Steps to Buying Life Insurance

1.  Understand what you want

• Know yourself

• Know your goals

• Know your budget

• Know how much insurance you need

• Know how much money you want to spend

2.  Compare costs of competing policies

•Do your homework and shop around, not just on price, but on benefits, coverage, and exclusions.  Possible comparisons:

•Annual Premiums:  Participating or non-participating?  If participating,  the 5 year dividend history? This year?

•Total premium cost over the next 10 years (excluding dividends)

•In 10 years, what will be your cash/loan value?  Paid-up conversion value? Extended term conversion value?

•Total Premium cost over 20 years?

•In 20 years, what will be your cash/loan value?  Paid-up conversion value? Extended term conversion value?

•At what interest rate can you borrow against the policy?  Is the interest rate guaranteed?

Steps to Buying Life Insurance (continued)

3. Select only a high-quality insurance company based on company ratings

•Price is not the only criteria.  You also want the company to be around to pay the benefits.  Remember, you are looking for a long-term insurance relationship

4.  Select an insurance agent with whom you feel comfortable and are not pressured

•Study the agent’s recommendations and ask for a point-by-point explanation if there are items you don’t understand

•Understand how the agent is getting compensated

•If they can’t (or won’t) explain all the costs and benefits, go to someone who can

•Do your homework

ü5.  Use wisdom in your decisions

•Make sure you check out the insurance company and read your policy when you receive it to ensure it is correct.  It must all be in writing!

•Consider alternative approaches: the net or an advisor

•Make sure you feel good about the decision before you sign anything or send money. Don’t rush into a decision.

•Make your check payable to the insurance company, not the agent, and be sure you are given a receipt for all money’s given.

Steps to Buying Life Insurance (continued)

There is a difference between choosing an agent, and being chosen by an agent.  The selection decision is up to you—use it wisely.

•Read your policy carefully during your “free-look” period.  Review your insurance policy annually after that.

•If you are changing policies, make sure you clearly understand the consequences.  Surrendering your policy to buy another could be very, very, very (get the hint) costly.

•If you have a complaint, contact your agent and the state insurance department

üb. Other information for a needs approach would be funeral expenses, debt elimination, children’s educational expenses, mission expenses, social security benefits, etc. Notice that the earnings multiple approach does not take into account your individual level of savings or your current financial condition.

Questions

•Do you have any questions on life insurance?

B. Understand the Key Areas 

of Disability Insurance

Determining Which Type of Life Insurance Is Best for You

üFor most, convertible (convertible to a cash-value policy) renewable (up to 30 years) term is the cheapest and best alternative (especially for students)

•Goal:  Income Replacement of breadwinner

•Relatively low cost

•Affordable coverage when life insurance is needed the most

•Can afford to carry the coverage needed for the time needed

•While it becomes very expensive with age, it may be less necessary as your other assets grow so you may need less insurance in the future

üCash-value insurance may be the best choice if you meet very specific criteria:

•Goal:  Medical Insurability.  You have a history of medical problems (and if you already have convertible term insurance) you can’t be denied life insurance if you convert

•Goal:  Estate Planning.  Your assets are very large, and you have estate planning issues (i.e., you need to shield some of your assets should you die)

•Goal:  Retirement Savings. You have already invested the maximums in your tax deferred accounts (IRA, 401k, Roth, SEP-IRA, etc.) and want additional tax-deferred savings

üStill unsure of yourself?

•Consider a renewable convertible term policy. 

•It allows the low cost of term insurance, with the ability to convert to a cash policy in the future within a specific number of years

•It gives you time to re-evaluate your current situation and still retain coverage for you and your family

Note of caution:

•Because of the complexity and high setup costs for cash-value life insurance, it is very expensive to change.  It is therefore of critical importance that you understand why you are buying and what you are buying before you purchase your policy.  These contracts are very expensive to change

•Consumers lose a significant amount of money each year because they buy policies they don’t understand and then cancel them a few years later. 

•Remember the key principles of insurance

Cash-Value Insurance

üWhat is cash-value or permanent insurance?

•It is an insurance contract that is purchased for your entire life with premiums divided between death protection and savings. 

