 Personal Finance PowerPoint Presentation, term life insurance. 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 measure twice, cut once, put in a formal process in place, look in something like set the goals, develop a plan to reach them, put the plan in action, review the results, and repeat the process periodically. Most of this information can be found at Investopedia, term life insurance, which you can find online. Take a look at the references, resources, continue your research from there. This by Julia Kagan, updated March 2nd, 2022 in prior presentations. We've been taking a look at insurance in general, then moving into the life insurance in conjunction with that overall discussion, noting that life insurance kind of fits into the classical types of insurance where we're basically safeguarding oftentimes against something that we're hoping will not happen, possibly has a low likelihood to happen, but if did happen would be financially devastating and therefore we insure against it, such as a home burning down, we might have property insurance, or such as someone suing us for millions of dollars, we might have liability insurance, and now such as dying prematurely, we might then have the life insurance, not so that we're going to safeguard ourselves against the loss of finances at that point because we'll be dead, but the people that are dependent on the income we were making when we were alive, which we can't make anymore because we're dead is what we typically buy the insurance for. Now the term life insurance is the most classical kind of life insurance where you're typically thinking about just buying life insurance for life insurance's sake. So this is kind of like the baseline thing that you want to be thinking about. And then if you're looking at any other kind of strategy, my perspective would be if you're looking at like permanent life insurance or something like that, that you should first be looking at the baseline and saying why wouldn't I just buy the term, which is usually usually cheaper and then invest the difference. You want to know what the strategy would be from the baseline as to why you'd be doing something other than simply the term life insurance would be my general rule that I would recommend to you. So what is term life insurance? Term life insurance also known as pure life insurance is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policy holder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to terminate. So once again, let's go through that one more time. Term life insurance also known as pure life insurance is a type of life insurance that guarantees payments of a stated death benefit. So if in the event of the death, then you've got the amount that is stated, a known stated amount of the death benefit. If the covered person, the person that basically you're covering, if they die in the event that they die dies during a specified time, which is of course the term. So you're going to be able to say I'm having the life insurance for this time frame. So once the term expires, whatever the term is, 10, 20, 30 years, if it expires, the policy holder can either possibly renew it. So you're going to renew the term, convert the policy to permanent coverage. So you might be able to convert it or allow the term life insurance policy to terminate, allow it to lapse. So how term life insurance works? When you buy a term life insurance policy, the insurance company determines the premiums based on the policy's value, the payout amount, and your age, gender, and health. So it's useful to think about how the insurance works in general. We're not going to get into the actuarial calculations, but you can think about of course the factors that would be involved in the insurance company's actuarial calculations. They are a company. They're trying to make a profit. They're trying to compete with other insurance companies. And so basically, if we're trying to insure against us dying prematurely, we're hoping that that doesn't happen. The odds of us dying prematurely are low. And it's unlikely that obviously we don't know if that's going to happen. The insurance company doesn't know if that's going to happen either. But if we put our information into a big number, into a big pool, then we can use statistics on large numbers to try to figure out what the likelihood is that they're going to be paying out for a percentage of those people. That's how they're going to help to determine what their payouts will be, which will be helping them to determine what their premiums will be. Obviously, factors that will then be likely to have you die earlier, statistically speaking, would be things like your age, possibly your gender, and your health. So in some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation hobbies, family history, and so on, so they can get quite personal over there at the insurance company. Are you selling my information like Facebook does? Once I give you all this stuff, I trust the more than Facebook. In any case, if you die during the policy term, the insurer will pay the policy's face value to your beneficiaries. This cash benefit, which is in most cases not taxable, may be used by beneficiaries to settle your health care and funeral costs, consume debt or mortgage debt, among other things. So obviously, at the point of death, you might have different things that you're trying to cover. What's the purpose of you trying to cover? You might have other people that are dependent on your income. You might be trying to cover basically funeral costs, which can be quite expensive or any outstanding debt that would be out there like a mortgage debt or other types of debt, for example. However, if the policy expires before your death, there is no payout, which is fine because then you lived, right? So that's not a bad thing because then you're actually earning the revenue and it's probably better to be alive and earning the revenue, even