 Personal Finance PowerPoint Presentation. Life Insurance Overview Part Number Two. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of major twice cut ones put in a formal process in place. Look in something like set the goal, develop a plan to reach the goal, put the plan in action, review the results, and repeat the process periodically. Most of this information can be found at Investopedia, Life Insurance Guide to Policies and Companies which you can find online. Take a look at the references, resources, continue your research from there. This is by Amy Fontenille, updated May 25th, 2022. We're continuing on from a prior presentation and we are continuing on from a prior discussion about insurance in general. Moving on here to the life insurance, noting that life insurance kind of falls into the category of our classical kinds of insurance like liability insurance and like property insurance where we're safeguarding against some event that may be not likely to happen in the future. Hopefully doesn't happen in the future but if did, would be financially devastating. Therefore, we're insuring against it such as the home burning down, someone suing us for millions of dollars or in this case, us dying, which is going to happen. So what are you going to insure against dying? You're going to die, I know, but dying prematurely would be a problem to people that are dependent upon us in a classical condition such as someone whose income is dependent upon by their family. We're continuing on now here. So we're on step number three from the prior presentation, compare policy quotes. When you've assembled all your necessary information you can gather multiple life insurance quotes from different providers based on your research. So obviously we would want to be doing some comparing and some contrasting at that point. Prices can differ markedly from company to company so it's important to take the effort to find the best combination of policy, company rating and premium cost. So clearly I think that would be easier to do oftentimes if you're looking at the more simplified just straight life insurance which might be the term life insurance if you're looking at more complex types of life insurance obviously that will add to the complexity as you're looking at the offers from different companies as well because the variance can change rapidly. So because life insurance is something that you will likely pay monthly for decades it can save an enormous amount of money to find the best policy to fit your needs. Benefits of life insurance. There are many benefits to having life insurance below are some of the most important features and protections offered by life insurance policies. Most people use life insurance to provide money to beneficiaries who would suffer a financial hardship upon the insured's death. So that's the classical case for life insurance. You have a family member, the wage earner of the family possibly, other people taking care of other needs in the family possibly. If the wage earner died that could be a problem for the other folks and therefore because they're dependent on the income you might want to have the life insurance to be helping out in that event hoping it doesn't happen but be insured against it if it does. However, for wealthy individuals the tax advantages of life insurance including the tax deferred growth of cash value tax-free dividends and tax-free death benefits can provide additional strategic opportunities. So taxes always provide more complication when you start to consider these types of tools. So again, are you buying the life insurance in order to actually buy life insurance to do the purpose of what life insurance does in general or are you buying it for some other kind of more complex tax structure even if you're buying it for some more complex tax structure I'd still go by the policy that if I don't understand it then maybe it's not worth the benefits that I'm getting from it. I'd like to invest in something that I understand going forward as a general rule that you might want to you know kind of keep in mind. So avoiding taxes, the death benefit of a life insurance policy is usually tax-free. Wealthy individuals sometimes buy permanent life insurance within a trust to help pay the estate taxes that will be due upon their death. So if you're a wealthy individual you could have the estate taxes which you might call say a death tax. So obviously you die and if you have more than a certain amount of money like Iris comes in and turns your corpse over and ruffles through your pockets and take your money, right? It's a death tax. So then of course you're going to have these strategies that come into place for people to avoid the death taxes. Obviously the first thing you would think of is like well if I'm on my deathbed then I'll just give all my money on my deathbed to my son or my wife or something or you know some family member at that point in time. The government has figured that out and then they try to stop that from happening at the deathbed and so on and so forth and the game plays out. So that whole that whole genre of taxation and planning has a whole lot of issues with it given of course taxes complicating things greatly. So this strategy helps to preserve the value of the estate for their heirs. Tax avoidance is a law abiding strategy for minimizing one's tax liability and should not be confused with tax evasion which is illegal. So if you start doing these kind of things you're saying well you're setting up these instruments and so on in order to avoid taxes. Well avoiding taxes if it's illegal to do then you're legally to do it