CHAPTER 8: INSURING YOUR LIFE. Basic Purpose of Insurance. To protect you and your dependents from the financial consequences of losing assets or income when an accident, illness, or death occurs. Concept of Risk. Risk is defined as uncertainty with respect to economic loss.
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To protect you and your dependents from the financial consequences of losing assets or income when an accident, illness, or death occurs.
Example—not driving to avoid the risk of an auto accident.
Risk avoidance is not always practical or possible!
Example: Driving within the speed limit reduces the likelihood of an accident.
Example: Wearing a seat belt can minimize the effects of an accident.
Example: When your calculator gets stolen, you bear the cost out of pocket.
Example: You transfer the risk to the insurance company when you buy an insurance policy.
An insurance policy is a contract between you and an insurance company in which the insurance company agrees to reimburse you for a loss.
Multiply annual earnings by an arbitrary number (usually 5-10)
Estimate needs and examine available resources
Step 1: Assess Family’s Economic Needs
Life insurance needs are not static. The amount and type of life insurance you need today will probably differ from the amount and type suitable for you 10 or 20 years from now.
1. Term insurance:
Coverage remains the same while premiums increase.
Premiums remain the same while coverage decreases.
Allows insured to renew policy without evidence of insurability.
Allows insured to convert to whole life policy without evidence of insurability.
Disadvantages of Term:
Level premiums paid until death or cancellation of policy.
Level premiums paid for a specified number of years; insurance remains in force until death.
Lifetime coverage purchased with a single premium.
Their purpose is to evaluate the company’s claim paying ability (ability of company to pay future claims).