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RMI test 3

Terms in this set (57)

Premature death
can be defined as (1) the death of a family head with outstanding unfulfilled financial obligations such as dependents to support, children to educate, or mortgage to pay off or (2) the death of a person that creates negative business consequences.
What cost associated with premature death?
● First, the family share of the deceased breadwinners' future earning is lost forever.
● Second, death results in additional expenses such as funeral costs, estate settlement costs, and other final expenses.
● third, because of insufficient income, some families will experience a substantial reduction in their standard of living.
● finally, survivors face certain noneconomic costs such as intense grief, loss of a parental role model, and counseling and guidance for the children.
Single people
(does not need large amounts of life insurance) the premature death of single people with no dependents to support or other financial obligations are not likely to create a financial problem for others.
Single-parent families
the need for large amounts of life insurance on the family head is great.
Two-income earners with children
● both income earners need substantial amounts of life insurance
Traditional families
● - The working parent in the labor force needs substantial amounts of life insurance.
Blended families
● the need for life insurance on both family heads is great
Sandwiched families
A son of daughter with children provides financial support or other services to one or both parents and a working spouse needs a substantial amount of life insurance
Amounts of life insurance
the need for life insurance varies widely depending on family size, income levels, existing financial assets, and financial goals.
● Two approaches can be used to estimate the amount of life insurance to own:
Human life value approach
Needs approach
Human life approach
the present value of the family's share of the deceased breadwinner's future earnings
Human life value can be calculated by the following steps:
■ Estimate the individuals average annual earnings over his productive lifetime
■ Deduct federal and state income taxes, social security taxes, life, and health insurance premiums.
■ Determine the number of years from the persons present age to the contemplated age of retirement.
■ Using a reasonable discount rate, determine the present value of the family share of earnings for the period determined in step 3.
Needs Approach
a method of determining how much life insurance you need based on funds your family would require to maintain their lifestyle after your death
Among the most important needs for most families are the following:
■ Estate clearance fund
■ Income during the readjustment period(1 or 2 year period following breadwinners death)
■ Income during the dependency period(period till youngest child is 18)
■ Life income to the surviving spouse
■ Special needs
● Morgage
● Educational fund
● Emergency fund
■ Retirement needs
Types of life insurance
term insurance and cash-value life insurance
Term insurance
life insurance protection for a specified number of years with no savings element. It is usually renewable and convertible.
convertible
a term insurance policy that can be converted to a cash value policy.
Types of term insurance
■ Yearly renewable term insurance- is issued for a one year period, and the policyholder can renew for successive one year periods to some stated age without evidence of insurability
■ 5, 10, 20, or 30 years- can be issued for different years but when renewed will cost more with age.
■ Term to age 65- provides protection until the age ofo 65, then it expires.
■ Decreasing term insurance: a form of insurance where the face amount gradually declines each year.
■ Reentry term- policy in which renewal premiums are based on select mortality rates if the insured can periodically demonstrate acceptable evidence of insurability.
Return of premium term insurance: is a product that returns the premiums at the end of the term period, provided the insurance is still in force.
uses of term insurance
1) If the amount of income that can be spent on life insurance is limited, term insurance can be effectively used
2) Term insurance is appropriate if the need for protection is temporary
3) Term insurance can be used to guarantee future insurability
Limitations of term insurance
1) Term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels
2) Term insurance is inappropriate if you wish to save money for a specific need (e.g., college education)
3) Decreasing term insurance does not provide for changing needs and is not an effective hedge against inflation
4) does not develop a cash value
Whole life insurance
cash value policy that provides lifetime protection
Ordinary life insurance
Type of whole life insurance providing protection throughout the insured's lifetime and for which premiums are paid throughout the insured's lifetime.
Legal reserve
Liability item on a life insurer's balance sheet representing the redundant or excessive premiums paid under the level-premium method during the early years. Assets must be accumulated to offset the legal reserve liability. Purpose of the legal reserve is to provide lifetime protection.
Net amount risk
the difference between the legal reserve and face amount of insurance
Cash surrender value
amount payable to the policy owners of a cash value life insurance policy if he or she surrenders the policy. the cash value that can be borrowed in a policy loan
Uses of Ordinary Life Insurance
when lifetime protection is needed, used to save money, builds cash values that can be obtained by surrendering the policy or by borrowing the cash value.
limitations of ordinary life insurance
some people are still under-insured after the policy is purchased
limited-payment life insurance
Type of whole life insurance providing protection throughout the insureds lifetime and for which relatively high premiums are paid only for a limited period.
Single Premium Whole Life insurance
a whole life policy that provides lifetime protection with a single premium payment
Variations of Whole Life Insurance
1) Variable life insurance
2) Universal life insurance
3) Indexed universal life insurance
4) Variable universal life insurance
5) Current assumption whole life insurance
Variable life insurance
a fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer
Universal life insurance
A flexible-premium whole life policy that provides lifetime protection under a contract that separates the protection and saving components. The contract is an interest-sensitive product that unbundles the protection, saving, and expense components.
Universal life insurance has certain characteristics, which include the following:
1. Unbundling of protection and saving component
2. Two forms of universal life insurance
3. Considerably flexible
4. Cash withdrawals permitted
5. Favorable income tax treatment
A distinct characteristic of universal life insurance is the separation or unbundling of the protection component and the saving component.
Premiums
Mortality charge
Expense charges
interest rate
Two forms of Universal Life Insurance
Option A pays a level death benefit during the early years, and the death benefit increases in later years to meet the corridor test required by the Internal Revenue Code