though you got to work to do that and whatnot. So you're basically buying the life insurance as a mitigating risk to lower the risk, not necessarily to you because you'll be dead, but to the things that you care about, people that are dependent upon you at the point that you die prematurely and if you don't die, well, then that's great. The insurance company doesn't pay out and you paid in and you still got something, you got a mitigation of the risk. So you may be able to renew a term policy at its expiration, but the premiums will be recalculated for your age at the time of renewal. So if you got like a 30-year policy after 30 years, then at the renewal point, they might then have to do the recalculation given the fact that you're 30 years older at that point. So term life policies have no value other than the guaranteed death benefit. So you're buying pure life insurance, that's what they're calling it. This isn't like an investment kind of thing, you're not cashing it in, there's not a cash value, there's nothing, you're not going to be putting money into an account or indexing it to some kind of fund or anything like that. There's no saving component as found in the whole life insurance products. So term life is usually the least costly life insurance available because it offers a benefit for a restricted time and provides only a death benefit. So the fact that you're buying just one thing, life insurance, then it's going to be cheaper than if you're buying multiple things like some kind of investment strategy and so on along with it. So for example, a healthy 35-year-old non-smoker can typically obtain a 20-year level premium policy with a $250,000 face value for $20 to $30 per month. Depending on the issuer, purchasing a whole life equivalent would have significantly higher premiums, possibly $200 to $300 per month or more because most term life insurance policy expire before paying a death benefit. The overall risk to the insurer is lower than that of a permanent life policy. So obviously, if you think about the payout policy, that's how they're going to be determining what the premiums are and they can kind of figure what that will be on a big stats kind of numbers game. So the reduced risk allows insurers the past cost savings to the customers in the form of lowering premiums. Now, when I say it's a game, you might think, well, it sounds like a gambling game or a scam kind of thing. Now, it's a business, so they're trying to basically figure out how much they're going to pay out if they're competing with other insurance companies. So it would behoove them. It's good for them to lower their premiums because that means that they're going to be more attractive than other types of companies. They can lower their premiums if they have accurate calculations on how much their benefits will be and then they can determine what their profits will be and try to make a profit while being competitive. So interest rates, the financial of the insurance companies and state regulations can also affect premiums. In general, companies often offer better rates at breakpoint coverage levels of the $100,000, $250,000, $500,000 and $1 million. Let's take a look at an example of term life insurance. 30-year-old George wants to protect his family in the unlikely event of his early death. So he doesn't think he's going to die, but he wants to be ready and help the people that are dependent upon him. He buys $500,000 10-year term life insurance policy with a premium of $50 per month. If George dies within the 10-year term, the policy will pay George's beneficiaries $500,000. If he dies after the term, after he turns 40, when the policy has expired, his beneficiary will receive no benefit. So I know what you're thinking. That means the whole family is going to try to kill him at that last year, but if they do that, I don't think they get the benefit if that happens. So that's how it works. You got the term, easy to calculate. You got the 10 years there and straightforward on the payout amount, and so there it is. So if he renews the policy, the premiums will be higher than his initial policy because they will be based on his age of 40 instead of 30. So if he wants to renew it after the 10-year term, then he would have to renew it at that point where he's older by 10 years. If George is diagnosed with a terminal illness during the first policy term, he likely will not be eligible to renew once that policy expires. That could be a problem. Some policies do offer guaranteed reinsurability without proof of insurability, so you might be able to get a policy that kind of guarantees your ability to renew it, but such features when available tend to make the policy cost more. Obviously, if you were to say, the term is no longer a term that's specific, then that's going to increase the cost of the policy. So you might, you could say, well, what have I got a 20-year policy or something like that when I started it off or those are the considerations that you would be making for the terms. So types of term life insurance, there are several different types of term life insurance. The best option will depend on your individual circumstances. The level term or level premium policies, these provide coverage for a specified period ranging from 10 to 30 years. Both the death benefit and premium are fixed because actuaries must account for the increasing cost of insurance over the life of the policy's effectiveness. The premium is comparatively higher than yearly renewable term life insurance. And then we've got the yearly renewable term, so yearly renewable term YRT policies, yearly renewable term policies have no specified term but can be renewed each year without providing evidence of insurability. The premiums change from year to year as the insured person ages the premiums increase. So obviously, if you're going to set up on a year by year so they can basically recalculate based on age, then you've