LIFE INSURANCE I: PRINCIPLES

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LIFE INSURANCE I PRINCIPLES
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WHAT RISK(S) ARE WE INSURING AGAINST?

• The potential for financial loss/hardship
  associated with the uncertainty about the date of
  ones demise
• ? premature death
• ? superannuation
• ? barriers to wealth transfer

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INSURANCE PLANNINGFUNDAMENTAL QUESTIONS

• 1.
• 2.
• 3.

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THE TIMING OF INSURANCE NEEDS
Pass wealth to heirs
Pay final expenses
Transfer ownership of business
Provide for retirement
Provide education funds
Protect spouse and dependents
25 35 45 55 65 75 85 95
Age of insured
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TYPES OF LIFE INSURANCE CONTRACTS

• Pure Insurance
• Term insurance
• Cash Value Insurance
• Whole life
• Endowment life
• Universal life
• Adjustable life
• Variable life

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TERM INSURANCE-ESSENTIAL FEATURES

• rental insurance
• term generally runs from one to thirty years
• purchased in blocks of 1,000 face value
• participating/nonparticipating
• Types of term insurance
• renewable term
• convertible term
• decreasing/increasing term
• Most appropriate when

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CASH VALUE INSURANCE-FEATURES

• permanent insurance
• provides pure insurance wealth accumulation
• death benefit
• (declining) insurance (increasing) cash
  value
• financial flexibility
• participating/nonparticipating
• Types of cash value insurance
• whole/straight/ordinary life
• limited payment life
• single premium life
• Most appropriate when

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CASH VALUE INSURANCE-contd

• Universal life
• Variable life
• Variable universal life

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LIFE INSURANCE CONTRACT TERMS

• ? Incontestability
• ? Nonforfeiture clause
• ? Spendthrift clause
• ? Beneficiary/simultaneous death provision
• ? Suicide clause

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LIFE INSURANCE POLICIESSETTLEMENT OPTIONS

• ? Lump sum
• ? Interest only
• ? Payments for stated period
• ? Payment of stated amount
• ? Life income
• ? Straight life income
• ? Life income with period certain
• ? Joint and survivor income

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LIFE INSURANCE POLICIESTAX CONSIDERATIONS

• Life insurance proceeds payable at death are
  generally excluded from beneficiarys gross
  income (IRC 101)
• Cash value accumulation during insureds lifetime
  (inside buildup) is tax-deferred until
  surrender
• Proceeds paid before death (at surrender) may be
  taxable to the extent they exceed insureds cost
• Annuity payments are partially taxable in year
  received
• Viatical settlements are generally nontaxable