Option B provides for an increasing death benefit which is equal to a constant net amount at risk plus the accumulated cash value
Cash withdrawals permitted
part or all of the cash value can be withdrawn.
Favorable income-tax treatment
the death benefit paid to a named beneficiary is normally received income tax free
Index Universal Life Insurance
A variation of universal life insurance with certain key characteristics; there is a minimum interest rate guarantee; additional interest is credited to the policy based on the investment gains of a specific stock market index; and a formula determines the amount of enhanced interest credited to the policy.
Variable Universal Life Insurance
Similar to universal life insurance with certain exceptions. Cash values can be invested in a wide variety of investments; there is no minimum interest rate guarantee; and the investment risk falls entirely on the policyholder.
Employment benefits
are employer sponsor benefits, other than wages that enhance the economic security of individuals and families. ( Group life insurance, group medical and dental insurance plans, group short term and long term disability plans, paid holidays and vacations.)
Differences between Group insurance and individual insurance
○ A distinct characteristic is the coverage of many persons under one contract. A master contract is a contract formed between the group policyholder and insurer for the benefit of the individual members.
○ Group insurance usually costs less than comparable insurance purchased individually
○ Efficient administration and marketing
○ Individual evidence of insurability is usually not required; rather group underwriting of risks is applied, which means that the characteristics of the group are used to determine the premium, not the characteristics of the individuals in the group.
○ Group plans make use of experience rating- which means the actual loss experience of the group is a major factor in determining the premiums charged.
Basic group insurance underwriting principles
Insurance incidental to the group.
Flow of persons through the group.
Automatic determination of benefits.
Minimum participation requirements.
Efficient administration
Eligibility Requirements in group insurance
- be a full-time employee
- satisfy a probationary period
- apply for insurance during the eligibility period
- be actively at work when insurance becomes effective
Group life insurance plans today have the following characteristics:
Group term life insurance
Conversion of term life into permanent insurance.
Insurance on spouse and dependent children.
Credit life insurance
Group Term Life Insurance
Most common form of group life insurance. Yearly renewable term insurance on employees during their working careers.
Accidental Death and Dismemberment
additional benefits payable in life insurance if the insured dies in an accident or incurs certain types of bodily injury.
Group medical expense insurance
an employee benefit that pays the cost of hospital care, physicians' and surgeons' fees, and related medical expenses
● Group medical expense coverage is available from several types of providers including the following:
○ Managed care organization- generic name for medical expense plans that provide covered services to the members in a cost-effective manner, which includes HMO's, PMO, and POS
○ Commercial insurers- include life and health insurance companies that sell both individual and group medical expense plans.
○ Blue cross and blue shield plans (hospital bills and physician fees)
○ Self-insured plans - means that the employer pays part or all of the cost of providing health insurance to the employees
Manage care plans
a generic name for medical expense plans that provide coverage services to the members in a cost-effective manner, which includes:
○ Health maintenance organizations (HMO's)
○ Preferred provider organization (PPO's)
Point of service POS
Health Maintenance Organization (HMO)
an organization that provides comprehensive medical care to subscribers for a fixed prepaid fee. may have cost sharing provisions.
HMO (Health Maintenance Organization) features include
Organized healthcare plans.
Broad, comprehensive medical services.
Restrictions on the choice of healthcare providers.
Payments of fixed premiums and cost sharing provisions.
Heavy emphasis on controlling cost.
HMO (Health Maintenance Organization) can be classified according to the following four categories:
○ Staff model- physicians are employees of the HMO and are paid a salary and possibly an incentive bonus to hold down cost.
○ Group model-physicians are employees of a group practice that has a contract with the HMO to provide medical services to HMO members
○ Network Model- HMO contracts with two or more independent group practices to provide medical services to covered members.
○ Individual practice association plan- is an open panel of physicians who work out of their own offices and treat patients on a fee for service basis.
Preferred Provider Organization (PPO)
A managed care plan that contracts with healthcare providers to provide certain medical services to the plan member at discount fees. To encourage patients to use PPO providers, deductibles, and coinsurance charges are reduced.
Coordination of benefits provision
provision in a group medical expense plan that prevents overinsurance and duplication of benefits when one person is covered under more than one group plan. The provision specifies the order of payment when more than one group medical expense plan covers the loss.
● The coordination of benefits provisions in most group plans are based on rules:
○ Coverage of an employee is usually primary to coverage as a dependent
○ If the parents of the dependent are married The plan of the parent whose birthday occurs first during the year is primary.
○ If parents of dependent are separated the following rules apply:
■ Parent awarded custody pay first
■ The stepparent pays second
■ Parent without custody pays third
■ Stepparent with person that doesn't have custody pays last
Continuation of group health insurance:
employees sometimes lose their group health insurance for a variety of reasons called "qualifying events." if you lose your coverage you and your covered dependents can elect to remain in your employer's group health insurance plan for a limited period under the Consolidation Omnibus Budget Reconciliation Act of 1985.
● Law applies to firms with 20 or more employees.
● A qualifying event includes termination of employment for any reason, divorce or legal separation, death of the employee, and attainment of a maximum age by dependent children.
Group disability-income insurance
pays weekly or monthly cash payments to employees who are disabled from accidents or illness (long term or short term)
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