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Life Insurance

Why are we talking about this?. Life Insurance . Life Insurance. When should I buy?. Life Insurance . What are my choices?. Clarification. “Assurance”- Definite “Insurance”- Possible In the USA, insurance refers to both. Life Insurance. Protection Policy Term Life Investment Policy

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Life Insurance

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  1. Why are we talking about this? Life Insurance

  2. Life Insurance When should I buy?

  3. Life Insurance What are my choices?

  4. Clarification • “Assurance”- Definite • “Insurance”- Possible • In the USA, insurance refers to both

  5. Life Insurance • Protection Policy • Term Life • Investment Policy • Whole Life • Universal Life

  6. Term Life • Face amount (protection or death benefit), • Premium to be paid (cost to the insured), and • Length of coverage (term). • Premium for set term • 5-30 years • ART (Annually Renewable Term) • Level Term Life • Be careful... • Mortgage Term Life • Decreases value every year/ level premium • Set payout at end • No cash value

  7. Whole Life • Permanent Investment • Very high premium • Premium contributes to cash value and total coverage • Very high fees- low internal rate of return when compared to similar, safe investments • High (but often times hidden) commission • As much as 1 year of premiums • Important note: Life Insurance is income tax free- not estate tax free

  8. Example • Say a 40-year-old nonsmoking male has a choice between a $250,000 Met Life universal policy with a $3,000 annual premium and a same amount of renewable term coverage with a 20-year fixed premium of $350. At the end of one year, the universal policy, assuming it paid 5.7% per year, tax-deferred, would have a cash value of exactly zero (cash value is the amount you would get back if you canceled the policy). But say he had instead invested $2,650 (the difference between $3,000 and $350) in a no-load mutual fund that averaged a total return of 10% annually. At the end of the first year, he'd have $2,841, accounting for taxes on the earnings at a 28% rate. At the end of 10 years, he would have accumulated more than $46,000 in after-tax savings in the mutual fund. Over the same period, the cash value of the policy would have climbed only to $31,819. • -Smartmoney.com

  9. Whole Life • Surrender Values often times don't equal premium for 12-15 years

  10. Universal Life • Product generated from advice: “buy term and invest the difference” • Similar to Whole life • Investment policy • No fixed death benefit or premiums unlike whole life • Interest sensitive- moves with interest rates • Financial market sensitive- Variable Universal Life

  11. Key Differences • Universal life offers monthly payment flexibility, and lump sum payment options, as well as flexibility over controlling death value payout • High surrender fee though • While more flexible than whole life both are not good options for people with incredibly variable incomes as taking policy loans

  12. Accidental Death Insurance • Cheap • Like term life • Does not cover health problems, or high risk activities

  13. Side notes • Life insurance can be transferred to the beneficiary before death, to avoid estate taxes • Or put in a trust • Often times it cannot be switched back though- (ie: after divorce) • Estate tax is for over $5 million in 2011-12 • Back to $1 million in 2013 • Now does whole life make sense? • Likewise- you can buy life insurance on someone else • Term life can generate incredible returns • Moral problem?

  14. Unclaimed Life Insurance • How do Life Insurance companies make money? • One way: ¼ of policies are not claimed!

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