 Personal Finance PowerPoint Presentation. Life Insurance Overview Part 1. 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, looking something like set the insurance goals, develop a plan to reach them, put the plan in action, review the results, 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 was by Amy Fontenille, updated May 25, 2022. In prior presentations, we've been taking a look at insurance in general. Now we're looking at life insurance in conjunction or in alignment with that discussion. Life insurance can kind of be thought of as more classical kind of insurance in some ways. In other words, if you think about like property insurance or liability insurance, you're typically safeguarding against something you hope doesn't happen. The likelihood of it happening, possibly being low, but if it did happen, would be financially catastrophic. Therefore, you are insuring against it, such as your home burning down or such as someone suing you for millions of dollars. Life insurance is kind of similar to that of insuring against dying. We're all going to die at some point, but dying possibly prematurely and therefore the people that depend on the income that you are earning would have an issue there and so that's what you're kind of could be thinking about in most cases insuring against. So in that sense, life insurance can be a little bit more straightforward, although there's a lot of complexities with all kinds of insurance, especially when you get into the calculations or the medical insurance, which we talked about in the past, which has been expanded to kind of encompass some other stuff. You're still insuring against that big financially catastrophic event, but it also kind of, you could think of it trying to cover all these other kind of things that are involved, including like the maintenance and the routine visits and that kind of stuff. So what is life insurance? Life insurance is a contract between an insurer and a policy holder. So the insurer, typically an insurance company and the policy holder, the person purchasing the insurance pain, the premium. Life insurance policy guarantees the insurer pays a sum of money. So that's typically the insurance company paying a sum of money to named beneficiaries. So these are people that are named as the recipients. So if you think about like a classical case like a husband purchasing insurance for the family, the husband saying hey, I've got money that is being dependent upon my future income and salary is what the family is dependent upon. If I died prematurely, then they would have a problem possibly a safeguard against that from happening by buying the insurance so that the beneficiaries, family members, possibly wife, then would be receiving money that would be kind of the idea in a classical kind of case. So when the insurer dies when we think the insurer is going to die within the policy term, so they might have died prematurely and that's when the insurance might kick in in exchange for the premiums paid by the policy holder. So the policy holder is the person that's going to be purchasing the policies and of course paying the premiums in order to mitigate the risk in the event that they die prematurely so that the people dependent upon them may still have some income to rely on. So during their lifetime, so the life insurance application must accurately disclose the insurer's past and current health conditions and high risk activities to enforce the contract. And this makes sense if we just think about how the insurance company works real quickly we can think that if I was trying to think about my likelihood of dying prematurely the likelihood might be low I'm trying to safeguard against that outside event that it could happen if I was to pool myself in and look at the big statistics numbers from the insurance company side of things although they can't predict who might die prematurely with a large set of numbers they can predict that someone might die prematurely and they can then calculate what their payouts are going to be and so on on an aggregate basis and that's how they can kind of try to figure out what the premiums should be and how it should cost and all that kind of stuff. Obviously if you have life conditions that are making it more likely that you're going to die if you tend to sleep every night on railroad tracks or something like that the insurance company might want to take that into consideration and adjust the risk factors based on that information. So types of life insurance many different types of life insurance are available to meet all sorts of needs and preferences depending on the short or long term needs of the person to be insured the major choice of whether to select temporary permanent life insurance is important to consider. So you might consider do you want to have life insurance that you're going to be purchasing for a certain point of time or some kind of permanent life insurance. Term life insurance term life insurance lasts a certain number of years then ends you choose the term when you take out the policy common terms are 10 20 or 30 years the best term life insurance policies balance affordability with long term financial strength so term life insurance has a set term which makes it a little bit easier to kind of think about in some ways and that can be kind of nice because obviously most of the time when you're thinking about life insurance you're probably thinking that you're going to be needing coverage during that time in your life when you're making income where other people possibly are dependent upon that income which lasts a certain term of time you would expect and you can think about you know what you're actually purchasing can be a little bit more straightforward of a calculation with term life insurance often times what types of term do we have we've got the decreasing term life insurance is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate so notice we kind of still have an idea of what is going on here what we're purchasing because it's a renewable item and the coverage decreases over the life of the policy but it does so at a predetermined rate we've got the convertible term life insurance allows policy holders to convert a term policy to permanent insurance that being the conversion component then we've got the renewable term life insurance provides a quote for