Life insurance: What PFMP Staff and Military Families Need to Know
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Transcript of Life insurance: What PFMP Staff and Military Families Need to Know
Life Insurance: What PFMP Staff and Military Families
Need to Know
Barbara O’Neill, Ph.D., CFP®, AFC, CHCRutgers Cooperative Extension
Webinar Objectives• Discuss basic insurance concepts
• Discuss basic life insurance concepts
• Describe different types of life insurance policies
• Discuss how to calculate life insurance needs
• Discuss life insurance information resources
• Discuss military life insurance options
Question #1What types of questions do your clients ask you about life insurance?
Third party risk protection
– Paying a company to share your large financial risks
– Requires a large pool of people pooling the same risk
What Is Insurance?
The Essence of Insurance
• Insurance consists of two basic elements:
– Reduction of risk
– Sharing of losses
• Law of Large Numbers – As the number of members in a group increases, predictions about the group’s behavior become increasingly more accurate
Why Is Insurance Important?
• Protects income and assets• Death
• Disability
• Lawsuits
• May be required by lender – secured loans
• May be required by law• For licensing (i.e., driving, medical practice)
• As employee benefit (health, disability)
Life is Full of Risks…Many Have Financial Consequences
• Damage to car in accident
• Loss of home and/or possessions
• Loss of income due to disability
• Loss of a household earner’s income due to death
• Loss of a homemaker’s services
• Large medical bills for disease or injury
• A court judgment of liability for damages
Common Types of Financial Risks
• Personal Risks
– Loss of income or life
– Illness, disability, or unemployment
• Property Risks
– Losses to property
– Damages by fire, theft, tornado, etc.
• Liability Risks
– Losses caused by negligence
– Injury or property damage to others
Five Ways to Manage Risk
• Do nothing and hope for the best
• Risk avoidance
• Risk reduction
• Risk acceptance
• Risk transfer (insurance)
RiskRiskAvoidanceAvoidance
RiskRiskShiftingShifting
RiskRiskAssumptionAssumption
RiskRiskReductionReductionWays toWays to
ManageManageRiskRisk
Don’t stop at a convenience store in a bad part of town after midnight
Wear seatbelts
Install an alarm system
Buy Insurance
Self Insurance
Source: Garman & Forgue (2010). Personal Finance
Question #2Do you have any other examples to illustrate risk management methods?
Two Key Insurance Concepts
• Loss Frequency – The likely number of times that a loss might occur over a period of time.
• Loss Severity – The potential magnitude of the loss(es) that may occur.
The Relationship Between Severity and Frequency of Loss
Source: Garman & Forgue (2010). Personal Finance
Common Types of Insurance
•Life
•Automobile and motorcycle
•Property (homeowners, renters)
•Health
•Disability
•Long-term care
•Umbrella
How Insurance Works
Insurance Policy – Contract between a person buying insurance (the insured) and an insurance company (the insurer).
An Insurable Interest Must Exist to Buy Insurance
Insurable Interest – When a person or organization stands to suffer a financial loss from a specific risk.
