1 / 53

CHAPTER 4

CHAPTER 4. Life Insurance Structure, Concepts, and Planning Strategies. Financial Services. There are 3 basic markets in financial services (Byerly) Wealthy About 3 – 4% of the population Middle America 25K – 100K household Low income Little need for financial services.

lana
Télécharger la présentation

CHAPTER 4

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 4 Life Insurance Structure, Concepts, and Planning Strategies Chapter 4: Life Insurance

  2. Financial Services • There are 3 basic markets in financial services (Byerly) • Wealthy • About 3 – 4% of the population • Middle America • 25K – 100K household • Low income • Little need for financial services Chapter 4: Life Insurance

  3. Business Philosophy (Byerly) • Gear marketing efforts at the wealthy • Higher profit potential per client • Fewer clients • Complex financial situations • Taxes • Estate planning • Focus on Middle America • Many more clients • Less profit per client • Simpler needs Chapter 4: Life Insurance

  4. INTRODUCTION TO THE RISK MANAGEMENT PROCESS • Identify the nature and cause of the risk • Assess probability of loss and amount of potential loss • Understand weaknesses of the current risk management plan • Evaluate alternative methods for handling the risk • Develop strategy and product recommendations • Implement the risk management plan • Monitor the situation Chapter 4: Life Insurance

  5. THEORY OF RISK TRANSFER: HANDLING RISK • Risk Avoidance • Simply choose not to do the risky activity • Risk Retention • Personally assume the risk • Voluntarily • Involuntarily (uninsurable) • Risk Reduction • Loss prevention and control • Smoke detectors • Spread out the risk • Insurance companies insure millions so the loss from one has little affect • Risk Sharing • Through deductibles and using other companies • Risk Transfer • Purchase of insurance • Hedging with contracts Chapter 4: Life Insurance

  6. Personal Risk Management: An Overview • Three steps to managing risk • Identify nature and cause of the risk • Determine how much if any risk you are willing to assume • Determine the best technique for handling the risk Chapter 4: Life Insurance

  7. Risk Management Strategy Chapter 4: Life Insurance

  8. Risk Management Strategies Chapter 4: Life Insurance

  9. Types of Insurances Available Chapter 4: Life Insurance

  10. INTRODUCTION TO LIFE INSURANCE Key reason for buying life insurance is to meet financial obligations in order to: • Pay off final expenses, estate taxes, state inheritance taxes, and administration costs • Provide for spouse, children, and other dependents • Provide funds for education • Provide for a legacy to heirs or charity • Pay off all debts and mortgages Chapter 4: Life Insurance

  11. Other Uses of Life Insurance • Transfer ownership of business or protect business against loss of key employees • Maintain adequate emergency fund • Very ineffective • Provide insurance for ex-spouse • Provide funds for charity • Create salary continuation plan for employees • Finance company’s obligations under continuation plan Chapter 4: Life Insurance

  12. Purchasing Life Insurance In Purchasing Life Insurance: • Main objectives are to determine how much insurance to purchase, and which type of insurance offers best value. • Secondary objective is to treat life insurance as a form of savings. • Very poor investment vehicles Chapter 4: Life Insurance

  13. Theory of Decreasing Responsibility Chapter 4: Life Insurance

  14. TERM INSURANCE • Essential Features • Rented for a specified time • Verbage to make it sound like a bad choice • Just like auto insurance • If renewable, can be renewed upon expiration • Premiums lower in earlier years, but jump dramatically later • Better phrased: as we get older any continuation will cost more • But if we want to increase coverage any insurance will cost more later than now • Provides pure protection with no savings Chapter 4: Life Insurance

  15. TERM INSURANCE • Types of Term Insurance • Level Term • 10 – 35 year terms • Renewable Term • Annual some 5 year • Convertible Term • May be more expensive than straight term • May have to prove insurability but may be able to “buy” guaranteed insurability • Usually increase in cost or reduction in face value at conversion • Decreasing Term • Credit life insurance • Very expensive • Usually not necessary Chapter 4: Life Insurance

  16. TERM INSURANCE • Important Options • Convertibility • Flexibility • Shopping for Term Policies Chapter 4: Life Insurance

  17. CASH VALUE INSURANCE • Essential Features • Death protection • Of course no such thing • Income protection better phrase • Permanence • Do you need it forever? • Level Premiums (Figure 4-3) • Cash value (Figure 4-4) • Cash value is the amount in the investment account after all expenses paid and any investment return has been added Chapter 4: Life Insurance