because you're able to pay the least amount of taxes that you're legally required to do. Whereas if it's evasion that means you're doing something that basically is illegal. You might be doing something kind of fraudulent you're taking illegal steps to stop paying the taxes. What's the line between the two? Sometimes it can be a little bit cloudy on the line between the two because certain tax strategies might not have worked their way through the law. So they might not be explicitly laid out in the law and they're being worked out in the courts or something like that. So when you get to more complex strategies it could be a little confusing in terms of what's the black and white, what's the line in terms of what's doable or not doable and those are more complex questions that usually come into play for more wealthy individuals. So who needs life insurance? Who needs it then? Life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured policy holder. Here are some examples of people who may need life insurance. You got parents with minor children classic kind of case here. If a parent dies the loss of their income or caregiving skills could create a financial hardship. So they're dependent on you, their children. The children dependent. So life insurance can make sure the kids will have a financial resource they need until they can support themselves. Parents with special needs adult children. So for children who require life long care and will never be self-sufficient, life insurance can make sure their needs will be met after their parents pass away. So hopefully of course the children would grow up and be self-supporting at some point in time. Certain people aren't going to be self-supporting in that way and you might need life insurance or people or strategy to help them in the event that hopefully they're still going to live longer than you but you won't have the same kind of support for your whole life for them. The death benefit can be used to fund a special needs trust that a fiduciary will manage for the adult child's benefit. Adults who own property together married or not if the death of one adult would mean that the other could no longer afford loan payments, upkeep might be a good idea. For example, one example would be an engaged couple who take out a joint mortgage to buy their first house. So now you've got two people purchasing the home which might be more dependent on say one person's kind of salary and so on. So seniors who want to leave money to adult children who provide their care. Many adult children sacrifice time at work to care for an elderly parent who needs help. This help may also include direct financial support. Life insurance can help reimburse the adult child's costs when the parent passes away. So young adults whose parents incurred private student loan debt or consigned a loan for them. Young adults without dependents rarely need life insurance but if a parent will be on the hook for a child's debt after their death, the child may want to carry enough life insurance to pay off that debt. Children or young adults who want to lock in low rates. This is probably the more common kind of scenario. The younger and healthier you are the lower your insurance premiums and that just kind of makes sense of course. So if you're a younger individual and you're going to be paying into the insurance for a longer period of time you might be able to lock in. You might be able to pay lower premiums because you're going to be paying it in for a longer period of time. So that would be a good benefit, a good deal to the insurance company. So a 20-something adult might buy a policy even without having dependents if there is an expectation to have them in the future. So in other words if you're saying I can buy insurance now I'm young, I'm healthy, I'm not married and so on but I think I might get married in the future. Who knows? I might want to mitigate against my risk of getting married or something like that you know. So you buy the insurance now where it could be cheaper at that point in time and then you might be lined up even if you don't have anybody dependent upon you at that time. So stay-at-home spouses, stay-at-home spouses should have life insurance as they have significant economic value based on the work they do in the home. According to salary.com the economic value of stay-at-home parent would have been equivalent to an annual salary of 162 $2581 in 2018 that's quite specific amount of home care costs. That's a lot more than I make. In any case, wealthy families who expect to owe estate taxes. Life insurance can provide funds to cover the taxes and keep the full value of the estate intact. So you got estate planning. Families who can't afford burial and funeral expenses. So a small life insurance policy can provide funds to honor a loved one's passing, which can be nice because of course, you know, you don't want to if you die and you're like, okay, now that now the people that are taking care of this don't have the funds obviously to pay for the funeral costs, which can be quite expensive and you get and you get to kind of like that seeing that you had in the big Lebowski or whatever where he's like, I would like your most modestly priced receptacle and he ends up putting the ashes in a coffee can and stuff like, you don't want that kind of stuff to happen. So you could have the life insurance in that case. So then we got the business with key employees. Now you got the business side of things. If the death of a key employees, such as the CEO would create a severe financial hardship for a firm, that firm may have an insurable interest that will