the year the policy is purchased premiums increase annually and are usually the least expensive term insurance in the beginning permanent life insurance on the other hand we've got the permanent life insurance as opposed to the term life insurance stays in force for the insurance entire life unless the policy holder stops paying the premiums or surrenders the policy it's typically more expensive than term so the permanent is going to be more confusing you can think of course from the calculation side of things if you look at the actuarial calculations because if you're not setting a set term of how long the policy is going to be covered for then you would think you would have more complex actuarial calculations because they would have to determine what the likelihood of you dying or when you're going to die kind of calculation would be which again if you look at the aggregate stacks with big numbers you can start to get a feel for what that would be so they can start to figure out their calculations and their premiums and so on so whole life insurance is a type of permanent life insurance that accumulates cash value cash value life insurance allows the policy holder to use the cash value for many purposes such as a source of loans or cash or to pay policy premiums so notice the whole life gets a little bit more confusing because of this component which you could argue might be kind of like an investment as well as kind of like life insurance right so now whereas the term life insurance is pretty clearly you're buying life insurance that's what it is and you're buying it for a term of time frame so that's where it gets a little bit more complex when you go into the whole life insurance which once again is a type of permanent life insurance that accumulates cash value cash value life insurance allows the policy holder to use the cash value for many purposes such as a source of loans or cash or to pay policy premiums so then we have universal life that's the UL universal life UL is a type of permanent life insurance with a cash value component that earns interest so once again you got this earning interest which you might think of something that's more like an investment investments or things that earn interest so it's a little bit different than maybe the term life which is something where it's pretty clear that you're buying simply the life insurance where with some of the permanent life insurance you might say well there's kind of an investment kind of component to this which is flexible premiums unlike term and whole life the premiums can be adjusted over time and designed with a level of death benefit or an increasing death benefit so I'll just tell you from my experience with people that I've dealt with on the life insurance most of the people have recommended to me that I'd like to be purchasing something that I kind of know what I'm purchasing so if I'm purchasing life insurance everything else equal I would basically like to be purchasing just the life insurance if I'm investing then everything else equal I would like to be basically putting my money into investment stocks and bonds savings accounts that are going to be doing something like the earning interest now obviously things can get more complex because you might say well what if there's tax implications and things and so on and there's tax benefits and if there's a significant amount of tax savings then obviously you might structure things that are going to be a little bit more complex I tend to think even if I'm going to get a benefit from it I'd rather invest in something that I understand or the simple thing that I understand and I know why I'm doing it rather than a quite complex thing unless there's a significant benefit so there's pros and cons of the different formats you can be picking so indexed universal that's the IUL is a type of universal life insurance that lets the policy earn a fixed or equity index rate of return on the cash value component then we've got the variable universal life insurance allows the policy holder to invest the policy's cash value in an available separate account it also has flexible premiums and can be designed with a level death benefit or an increasing death benefit so top rated companies to purchase so you could just take a look at this obviously from investopedia but if you're trying to actually do comparisons of companies you can take a look at some of these and do your own research from their nationwide protective mass mutual mutual of Omaha and so on we might go into a bit more on those lists later term versus permanent life insurance term life insurance differs from permanent life insurance in several ways but tends to best meet the needs of most people so if you talk to a lot of people I guess more people that might be considered more conservative type of people might say that the term life insurance might be the way to go for the reasons or for partially the reasons we've discussed in that if you're purchasing life insurance it's pretty straight cut the term life insurance is life insurance if you're investing in something that has an investment component then you might want to be investing in stocks and bonds so that you know that you're investing in something with an investment component unless again you're doing some kind of strategy that is giving you some other benefits such as possibly tax benefits so term life insurance only lasts for a set period of time and pays a death benefit should the policy holder die before the term has expired so obviously you have a term which given a lifetime you can be fairly you can set a fairly accurate term to say oh wait this is the part of the life where people might be dependent upon my income so I'm going to set the term life insurance here and then and then have that coverage in the event that a problem happens that meaning you die prematurely it's quite a problem big problem for you it's a problem for other people too if they're dependent on your income so permanent life insurance stays in effect as long as the policy holder pays the premium another critical difference involves premiums term life is generally much less expensive than permanent life because it does not involve building a cash value so once again you're not doing this whole cash value thing you're just buying life insurance right I'm buying life insurance why are you buying