got a different kind of actuarial calculation when they're trying to determine what the amounts will be as to up here when you've got the level term or level premium when they're going to have to calculate what that premium will be even though the risk factors obviously change along with age, one of the major factors that will affect the actuarial calculations. Although there's no specified term, premiums can become prohibitively expensive as individuals age making the policy an unattractive choice for many. So for a lot of people, you might be thinking, well if I get the year to year policy and then the rates are going to be increasing on a year by year basis, maybe what I would like to do, I might be thinking I'm trying to cover people for my earning years until possibly children reach adulthood or something like that or they're working on their own or I pay off the mortgage or something. So many people might be saying that will be like 10 to 20 years or something like that and so I'd like to get the level term so that would help for budgeting type of things. You would think decreasing term policies. So these policies have a death benefit that declines each year according to a predetermined schedule. So the death benefit is the amount that would be paid out upon your death. So one way to kind of deal with this obviously as you get older and older then you would think that to the insurance company there's more risk of you possibly dying and therefore they would like to increase the policy. But as you get older and the premiums, but as you get older and older as well, it's likely that you have less and less people dependent upon you. So if you have a young child obviously that's dependent upon you, as they get older they're less and less hopefully possibly dependent upon you. So one way that you can kind of even things out is to say well maybe the amount of the death benefit, the amount that would be paid off if I died prematurely could go down over time making possibly the premiums cheaper. So the policy holder pays a fixed level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principle of the home loan. So one thing you might be saying, well one of my major costs happens to be the loan here. That's where a lot of my revenue is going to. So possibly as the value of the loan goes down, then maybe you're going to be lining up your policy to have a decreasing payout as the loan value goes down, which means the death benefit you need less of a death benefit to just basically pay off the mortgage. So once you've picked a policy that's right for you, remember to research the firms you're considering thoroughly to ensure you'll get the best term life insurance available. So clearly you want to think about what your goals are, what tools are best to reach those goals, and look for the insurance company that are best at the particular tools that you want to be applying into noting that when you talk to people like insurance brokers who are kind of salespeople, they might try to dissuade you or give you other goals and objectives, which may or may not be good. So you want to make sure that whatever you're looking into lines up with your specific needs, your specific goals, which you might want to talk over with someone who is independent from, say, someone that works for an insurance company or possibly a salesperson or broker. So benefits of term life insurance. Term life insurance is attractive to young people with children. Parents may obtain large amounts of coverage for reasonably low costs. So obviously when people have children, that's when the income is most necessary because you possibly might only have like one working person that people are very dependent on the salary. So upon the death of the parent, the significant benefit can replace lost income. So these policies are also well suited for people who temporarily need specific amounts of life insurance. So for example, the policy holder may calculate that by the time the policy expires, their survivors will no longer need extra financial protection or will have accumulated enough liquid assets to self-insure. So you might be saying, I'm going to get the insurance until, you know, the kid is 18 or something like that. And or until I can basically accumulate my own assets, meaning once I pay off the mortgage, I can basically self-insure, right? Because now I've got enough money to cover the needs for the people that are dependent upon me, which would be great. So obviously as someone's lifespan goes usually in the middle of life, for most people, you're going to have a large amounts of debt because possibly a lot of people are going to be picking up families in a home and a mortgage. And that's when the life insurance is going to be most critical. And then once the mortgage is paid off, they might be in a situation where they have more assets than liabilities. Their balance sheet is looking good at that point. And if you died, then you might, you're basically self-insured in that the people that are dependent upon you could get the assets that you have at that point in time. Whereas if you died before that, when you were just starting the family, there would be a bunch of debt that they would be getting because you still own like the mortgage. So term life insurance versus permanent life insurance. The main difference between a term life insurance policy and a permanent life insurance policy such as universal life insurance are the duration of the policy, the accumulation of a cash value and the cost. The right choice for you will depend on your needs. Here are some things to consider. Cost of the premiums. Term life policies are ideal for people who want substantial coverage at low costs. Customers who own whole life insurance pay more in premiums for less coverage but have the security of knowing they are protected for life. While many buyers favor the affordability of term life, they are paying premiums for