allow it to purchase a life insurance policy on that employee. So now you got a CEO possibly they're like the face of the company or something like that. If they die could be a problem to the company. You might then have an insurable interest there. It's buried pensioners instead of choosing between a pension payout that offers a spousal benefit and one that doesn't pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called pension maximization. Those with pre-existing conditions, such as cancer, diabetes or smoking. Smoking is a pre-existing condition now. I thought it was just anyways I'm not up to date on that. So in any case, note however that some insurers may deny coverage for such individuals or else change are charged very high rates. Research policy options and company reviews because life insurance policies are a major expense and commitment it's critical to do proper due diligence to make sure the company you choose has a solid track record and financial strength given that your errors may not receive any death benefits for many decades into the future. Investopedia has evaluated scores of companies that offer all different types of insurance rated the best in numerous categories. So it might look a little bit about the insurance companies kind of in the future just so you can get a launching point and start your research from there. Life insurance can be a prudent financial tool to hedge your bets and provide protection for your loved ones in case of death should you die while the policy is enforced. However, there are situations in which it makes less sense such as buying too much or insuring those whose income doesn't need to be replaced. So it's important to consider the following what expenses couldn't be met if you died. So if you died who's kind of dependent on you what kind of needs need to be met at that point that's possibly being taken care of by your income and do you have other assets that might be able to kind of hedge that. So if your spouse has a high income and you don't have any children maybe it's not warranted. It is still essential to consider the impact of your potential death on a spouse and consider how much financial support they would need to grieve about worrying about returning to work before they're ready. So even in that situation if you don't have any dependence or something like that it might be nice to have enough life insurance to take care of the funeral costs and whatever needs to happen for the grieving process and whatever. However, if both spouses income is necessary to maintain a desired lifestyle or meet financial commitments then both spouses may need separate life insurance coverage. Oftentimes these days you got two working people that are dependent on their current income to meet their current lifestyle and in which case if one of them died prematurely could hamper the other person's lifestyle obviously. So if you're buying a policy on another family member's life it's important to ask what are you trying to ensure children and seniors really don't have any meaningful income to replace but burial expenses may need to be covered in the event of their death. When you talk to like insurance people that sell life insurance and stuff like that they might try to sell you life insurance for everybody that everybody needs a life insurance but obviously if you're talking about children or seniors that don't have any income, no one's really dependent upon them then you got to think about well why do they need the life insurance? Do I need the life insurance just in the event that they died so they can cover expensive funeral costs? Possibly can I self-insure against something like that for children? Are we ensuring really early so that we can get a really cheap policy for a long time that they can then carry when they do have people that are dependent upon them? Is that the strategy? You know what's the rationale there? So beyond burial expenses a parent may also want to protect their child's future insurability by purchasing a moderate sized policy when they are young. So that's the strategy for younger people you're saying okay maybe they don't have anybody dependent upon them at this time but if they get the policy now it's going to be really cheap maybe you can lock in a really cheap rate at that point because you're going to be paying into it for a longer time so doing so allows that parent to ensure that their child can financially protect their future family so then if you lock in that lower rate then maybe they're allowed to go start smoking and stuff because you already locked it in so now they won't get penalized I don't know that's not a good reason to start smoking just because you're locked into your insurance but that might be a strategy parents are only allowed to purchase life insurance for their children up to 25% of the enforced policy on their own lives could investing the money that would be paid in premiums for permanent insurance throughout a policy earn a better return over time so in other words if you have permanent policies and you've got this kind of investment component to it would it be worth more to basically invest it somewhere else would you earn more on it so as a hedge against uncertainty consistent saving and investing for example self-insuring might make more sense in some cases if a significant income doesn't need to be replaced or if policy investment returns on cash value are overly conservative how life insurance work a life insurance policy has two main components a death benefit and a premium fairly straightforward when you get down to the basics of it you got the premium you got the