üWhat are its advantages?

•Provides insurance that cannot be cancelled

•Can be used for estate, retirement, and “forced” savings

•What are its disadvantages?

•It is very complex and expensive

•Unless premiums are paid, it can expire worthless

•Certain cash-value products can lose money

Understanding Cash Value Insurance:
The Process

üDifferent types of cash-value insurance?

•Whole life.  For those who want term protection with a savings element

•Universal life insurance. For those who want a flexible policy that combines term protection and tax-deferred savings

•Variable life. For those who want term protection and to manage their own investments with an opportunity for tax-deferred savings.

•Variable Universal Life.  For those who want term protection, full policy flexibility, and to manage their own investments

üThe differences in cash-value products relate to the goals, types of investments, and flexibility

•Goals:  The type of return and risk the insured are willing to take with their investments. 

•Types of investments:  The types of investment vehicles the non-mortality portion of the premiums are invested in, i.e., long-term bonds, short-term cash, stocks, etc.

•Investment, premium and face amount flexibility:  The ability to change the type of investments, monthly premium amounts, or the face value amount during the life of the contract.

üThe key is to understand why you want cash-value life insurance

•Understand your needs

•Understand the individual polices of competing life insurance companies, i.e., the charges and deductions of the insurance company, and fees and expenses of the mutual funds/assets invested in

•Select the policy that gives you maximum benefit at the lowest possible cost to you.

üWhy are cash value premiums higher than term?

•It is priced for your entire life

•Earlier premiums must be priced higher to take into account that mortality costs increase as you age

•It includes a savings component

•These savings must be funded

•It cannot be terminated by the insurance company

•95% of all cash-value policies are paid

•It is more costly and time consuming to administer

•There are more and higher up-front and operating fees, and sales and other charges are higher

üIt is not uncommon for the deductions and fees to range between 5% and 15% of every dollar you put into some types of cash-value insurance. 

•As such, the cash-value portion of this life insurance grows slower than a term policy with the remainder invested

üCash-value insurance is not for everyone, but it may be for some

•Key is to understand your needs and the needs cash-value insurance can fill

•Estate planning, Retirement planning, after all other tax-deferred vehicles have been filled, and Forced savings (but it is not as good as other savings vehicles)

Cash-value Insurance

Important questions to ask about cash-value insurance:

•Are the premiums within my budget?  Are costs reasonable?

•Can I commit to these premiums over the long-term?

•On a variable life policy, what is the assumed interest rate in the illustration?

•Is the classification shown in the illustration appropriate for me (i.e. smoker/non smoker, male/female)

•Which figures are guaranteed and which are not?

•Will I be notified if the non-guaranteed amounts change?

•Is the death benefit guaranteed?

•Will the premiums always be the same, even if interest rates are lower that the illustration?

•Is the illustrated premium sufficient to guarantee protection for my entire life?

•Is the “current rate” illustrated actually the rate paid recently?  What was the current rate in each of the last five years?

•What assumptions have been used regarding company expenses, dividends, and policy lapse rates?

•Does all my cash value earn the current rate?

•Is the illustration based on the “cash surrender value” or “cash value?”  The cash surrender value is usually lower and reflects what will be paid if the policy is cancelled.

Cash-value Insurance for Students

üKey Questions:

•Can you commit to the premiums over the long-term?

•How can you, when you may not have a job?

•Do you need the tax benefits now?

•A 401k or IRA may be better?  Fill those first

•Are the rates of return guaranteed?

•No.  Be careful of people selling these products who do not know what they are selling?

•Do you have a history of medical problems that would preclude your ability to get term insurance?

•In this case, you “might” look into cash-value or convertible term insurance)

 What are the different types of life insurance?

•Term insurance

•Cash value (or endowment)

•Note:  All life insurance is term insurance.  The difference is that cash-value insurance has a separate investment component that accrues, after fees and expenses (and these may be substantial), without taxes

Life Insurance Policy Terms

üPremium

üThe monthly cost of the policy

üFace value

üThe benefit due upon death

üInsured

üThe person whose life is covered by the policy

üPolicy owner

üThe individual or business that pays for and owns the policy

üBeneficiary

üThe recipient of the benefit upon the death of the insured

Different Types of Life Insurance

üWhat is Term Insurance?