•Example #1: A person who lives in a house that is insured
•Example #2: The spouse of person who is covered by life insurance
Basic Insurance Terms
• Coverage = What insurance contract pays for
• Term = Length of insurance contract
• Premium = Cost of insurance contract
• Claim = Request for insurance benefit payment
• Choice = Level of risk you want to take
– e.g., Amount of insurance coverage, deductibles
• Chance = Possible risks you have; statistics
– e.g., Age, density of area where you live
• Control = Lifestyle and behavior
– e.g., Driving habits, health habits
Insurance Cost Factors
Insurance is Regulated by States
Insurance Information Institute
http://www.iii.org
• Pays when the policy owner dies
• Generally purchased to financially help those left behind
• Provides money to beneficiary(s)
• Can be temporary or permanent coverage
Life Insurance Basics
Financial Planning With Life Insurance
• Protect those who depend on your income from financial loss resulting from your death
– Reduces financial burdens of survivors
• Obtained by purchasing a policy
– The insurance company promises to pay a lump sum (death benefit) to a named beneficiary at the time of the policy holder’s death (or sometimes while they are still alive)
10-22
Other Reasons to Buy Life Insurance
– Pay off a mortgage or debts
– Provide an education or income for children
– Accumulate savings
– Continue a business after key personnel die
– Set up an estate plan (e.g., fund trusts with life insurance)
– Pay estate taxes (e.g., farmers and business owners)
10-23
Key Life Insurance Terms
• Mortality Tables- Provide odds on your dying, based on your age and sex.– Premium is based on life expectancy and projections for payouts for
persons who die (called actuarial tables)
– Older people pay higher premiums because they will die sooner
• Face Amount- The dollar value of protection listed in the policy and amount used to calculate the premium (e.g., $100,000)
• Group Term Insurance- Issued to people as members of a group rather than as individuals
10-24
Key Provisions in a Life Insurance Policy
• Beneficiary and contingent beneficiaries (those who will receive benefits upon the insured’s death)
• Incontestability clause After the policy has been in force for a specified period, the company can’t dispute its validity for any reason (usually 2 years)
• Length of grace period for late payments
• Reinstatement of a lapsed policy if it has not been turned in for cash (must qualify again and pay overdue premiums)
10-25
More Key Policy Provisions
• Non-forfeiture clause allows you to keep accrued benefits in a whole life policy if you drop the policy
• Policy loan provision to borrow against cash value
• Suicide clause during first two years (only get back premiums in the event of suicide)
• Policy rider modifies the coverage by adding or excluding conditions or altering benefits
Common Life Insurance Policy Riders
• Waiver of Premium for disability benefit
• Accidental Death Benefit – “double indemnity”
• Guaranteed Insurability Option (can buy additional insurance at specified intervals without a medical exam)
• Cost of Living Protection (helps maintain purchasing power)
• Accelerated Benefits, also called living benefits (make payments to those who are terminally ill before they die)
10-27
• Often provided as employee benefit (e.g., 1 to 5 x salary)
• Least expensive type of life insurance coverage
• Lasts for specific time period (e.g., 1 to 30 years)
• Provides protection during its term; like “renting insurance”
• No cash value
• Gets more expensive with age
• May not be able to get after age 65
Term (Temporary) Life Insurance
Common Types of Term Life Insurance– Renewable Term- Can renew; higher premium
charged
– Multiyear Level Term- Same premium for set period (e.g. 15 or 20 years)
– Conversion Term- Allows change to a permanent policy
– Decreasing Term- Face value decreases over time (frequently used for mortgages)
10-29
• Combines life insurance coverage and an investment account (a.k.a., cash value)
• More expensive than term life insurance
• Amount of premium based on age when you buy the policy
• Can borrow against the cash value
• Generally need to hold policy a long time for a good investment return
Permanent Life Insurance
Types of Permanent InsuranceStraight-Life or Whole-Life Insurance
– Pay the premium as long as you live– Accumulates a cash value you can borrow against– Look carefully at the rate of return
Limited Payment Policy– Pay premiums for a stipulated period– Policy then “paid up” and you remain insured for life
Variable Life Policy- Fixed premiums; cash put into investment accounts
Adjustable Life Policy- Can change coverage with needs
Universal Life- Can change premium, time period, benefit
There are many variations of these policy types; read the fine print!10-31
Comparison of Premium Dollars for Life Insurance
Source: Garman & Forgue (2010). Personal Finance
Question #3What type of life insurance do you have and why?
Who Needs Life Insurance?
• Do you have people you need to protect financially? Will your
death cause them financial hardship?
– Common Scenario: joint debt with a surviving spouse
• Are you single and have a lot of debt?
– Common Scenario: student loans cosigned by parents
• Do you have parents, relatives, or a charity that you want to
support?
– Common Scenario: divorced parent with children
Avoid being persuaded to buy unnecessary life insurance!