  18. Cash Value Insurance • Essential Features • Flexibility • Loans (bad idea) • Do you have to pay yourself back? • Paid up policies; if you want tostop paying premiums • Same face for a specific time • Reduced face for a specific period of time • Level Premiums (Figure 4-4) • Dividend Option (more on this later) • Emergency Fund Chapter 4: Life Insurance

  19. Comparison of Level Premiums Comparison of Level Premiums for $1,000 Insurance How much would you pay per month for a $100,000 policy? This figure is misleading in it’s attempt to convince you that term insurance is a bad choice. You can buy 35 year fixed term. Chapter 4: Life Insurance

  20. People are Over-Premiumed and Under-Insured Source: American Council of Life Insurance, 1998 Chapter 4: Life Insurance

  21. What does the difference mean? • Whole life policy $100,000 at age 30 costs average of 100 * $17.12 = $1,712 per year. • Term 100 * $2.58 = $258 • Invest the difference for 35 years at 12% ($1,454) • End investment value = $627,638 • A whole life policy can never exceed it’s face value without endowing. This could create tax issues. Chapter 4: Life Insurance

  22. WHOLE LIFE INSURANCE • Essential Features • Guaranteed fixed premiums • Guaranteed death benefit • Offers protection plus savings • Conservative investments • Variation of Whole Life Insurance • Limited-Pay Whole Life • Modified or Graded-Premium Whole Life • Single-Premium Whole Life • Endowment Life • Current Assumption Whole Life • Return-of-Premium Whole Life • Important Issues • Investment risk remains with the insurance company • “Guaranteed” nature of this policy • Appropriate for conservative person with long-term need Chapter 4: Life Insurance

  23. Cash Value Policies Chapter 4: Life Insurance

  24. UNIVERSAL LIFE INSURANCE • Essential Features • Premium payments (timing and amounts) are flexible • Debt benefits is adjustable • Investment risk shifts from insurance company to the policyholder • Unbundling of expenses and cash value accounts • Variation of Universal Life Insurance • Indexed universal life • Adjustable life insurance • Important Issues • High level of transparency • Flexibility of premium payments • Policy can be tailored to changing needs of policyholder • Option A and Option B Chapter 4: Life Insurance

  25. UNIVERSAL LIFE In contrast to whole life, universal life: • Premium payments are flexible. • Death benefit is adjustable. • Investment risk shifts from insurance company to policyholder. Chapter 4: Life Insurance

  26. How Universal Life Insurance Works Chapter 4: Life Insurance

  27. UL Chapter 4: Life Insurance

  28. Premium 595 1st year Charges 2.35% + 1.25% + 4% = 7.6% 45.22 + 240 + 96 = 381.22 (64%) After first year $141 (23.7%) Does not include costs of insurance Chapter 4: Life Insurance

  29. VARIABLE LIFE INSURANCE • Essential Features • Cash value and death benefit based on investment performance of separate account • Minimum death benefit paid as long as premiums paid • Investment risk shifts from insurance company to the policyholder • Variation of Variable Life Insurance • Single-premium variable life • Variable-universal life • Important Issues • Policyholder makes the investment decisions • Investment choices include: equity mutual funds, fixed income mutual funds and money market instruments • Appropriate for policyholder with investment acumen Chapter 4: Life Insurance

  30. Other Life Insurance Policies • SURVIVORSHIP LIFE POLICY • First-to-Die Policies • Second-to-Die Policies • Ownership Options • Accelerated Death Benefits • Living Death Benefits • FAMILY INCOME • INSURANCE FOR INDIVIDUAL FAMILY MEMBERS • Spousal Insurance • Insurance for Children Chapter 4: Life Insurance

  31. Life Insurance Contract • Ownership clause • Incontestability clause • Grace period • Reinstatement clause • Non-forfeiture clause • Dividend options • Policy loans • Beneficiary provisions • Suicide clause • Simultaneous death clause Chapter 4: Life Insurance

  32. Life Insurance Policy Riders • Accelerated death benefit • Accidental death benefit • Disability waiver of premium • Disability income rider • Family rider • Guaranteed insurability option Chapter 4: Life Insurance

  33. LOANS FROM LIFE INSURANCE POLICY • Net Borrowing Cost • Ignores Opportunity Cost • Must pay back the loan or the interest continues • Reduces Death Benefit • Taxed at Highest Rate if it Violates 7-Pay Test • Desirable if Alternative Sources Not Available (absolute last resort) Chapter 4: Life Insurance