death benefit term life insurance has these two components but permanent or whole life insurance policies also have a cash value component so clearly again the term life insurance is just classical insurance pretty basic to understand why are you buying it because I'm trying to insure against my dying and the impact it might have on someone who could or may in the future be dependent upon me at this point in time the term gets a little bit more confusing so one we've got the death benefit the death benefit or face value is the amount of money the insurance company guarantees the beneficiaries identified in the policy when the insured dies the insured might be a parent and the beneficiaries might be their children for example the insured will choose the desired death benefit based on the beneficiaries estimated future needs the insurance company will determine whether there is an insurable interest and if the proposed insured qualifies for the coverage based on the company's underwriting requirements related to age health and any hazardous activities in which the proposed insured participates to the premium premiums are the money the policy holder pays for the insurance the insurer must pay the death benefit when the insured dies if the policy holder pays the premium as required and premiums are determined in part by how likely it is that the insurer will have to pay the policy's death benefit based on the insured's life expectancy so obviously you're going to have to pay the premium when you pay the premium that will require the insurance company possibly to pay out to the beneficiary event that you die within the term for example the calculation of the premium will be dependent in part on their actuarial calculation as they put your numbers into the whole group of numbers and it could be dependent in part on your particular risk factors including the smoking thing factors that influence life expectancy including the insured's age gender medical history occupational hazard and high risk hobbies part of the premium also goes towards the insurance company's operating expenses premiums are higher on policies with larger death benefits clearly individuals who are at high risk clearly and permanent policies that accumulate cash value clearly right because all those things one the premiums are going to be higher if you have larger death benefits meaning if I die I want you to be paying out millions to these people well that's going to cost more in the premium side of things individuals who have high risk smoking on railroad tracks as you sleep with the lighter still open because you like to light your cigarettes with a bonfire on the railroad track that kind of thing well then that's going to increase your risk you would think and the permanent policies that accumulate cash value because that's kind of like an investment as well so you're kind of combining two things together so you would think the premiums would be higher for them number three cash value so this is for the non-term so the cash value or permanent life insurance serves two purposes it is a savings account that the policy holder can use during the life of the insured the cash accumulates on a tax deferred basis so there we got that tax component which is just going to confuse the whole thing so some policies may have restrictions on withdrawals depending on how the money is to be used for example the policy holder might take out a loan against the policy's cash value and have to pay interest on the loan principle so you can kind of use it as a safeguard in a few different ways if you have this cash value in there then you might say well if I can't take the money out maybe I can take a loan and I can use the cash value as basically collateral on the loan which could be another way to have available money possibly in the event that you really needed it the policy holder can also use the cash value to pay premiums or purchase additional insurance so you can use it to buy more insurance the insurance company gives that option to you the cash value is a living benefit that remains with the insurance company when the insured dies any outstanding loans against the cash value will reduce the policy's death benefit life insurance writers and policy changes many insurance companies offer holders the options to customize their policies to accommodate their needs writers are the most common way policy holders may modify or change their plans there are many writers but availability depends on the provider the policy holder will typically pay an individual premium for each writer or a fee to exercise the writer though some policies include certain writers in their base premium so the additional death benefit writer provides additional life insurance coverage in the event the insured's death is accidental so if you accidental death the waiver of premium writer relieves the policy holder for making premium payments if the insured becomes disabled and unable to work the disability income writer pays a monthly income in the event the policy holder becomes unable to work for several months or longer due to a serious illness or injury upon diagnosis of terminal illness the accelerated death benefit writer allows the insured to collect a portion or all of the death benefit the long term care writer is a type of accelerated death benefit that can be used to pay for nursing home assisted living or in-home care when the insured requires help with activities of daily living such as bathing eating and using the toilet the guaranteed insurability writer lets the policy holder buy additional insurance at a later date without a medical review