10-34
How Much Life Insurance?• Funeral costs
• Mortgage/debt costs
• Needs of beneficiaries (e.g., number and age)
• Goals (e.g., college costs for children)
• Care expenses for children
• Ability/income of spouse or guardian
• Other financial assets
Online Life Insurance Calculators: www.lifehappens.org/life-insurance-needs-calculator/
http://www.bankrate.com/calculators/insurance/life-insurance-calculator.aspx
Estimating Life Insurance Needs• The Easy Method
– 70% or 75% of your salary for seven to ten years while your family adjusts
– Assumes typical family without special needs
• The DINK Method– Dual income, no kids
– Assumes spouse earnings will continue
– Cover funeral + ½ debts
• The “Family Need” Method– More thorough than the first three methods
– Considers employer provided insurance, Social Security benefits, income, and assets
10-36
“Family Need” Method Process • Follow these steps:
– Estimate annual income needed by survivors
– Calculate # of years income is needed
– Add expenses (e.g., funeral, debt, other)
– Subtract income, such as government benefits and survivor’s income, and existing assets
• Review periodically as needs change
Life Insurance Worksheet #1
Life Insurance Worksheet #2https://www.hr.cornell.edu/benefits/insurance/worksheet.pdf
Types of Life Insurance Companies
2 Types of Life Insurance Companies
Type of Company Owned by
Stock life Insurance Shareholders
Mutual life insurance Policyholders
10-40
Stock Life Insurance Companies
• Owned by shareholders
• Sell non-participating (non-par) policies
• Majority of life insurance companies
• Consider the financial stability of the insurance company
10-41
Mutual Life Insurance Companies
• Owned by policyholders
• 5% of policies are from this type of company
• Participating policy premiums are higher than non-participating policies
– Part of the participating premium is refunded to the policyholders annually in the form of a policy dividend
10-42
Other Types of Life Insurance • Group life insurance
– Term insurance
– Often provided by an employer
– No physical is required
• Credit life insurance
– Debt paid off if you die
• Mortgage, car, furniture
– Expensive protection (usually overpriced)
• Endowment Life Insurance- pays policyholder a lump sum if still living at end of the endowment period
10-43
Buying Life InsuranceConsider:
– Present and future sources of income (self/spouse)
– Accumulated assets
– Outstanding debts
– Group life insurance benefits (if any)
– Special needs of family members
– Available Social Security benefits
– Financial strength of insurance companies
10-44
Buying Life Insurance• Compare policy costs based on:
– Company’s cost of doing business
– Return on company’s investments
– Policy features
• Interest-adjusted index
– Used to compare policy costs
– Lower index = lower cost policy
– Like an APR for credit or APY for bank products
10-45
Buying Life Insurance• Research insurance company ratings by major rating
firms:
• A. M. Best
• Standard and Poor’s
• Duff & Phelps
• Moody’s
• Weiss Research
• Talk to knowledgeable friends/family or advisors
• Check out online premium quote services
• Visit sites such as www.quotesmith.com
Male, born 1/1/1980; 190 lb; Living in New York State
$400,000 term insurance – 10 years
Preferred (best health), never smoked
$55+ per quarter ($220/yr)
Standard, current smoker
$155+ per quarter ($620/yr)
Sample Online Life Insurance Quote
Source: www.directquote.com
Question #4What other factors do you tell people to consider when buying life insurance?
Choosing an Insurance Agent
• Ask friends, family and/or other financial advisors for recommendations.
• Does the agent belong to insurance industry professional associations
• Is the agent a Chartered Life Underwriter (CLU)?
• Is the agent willing to take the time to answer questions and find a policy that is right for you?
• Do you feel pressured?10-49
Obtaining and Examining a Policy
• First step: apply for policy
• Second step: provide medical history
– Usually no physical for a group policy
• Read the contract carefully
• Use the “free-look” period to change your mind, if necessary
• Give beneficiaries and executor(s) of your will a photocopy of the policy (or key data about it)
• Review periodically; revise as needed10-50
Life Insurance Evaluation Service
• Compares costs and benefits of cashing in a policy or keeping it and buying different forms of coverage
• By Consumer Federation of America, a national consumer advocacy group
• Costs about $100 for the evaluation
www.evaluatelifeinsurance.org/#two
Should You Switch Policies?
• Switch if benefits exceed costs of getting new physical exam and paying policy set-up costs
• The older you are, the higher the premium
• Are you still insurable?
• Can you get all the provisions you want?