life insurance because I want to have insurance against me dying that's what I'm doing right so that's straight forward on what you're purchasing which is nice before you apply for life insurance you should analyze your financial situation and determine how much money you would be required to maintain your beneficiary standard of living or meet the need for which you're purchasing a policy so clearly if you're purchasing a policy so that if you were happening to die prematurely and your dependents are now then dependent upon the insurance how much is the insurance paying out and would that be sufficient in that event so for example if you are the primary caretaker and have two children and four years two children and four years old you would want enough insurance to cover your custodial responsibilities until your children are growing up and able to support themselves you might research the cost of hiring a nanny and a housekeeper or using commercial child care and cleaning services then perhaps add some money for education include any outstanding mortgage and retirement needs for your spouse and your life insurance calculation especially if the spouse earns significantly less or as a stay at home parent add up what these costs would be over the next 16 or so years add more for inflation and that's the death benefit you might want to buy if you can afford it so obviously that can get quite complex but you can try to budget out alright how long is this you know are these needs going to be held given the fact that the children's age or the children's age and so on and try to factor out how much insurance would then be appropriate which once again if you're buying term life insurance then you can try to get the policy that covers you know that calculation and usually it's a little bit more straightforward how much life insurance to buy many factors can affect the cost of life insurance premiums certain things maybe beyond your control but other criteria can be managed to potentially bring down the cost before applying after being approved for a life insurance policy if your health has improved and you've made positive lifestyle changes you can request to be considered for change in risk class let me guess it's smoking if I smoke I have to they're going to tell me my life insurance is going to be ridiculously expensive so even if it is found that you're in poor or health then at the initial underwriting your premiums will go will not go up so if you're found so if you're found to be in better health then you can expect your premiums to decrease which could be nice step one determine how much you need think about what expenses would need to be covered in the event of your death things like mortgage college tuition and other debts not to mention funeral expenses just put me in the ground in a cardboard box for crying out loud okay plus income replacement is a major factor if your spouse or loved ones need cash flow and are not able to provide it on their own there are helpful tools that are designed to calculate the lump sum that can satisfy any potential expenses that would need to be covered so you might want to take a look online think about calculation tools in the event of death what affects your life insurance premiums and costs step two prepare your application age this is the most important factor because life expectancy is the biggest determination of risk for the insurance company side of things if they're trying to calculate what's the likelihood of your dying if you're you know 22 probably less likely that you're going to die than if you're 70 or something right obviously of course a lot of 22 year olds are kind of reckless maybe like 30 something would be a safer area but in any case you see what I'm saying gender because women statistically live longer they generally play lower rates than males of the same age bias my goodness but in any case that makes sense of course because actuarial calculations if women tend to live longer then that's good for life insurance calculations so that's good smoking I knew it I knew it on the top three one person who smokes is at risk for many health issues that could shorten life and increase risk based premiums so if you smoke then they're gonna they're gonna increase your premiums they're already charging me more for my taxes on my cigarettes and now they're in my life insurance my medic they're just taxing me so they're all taking money from the smokers health medical exams for most policies include screening for health conditions like heart disease diabetes and cancer related medical matrix that can indicate risk lifestyle dangerous lifestyles can make premiums much more expensive so if you just like to sleep on railroad tracks or something like that then that could increase the risk so family medical history if you have evidence of major disease in your immediate family your risk of developing certain conditions is much higher so if you have family risk then they're just gonna that doesn't seem fair just because my dad had heart disease and my dad's dad had heart disease and my mom's dad then that's how it works because you're more likely to have heart disease whatever driving record a history of moving violations or drunk driving can dramatically increase the cost of insurance premiums so what I hit a few cars what not no one was hurt yeah they might increase the premium for that possibility life insurance buying guide life insurance applications generally require personal and family medical history and beneficiaries information so you will also likely need to submit to a medical exam so they're gonna check you out on this one you might be able to some of the other ones is pre-existing condition stuff whatever life insurance they're not messing around they want to know what your health is like possibly here so you will need to disclose any pre-existing medical conditions history of moving violations DUIs and any dangerous hobbies such as auto racing or skydiving so if you're skydiving you know I don't even wear a parachute when I do it so that's gonna increase standard forms of identification will also be needed before a policy can be written such as your social security card, driver's license and US passport so they even want to know it's you that you're talking about these people so picky we'll continue on with this in the following presentation