November 17, 2011Objective: Students will evaluate the

primary purpose of life insurance.

Life Insurance• The primary purpose of life insurance is to

protect families from loss of income caused by the death of a wage earner.

• The beneficiary is the person who receives the benefits from a life-insurance policy when the insured person dies. There can be more than one beneficiary of an insurance policy.

• A key to the amount of life insurance a person needs is the amount of additional money the survivors will need to maintain their quality of life if the insured person dies.

Who Needs Life Insurance? (Rank)

___ A. Single person with no children___ B. Young child___ C. Retired couple with self-supporting children___ D. Working spouse married to a nonworking

spouse with children___ E. Working spouse married to a nonworking

spouse with no children___ F. Single working parent with children

Two Types of Life-Insurance

• There are two basic types of life insurance:– Term– cash-value.

Term Life Insurance

• When you buy term life insurance, you are buying insurance only on your life; there is no savings feature as there is with a cash-value policy.

• If you die during the covered period, or term of the policy, the insurance company will pay your beneficiaries the face value of the policy. – The face value is the amount of money the

beneficiaries receive if the insured person dies.

Term Life Premiums• When you first buy term life insurance the annual premium

start higher and higher as the insured person gets older. Premium rates are based on the probability of death at each age level and on the insurance company’s cost of doing business.

• The major advantage of term insurance for younger families is the opportunity to secure a lot of protection against the loss of the primary wage earner for relatively little cost.

• As people grow older, there is a greater likelihood or probability of death, so the premiums become quite high. Many older people stop paying for their term insurance since they no longer need to protect survivors from income loss.

Cash-Value Life Insurance• A cash-value policy offers protection plus a savings feature. • As with term insurance, the insurance company pays the

beneficiaries the face value of the policy if the insured person dies while the policy is in force.

• With most cash-value policies, the premiums are the same each year as long as the policy is in force, unlike premiums for most term policies, which increase with the age of the insured person.

• Because part of the premium goes toward the savings feature, the insurance company charges more for a cash-value policy than for a term policy with the same dollar coverage. – The amount of savings available in cash, loans or withdrawals is

called the cash value or cash-surrender value.

Different Cash-Value Policies• There are many different kinds of cash-value policies. Only three will be

described here.– The most popular type is the whole-life policy. The insured person pays

the same premium each year of his or her life (hence the term “whole life”) or until he or she reaches some specified age, such as 85 or 90.

– As its name indicates, a limited-payment policy requires the insured to pay a level, or unchanging, premium for a limited number of years, such as 20. The policy is then paid up. For the same coverage, the premiums are generally higher for a limited-payment policy than for a whole-life policy because the number of premiums is less. • Many athletes, models and entertainers like limited-payment plans because they

can afford large premiums during their primary earning years, which for most are quite limited.

– An endowment life-insurance policy also has a limited number of level premium payments, such as 20. The primary difference between an endowment and a limited-payment policy is that the insured can receive the face value of the endowment policy after making the last payment. In other words, the cash value of the policy is equal to the face value of the policy after all premiums are paid. • For limited payment policies, the cash value is less than the face value after all

premiums are paid.

Cash-Value• When a policy has a cash value or cash-surrender value, the

policyholder can do several things with the accumulated amount:– Borrow up to the full amount of the cash value at a favorable

interest rate.– Cancel the policy, and receive the cash value.– Use the cash value to pay future premiums.– Receive the cash value paid out over a period of years.

• When the policyholder dies, the insurance company deducts from the face value of the policy anything it paid out to him or her, such as a loan. The company then pays the remainder to the beneficiaries.

• People who have trouble saving may like the investment feature of cash-value policies.– Others believe they can do much better investing the difference in

premiums between a term and cash-value policy in their own savings and investment plans.