• NEVER cancel an old policy until new policy is in hand
10-52
Choosing Settlement OptionsSettlement Options = choices of how the insurance money is paid out
– Lump-Sum Payment = most common method
– Limited Installment Plan
• In equal installments to beneficiary for a specific number of years after your death (e.g., 10-years)
– Life Income Option
• Payments to the beneficiary for life
– Proceeds Left with the Company
• Pays interest to the beneficiary
10-53
Life Insurance for Military FamiliesServicemembers' Group Life Insurance (SGLI)
• Low cost group term life insurance automatically available to all active service members
• Automatically activated for $400,000; SM can elect lower coverage or no coverage
• Coverage in effect for 120 days after discharge
• Dependent children automatically insured for $10,000 at no additional cost to SM; generally until child is 18
– Unless child is a full time student or totally disabled
• Can convert to Veterans Group Life Insurance when released from service
More About Military Life Insurance• Depending on family needs, SM may require more coverage, but
SGLI is a good base to build on
• Key form for all transactions related to SGLI: Form SGLV 8286, Servicemembers’ Group Life Insurance Election and Certificate
• Benefits for beneficiaries do NOT pass through a will; beneficiaries must be listed on SM’s SGLI documents
• When life events happen, it is important for SMs to keep their life insurance beneficiaries current
– Two types of beneficiaries: Primary and Contingent
– Beneficiary Designation Worksheet: http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf
More About SGLI• Premium ranges from $3.25/mo for minimum
$50,000 to $26/mo ($312/yr) for $400,000 (cost: $3.25 per $50,000 of coverage)
• Coverage can be extended for up to two years if the Servicemember is totally disabled at separation
• Part-time coverage is provided to Reserve members who do not qualify for full-time coverage
• Because SGLI is term insurance, there is no cash value; it also does not pay dividends
• Web site: http://benefits.va.gov/insurance/sgli.asp
Veterans Group Life Insurance (VGLI)
• After SM leaves military, SGLI can convert to VGLI
• See http://benefits.va.gov/insurance/vgli.asp
• SM should compare VGLI premiums and features with individual policies to determine the best deal
• SM have 120 days from military separation to apply for VGLI
• VGLI is renewable term life insurance with no cash value
• SM may purchase in multiples of $10,000 up to $400,000
– Coverage cannot exceed what SM had under SGLI at the time of separation from service
Traumatic Injury Protection Under SGLI (TSGLI)
• See http://benefits.va.gov/insurance/tsgli.asp
• Extra $1/mo premium ($26 + $1 = $27 total monthly)
• Provides payment for SM suffering a traumatic loss: loss of sight, hearing, speech, or limbs (on or off duty)
• Rider attached to SGLI policy
• Only covers SM; spouse/children are not eligible
• Pays a benefit between $25k-$100k (depending on injury)
• Cannot be decline if SM is insured; can only be declined if SM also declines SGLI
Family Servicemembers Group Life Insurance (FSGLI)
• Automatic coverage to spouses (except SM married to SM) and dependent children of an active duty SM covered by SGLI
• Spouse insured for $100k or amount of SM’s coverage, whichever is less; SM spouse must apply for spouse coverage
• Maximum spouse coverage is issued automatically but can be declined or reduced in writing by a SM
• Coverage is issued in increments of $10,000
• Premium increases as spouse ages
• SM is always the beneficiary of FSGLI policy
• Premiums deducted from service pay (shown on LES)
• See http://benefits.va.gov/insurance/fsgli.asp
Question #5What else is important to tell service members and their families about life insurance?
In Summary• Life insurance is an important building block
for family financial security
• Life insurance policies can be temporary (term) or permanent with cash value
• The best way to calculate family life insurance needs is with a personalized analysis
• Resources exist to calculate insurance needs
• Check insurance company ratings
Recommended Action Steps• Review your current life insurance policy (if any)
• Make a list of questions for your insurance agent
• Review some life insurance calculators or worksheets (to become familiar with them)
• Do a personal life insurance needs analysis
• Visit the Web site of your state insurance regulator
• Explore available group life insurance options through your employer or a professional association
Questions? Comments Experiences?
Please complete the webinar evaluation and follow the instructions to receive CEU credits.
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