit of
life insurance is providing financial
protection for your dependents after you
death.
 Protection from creditors – a life
insurance policy can be structured so
that death benefits are paid directly to a
named beneficiary, which means that
creditors cannot claim the cash benefits
from your life insurance policy.
 Tax benefits – life insurance proceeds
paid to your heirs are not usually subject
to state or federal income taxes, and
under certain circumstances they can
pass to named beneficiaries free of any
estate taxes
 Vehicle for savings – some type of life
insurance policies can serve as a saving
vehicle, particularly for those who are
looking for safety of principal.
Just as with other aspects of personal
financial planning, life insurance decisions can
be made easier by following a step-by-step
approach. You will need answer to the
following questions.
 Do you need life insurance?
 If so, how much life insurance do
you need?
 Which type of life insurance is
best, given your financial
objectives?
 What factors should be considered
in making the final purchase
decision?

5. Step 1: Asses your
family’s total economic
needs
• Income needed to
maintain an adequate
lifestyle
• Extra expenses if the
income producer dies
• Special needs of
dependents
• Debt liquidation
• Liquidity
minus
Step 2: determine what
financial resources will
be available after death
• Savings and
investment
• Income from Social
Security survivor’s
annual income; other
annual pensions and
profit-sharing
programs
• Other life insurance
• Other resources
equals
Step 3:
Amount of additional
life insurance required
to protect your family
How Much Life Insurance Do You Need?

6. 1. Term Life
2. Whole life
3. Universal life
 What Kind Of Policy Is Right For You?
 Term Life – which provides a
specified amount of insurance
protection for a set period, is the
simplest type of insurance policy.
 Types of Term Life Insurance
 Straight or level term – a term
insurance policy written for a
given number of years, with
coverage remaining unchanged
throughout the effective period.
 Decreasing term – a term
insurance policy that maintains a
level premium throughout all
periods of coverage while the
amount of protection decreases.
 Whole Life – in contrast with term
life, a whole life provides permanent
insurance coverage during an
individual’s entire life.
 Type of Whole Life Insurance
 Straight Life – individual pay a level
premium each year until they die or
exercise a non forfeiture right.
 Limited Payment – covers your entire
life but the premium payment is based
a specified period.
 Universal Life Insurance – is
permanent cash value insurance that
combines term insurance, which
provides death benefits, with a tax
sheltered savings/investment account
that pays interest, usually at
competitive money market rates.

7. Other Type Of Life Insurance
 Variable life insurance – in which
the benefits are a function of the
returns being generated on the
investments selected by the
policyholder.
 Group life insurance – life
insurance that provides a master
policy for a group member receives
a certificate of insurance.
Other Special-purpose life policies
 Credit life insurance – life
insurance sold in conjunction with
instalment loans.
 Mortgage life insurance – a term
policy design to pay off the
mortgage balance in the event of
the borrower’s death.
 Industrial life insurance (home
service life insurance) – whole life
insurance issued in policies with
relatively small face amounts.

8. Type of policy Advantages Disadvantages
 Term
 Whole life
 Universal life
 Variable life
 Low initial premium simple,
easy to buy
 Permanent coverage Savings
vehicle: cash value builds as
premiums are paid.
Some tax advantages on
accumulated earnings.
 Permanent coverage Flexible:
lets insured adapt level of
protection and cost of
premiums. Saving Vehicle: cash
value builds at current rate of
interest. Savings and death
protection identified
separately.
 Investment vehicle: insured
decides how cash value will be
invested.
 Provides only temporary coverage for a set period.
May have to pay higher premiums when policy is
renewed
 Cost provides less death protection per premium peso
than term. Other provides lower yields than other
investment vehicle. Sales commissions and marketing
expenses can increase cost of fully loaded policy.
 Can be difficult to evaluate true cost at time of
purchase: insurance carrier may levy costly fees and
charges.
 Higher risk

9. Life Insurance
Contract Features
Key features found in most life insurance
contracts are the beneficiary clause,
settlement clause, settlement options, policy
loans, premium payments, grace period,
nonforfeiture options, policy reinstatement,
and charge of policy.
 Beneficiary is a person who will receive the
death benefits of the policy on the insured’s
death.
 Settlement options
 Lump sum this is the common settlement
option, chosen by more than 95% of
policyholders.
 Interest only the insurance company keeps
policy proceeds for a specified time; the
beneficiary receives interest payments,
usually at some guaranteed below-market
rate.
 Fixed period the face amount of the
policy, along with interest earned, is paid
to the beneficiary over a fixed time period.
 Life Income the insurer guarantees to pay
the beneficiary a certain amount for the
rest of his or her life.
 Policy loan an advance, secured by
the cash value of a whole life
insurance policy, made by an insurer
to the policyholder
 Premium payments all life insurance
contracts specify when premiums,
which are normally paid in advance,
are due.
 Grace period permits the policyholder
to retain full death protection for a
short period (usually 31 days) after
missing a premium payment date.
 Nonforfeiture options pays a cash
value life insurance policyholder the
policy’s cash value when a policy is
terminated before its maturity.
 Paid-up insurance
 Extended term insurance
 Policy reinstatement
 Change of Policy

10. Other policy features
 Multiple indemnity clause - increase the fact amount of the policy, most often
doubling or tripling it, if the insured dies in an accident.
 Disability clause - clause in life insurance contract containing a waiver-of-
premium benefit alone or coupled with disability income.
 Guaranteed purchase option – an option in a life insurance contract giving the
policyholder the right to purchase additional coverage at stipulated intervals
without providing evidence of insurability.
 Participating policy – a life insurance policy that pays policy dividends reflecting
the difference between the premiums that are change and the amount of
premium necessary to fund the actual mortality experience of the company.