  34. LIFE INSURANCE SETTLEMENT OPTIONS • Basic Considerations • Will the original intent be followed • After distribution control goes to the beneficiary • Distribution • Lump-Sum Payment: Tax-Free • Fixed Annuity: Partially Taxable • “annuitization” • Control of money goes to insurance company • Fixed Period Option • Fixed Income Option • Life-income Option Chapter 4: Life Insurance

  35. SETTLEMENT OPTIONS • Annuitization • The process of converting from a lump sum into some form of a payment stream • Insurance company “insures” the payment stream • Insured loses control of the assets • PMT for Life • What if die in 3 years • Insurance company keeps the rest • Period certain • The insurance company guarantees a certain # of payments • 10 year certain • If die in 15 years the insurance company pays until you die • If die in 5 years, the insurance company would pay to a beneficiary the amount that would have been received for 10 years, the insurance company would keep any excess Chapter 4: Life Insurance

  36. Taxation • TAXATION OF LIFE INSURANCE • Distribution upon Death • Usually not taxable • Distribution during Life • Dividends not taxable • Loans could be taxable • Cashing out could be taxable • LIFE INSURANCE AND ESTATE TAXES • If the owner, policy included in estate Chapter 4: Life Insurance

  37. Switching • SWITCHING LIFE INSURANCE POLICIES • Replacement should be watched carefully • CV to CV could be churning • Term to CV • Convertible not really a switch • CV to term • Special reporting requirements Chapter 4: Life Insurance

  38. BUSINESS USES OF LIFE INSURANCE • Buy-Sell Agreement • Key Man Insurance • Insurance for Professionals • Group Life Insurance • Split-Dollar Life Insurance • Life Insurance in Qualified Plans • Section 412(i) Plan • Life Insurance in Non-Qualified Plan • Welfare Benefit Trust Chapter 4: Life Insurance

  39. Buy-Sell Agreement • Partners would have insurance on other partners. If a partner dies, the others receive a death benefit that they use to buyout the business interest from the deceased partner’s beneficiaries. • Key Man Insurance • Used to help defray expenses incurred and revenues lost if a critical employee dies. • Split-Dollar Life Insurance • IRS has some rulings that may impact the taxation of this type of strategy Chapter 4: Life Insurance

  40. Split Dollar Policies Figure 4-6 How Do Split Dollar Policies Work Chapter 4: Life Insurance

  41. MISCELLANEOUS LIFE INSURANCE ISSUES • CAPITAL MAXIMIZING STRATEGY • LIFE INSURANCE IN AN IRREVOCABLE TRUST • LIFE SETTLEMENT OPTIONS • LIVING DEATH BENEFITS • POLICY ILLUSTRATIONS Chapter 4: Life Insurance

  42. How a Life Insurance Trust Works Chapter 4: Life Insurance

  43. LIFE INSURANCE PLANNING • UNDERSTAND THE CLIENT’S GOALS • Income replacement • Pre-funding children’s education • Pay off debts • Provide for final expenses and taxes (liquidity) • Leaving a legacy • CALCULATE THE LIFE INSURANCE NEED • IDENTIFY THE BEST TYPE OF POLICY • SELECT THE INSURANCE COMPANY • PURCHASE THE POLICY Chapter 4: Life Insurance

  44. Expense Needs Versus Sources of Income Table 4-5 Expense Needs Versus Sources of Income Chapter 4: Life Insurance

  45. POLICY SELECTION OR REPLACEMENT • ABILITY TO FUND PREMIUM PAYMENTS • POLICY SUITABILITY • Amount of death benefit needed • Duration of the need • Client factors • POLICY REPLACEMENT Chapter 4: Life Insurance

  46. INSURANCE COMPANY SELECTION • FINANCIAL STABILITY • CLIENT SERVICE • REPUTATION FOR PAYING CLAIMS • UNDERWRITING STANDARDS • POLICY PRICING Chapter 4: Life Insurance

  47. RATINGS OF INSURANCE COMPANIES Rating Agencies • A.M. BEST • Fitch • Moody’s • Standard & Poor’s • Weiss Chapter 4: Life Insurance

  48. DETERMINATION OF LIFE INSURANCE NEEDS Two Time-tested Methods: • Human Value Approach Based on Client’s Income Potential • Capital Needs Analysis Sufficient for Covering Family’s Economic needs Chapter 4: Life Insurance

  49. Determination of Life Insurance Need Chapter 4: Life Insurance

  50. INSURANCE NEEDS EXAMPLE:Gathering Data Table 4-8 Family and Financial Data for John Smith Chapter 4: Life Insurance

More Related