•Insurance protection for the insured over a specific term or time period.

üWhat are its advantages?

•It is the least expensive form of insurance

•Death benefit coverage is for a specific term

üWhat are its disadvantages?

•It is only valid if the insured dies during the term

•Insurance may not be renewed once your term expires

•Advancing age increases the cost of insurance

Understanding Term Insurance:
The Process

üWhat are the different types of Term Insurance?

üRenewable term insurance

•Can be renewed for a specific number of years

•Generally have a guaranteed maximum premium for some period of time

•The longer the guaranteed premium (.i.e., 10 years), the higher the monthly or annual premium

üDecreasing term insurance

•Premiums remain constant while the face amount of coverage decreases

•This takes into account the fact that the mortality cost of term insurance increases in later years

•Generally for a specific loss coverage, such as mortgage or child dependency where need changes

üConvertible term life insurance

•Term policy that can be changed to cash-value policy within a specific number of years

Term Insurance (continued)

üWhy are premiums for term much less than cash-value?

•You are only paying for insurance for a specific period, i.e. risk is priced one period at a time

•95% of term policies lapse without payment

•It is generally for a shorter period, i.e. 1-10 years. 

•The longer the period, the more insurance companies must charge higher fees in the early years to offset the more expensive mortality charges and fees in the later years

•Term is generally easier and cheaper to administer

•Fees and sales charges are less complex

Term Insurance (continued)

üKey questions when purchasing term insurance:

•How long can I keep this policy?

•What are the renewal terms of the contract?

•When will my premiums increase?

•Can I convert my term policy to a permanent or cash-value policy?  What are the details?

•How strong is the company financially?

How is it calculated?

ü1. Adjust salary down to compensate for the reduction in household expenses

    2. Choose the appropriate interest rate to match the assumed after-tax and after-inflation earnings on the policy settlement.

ü3. Determine the income stream replacement and annuity

The Needs Approach

üHow is it calculated?

1. Adjust the salary downward

2. Add up all funding needs

The total needs of the beneficiaries includes: immediate, debt elimination, transitional, dependency, spousal life income, education, and retirement funds

3. Subtract current insurance coverage and other available  assets

This is additional coverage necessary

4.  Determine the income stream replacement and calculate the needed annuity

Life Insurance and Your Investment Plan

V.  What Kind of Life Insurance?

How much Life Insurance?

üHow do you determine your Life Insurance needs?

From the old LDS Handbook for Families it states: 

•Insure the family’s breadwinner first, then others, if desired, as income permits. At a minimum, get enough life insurance to pay for such things as a funeral, taxes, mortgage on the home, car payments, and other debts. The next priority should be to get enough insurance that, supplemented by any government retirement benefits the surviving spouse may be entitled to, there will be sufficient to provide for the family and to make provisions for the children’s education and missions. “Handbook for Families:  Preparing for Emergencies,” Ensign, Dec. 1990, 59.

üThere are two different methods of determining how much life insurance. 

•The earnings multiple approach

•The goal is earnings replacement

•It seeks to replace the annual salary stream of a bread winner for X years, normally 5 – 15 times gross salary is recommended.

•The lower general interest rates, the higher the multiple needed

Who needs Life Insurance?

üWho needs life insurance?

•Not everyone needs life insurance.  Those who do include:

üSingle or married with dependents or children

üMarried, single income couple where the spouse has insufficient work skills or savings

üBusiness owners who wish to transfer their businesses to the next generation

üThose whose estate exceeds the estate tax-free transfer threshold

How does Life Insurance Work?

üInsurance is an example of risk pooling

•Individuals transfer (share) their financial risks with others to reduce catastrophic losses from:

•Death

•Accidents, or

•Health problems

Why Life Insurance?

•Insurance is for emergency planning and control of your life

•We have been commanded to keep adequate insurance

•Death is not an excuse for not taking care of our families

How can life insurance help?

•The investor purchases a cash-value product with low fees and expenses, and can direct, to a degree, where the assets are invested.  This become forced savings to aid in achieving the investor’s goals. 