an extended period and having no benefit after the term expires is an unattractive feature. Upon renewal, the term life insurance premiums increase with age and may become cost prohibited over time. Renewal term life premiums may be more expensive than permanent life insurance premiums would have been at the issue of the original term policy. Availability of coverage. Unless a term policy has guaranteed renewable policy, the company could refuse to renew coverage at the end of the policy's term if the policy holder developed a severe illness. So if you've got 20-year term policy and the term ended and you're like, ah, maybe I still need the policy for some point but now you've got a problem and illness at that point, that's going to be an issue typically to renew the policy. Permanent insurance provides coverage for life as long as premiums are paid. Investment value. Some customers prefer permanent life insurance because the policies can have an investment or saving vehicle. A portion of each premium payment is allocated to the cash value with a growth guarantee. So we'll talk more about this in future presentations when we focus in on these policies but you've got this investment component to it. So you want to make sure, and my question would always be why wouldn't I just put it into the pure life insurance and invest the difference in an investment and you want to have some rationale if you're looking at your insurance policy as an investment tool for that. Is there a tax benefit? Yeah. So some plans pay dividends which can be paid out or kept on deposit within the policy over time. The cash value growth may be sufficient to pay the premiums on the policy. There are also several unique tax benefits such as tax deferred cash value growth and tax free access to the cash portion. So financial advisors warn that the growth rate of a policy with cash value can partly compare to other financial instruments such as mutual funds and exchange traded funds. Also substantial administrative fees often cut into the rate of return. So obviously they might be more expensive to administrate these more complex kind of policies hence the common phrase, quote, buy term and invest the difference, end quote. So if you talk to a term insurance person that's going to be their theme. That's going to be their motto. It's a good one. If you want to have a rationale as to why you wouldn't do that. That would be the baseline. That's what you would do. I would think unless there's some rationale, some goal that you have that would validate not doing that. So however, the performance is steady and tax advantage a benefit when the stock market is volatile. Other factors. Apparently there is no one size fits all answer to the term versus permanent insurance debate. Other factors to consider include is the rate of return earned on investments sufficiently attractive. Does the permanent policy have a loan provision and other features? Does the policyholder have or intend to have a business that requires insurance coverage while life insurance play a role. Will life insurance play a role in tax sheltering a sizable estate term life insurance versus convertible term life insurance. Convertible term life insurance is a term life policy that includes a conversion rider. So the rider guarantees the right to convert an enforced term policy or one about to expire to a permanent plan without going through underwriting or approving insurability. The conversion rider should allow you to convert to any permanent policy the insurance company offers with no restrictions. The primary features of the rider or maintaining the original health rating of the term policy upon conversion even if you later have health issues or become uninsurable and deciding when and how much of the coverage to convert. The basis for the premium of the new permanent policy is your age at conversion. Of course overall premiums will increase significantly since whole life insurance is more expensive than term life insurance. So your ability to convert from the term life insurance to the whole life which usually has this kind of investment component to it. So the advantage is the guaranteed approval without a medical exam. Medical conditions that develop during the term life period cannot adjust premiums upward. However the company may require limited or full underwriting if you want to add additional riders to the new policy such as a long term care rider. What is term life insurance? Among insurance policies term life insurance guarantees payment of a stated health benefit if the policy holder dies within the stated term period. Term periods may last anywhere from one to 30 years. Importantly term life insurance policies do not possess monetary unless the holder dies within the term. However term life insurance may be less costly than other life insurance options such as whole life insurance. What is the difference between term life and whole life insurance? Term life insurance occurs over a predetermined period of time typically between 10 and 30 years. Term policies may be renewed after they end with premiums recalculated according to the holder's age, life expectancy and health. By contrast whole life insurance covers the entire life of the holder unlike a term life policy whole life insurance includes a savings component where the cash value of the contract accumulates for the holder. Here the holder can withdraw or borrow against the savings portion of their policy where it can serve as a source of equity. Do you get your money back at the end of a term life insurance policy? The holder will not have their money returned once a term life insurance policy expires if they outlive the policy because you bought the ability to lower the risk that's what you're purchasing. So meanwhile whole life insurance premiums may cost as much as 10 times more by comparison. This is because the risk to the insurer is much lower with term life policies.