640 Class 6 - Class 6 Insurance and Risk Management George...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Class 6 Insurance and Risk Management George D. Krempley Bus. Fin. 640 Winter 2008
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Agenda Review Premature Death Financial Impact of Premature Death on Different Types of Families Methods for Determining Amount of Life Insurance to Own Types of Life Insurance Life Insurance Contractual Provisions
Background image of page 2
Premature Death The death of a family head with outstanding unfulfilled financial obligations can cause serious financial problems for the surviving family members The deceased’s future earnings are lost forever Additional expenses are incurred, e.g., funeral expenses, uninsured medical bills, and estate settlement costs Some families will experience a reduction in their standard of living Noneconomic costs are incurred, e.g., grief
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Economic Justification of Life Insurance The purchase of life insurance is financially justified if The insured has earned income and, Others are dependent on those earnings for financial support
Background image of page 4
Financial Impact of Premature Death on Different Types of Families The need for life insurance varies across family types: Single person Single-parent family Two income earners with children Traditional family Blended family Sandwiched family
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Amount of Life Insurance to Own Three approaches can be used to estimate the amount of life insurance to own: The human life value approach The amount needed depends on the insured’s human life value, which is the present value of the family’s share of the deceased breadwinner’s future earnings To calculate: – Estimate the individual’s average annual earnings over his or her productive lifetime – Deduct taxes, insurance premiums and self-maintenance costs – Using a reasonable discount rate, determine the present value of the family’s share of earnings for the number of years until retirement
Background image of page 6
Amount of Life Insurance to Own The needs approach The amount needed depends on the financial needs that must be met if the family head should die Important family needs must consider: – An estate clearance fund: cash needed for burial expenses, uninsured medical bills, and taxes – Income needed for the readjustment period , a 1-2 year period in which the family adjusts to its new living standard – The dependency period is the period until the youngest child reaches age 18 – Life income to the surviving spouse, including income during and after the blackout period. The blackout period refers to the period from the time that Social Security survivor benefits terminate to the time the benefits are resumed Families should also consider special needs, e.g., funds for college education and emergencies
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Amount of Life Insurance to Own The capital retention approach This approach preserves the capital needed to provide income to the family Income-producing assets are preserved for the heirs To calculate: Prepare a personal balance sheet – Determine the amount of income-producing capital – Determine the amount of additional capital needed to meet the family needs
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 128

640 Class 6 - Class 6 Insurance and Risk Management George...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online