•The investor, upon retirement (or even before), can then borrow against the account.

Why have life insurance?

•It transfers the economic loss of death from an individual to a insurance company by way of a life insurance contract

•It can help us take care of our own and extended families should we die

•Death is not an excuse for disobedience

üOther Benefits: Estate Planning

•Life insurance products can be helpful in making sure there are sufficient funds for estate tax purposes

üAn owner has a business worth $3 million.  When he dies, he wants the business to pass to his son. How can life insurance help?

•The owner puts the business in a trust, with the son as trustee, and buys a $750,000 life insurance policy, with his trust as beneficiary. 

•When he dies, the trust takes the $750,000 policy  and pays the estate taxes.  The son is the beneficiary and now owns the business estate-tax free.

üRetirement Planning

•The cash-value portion of life insurance grows tax-free, after (lots of) fees and expenses

üAn investor wants to save for retirement.  He has already invested the maximum in his 401k, Roth IRA, and other vehicles.  How can life insurance help?

•A cash value product provides both a death benefit and savings component.  The cash value portion grows tax deferred after fees and expenses

•The investor can borrow against the cash value in the insurance contract for a low-cost loan. He will pay a specified interest rate for the loan, and if not paid back, the death benefit is reduced

üForced Savings

•For those without the discipline, life insurance can be an expensive type of forced savings

üThe investor is unable to save for retirement, although he is good at paying his bills.  

Should you insure against all losses?

•No.  Some losses are not as critical as others.  Insure against the critical or serious losses

üCan you classify your risks?

•Yes.  I like two thoughts:

•Frequency of loss

•How often does the loss happen?

•Severity of loss

•How severe are the results if the loss happens?

•What is the key to insurance?

•You need to balance the cost of reducing risk with the severity of the loss

•Insure against high severity losses that rarely occur—those that could have a major impact on the financial condition of you and your family

•Reduce and avoid those other risks that you can

How do you eliminate risk?

•Avoid it.  You can take care of yourself, avoid high risk occupations, eat well, and exercise.

•Reduce it.  You can reduce some risks by adding fire extinguishers and burglar alarms, adding airbags, or getting regular medical checkups

•Assume it.  You  can assume the risk through self-insurance.  If the costs are not too high, you can assume some risks yourself

•Transfer it.  You can transfer the risk to others by purchasing insurance.  You are paying premiums to transfer the risk to an insurance company.

What are the major types of insurance?

•Life Insurance, Health Insurance, and Auto, Home, Disability, and Liability Insurance

üWhat is the purpose of insurance?

•The purpose of insurance is to transfer the risk of certain types of losses or events from yourself to another institution. 

•By transferring risk, it can help you and those you love achieve your specific goals if you die, get sick or become unable to work

•Specific goals may include:

•To take care of your spouse and children

•To raise children without working outside the home

•To be able to go to college and on missions

What is insurance?

              

                  Insurance is a legal contract between you and an insurance firm whereby the firm agrees for a premium (fee) to pay you compensation for certain kinds of losses or events, i.e., death, sickness, compensation for accidents, loss of ability to work, legal expenses, etc.  

What is life insurance?

Insurance that provides compensation to your beneficiaries should you die prematurely. 

This is a high severity risk

Insurance Basics

üInsurance is an important part of becoming financially self-reliant. Elder Marvin J. Ashton said: 

•Appropriately involve yourself in an insurance program. It is most important to have sufficient medical, automobile, and homeowner’s insurance and an adequate life insurance program. Costs associated with illness, accident, and death may be so large that uninsured families can be financially burdened for many years. (Marvin J. Ashton, “Guide to Family Finance,” Liahona, Apr. 2000, 42.)

Insurance Basics (continued)

üPresident N. Eldon Tanner further commented:

•With rising medical costs, health insurance is the only way most families can meet serious accident, illness, or maternity costs, particularly those for premature births. Life insurance provides income continuation when the provider prematurely dies. Every family should make provision for proper health and life insurance. (N. Eldon Tanner, “Constancy Amid Change,” Ensign, Nov. 1979, 80.)

Insurance Basics (continued)