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3134 TOPIC 7 Insuring your Life.doc - TOPIC 7 INSURING YOUR...

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TOPIC 7: INSURING YOUR LIFE WHAT IS LIFE INSURANCE? Life insurance - Purchase policy; insurance company promises to pay a lump sum at the time of the policy holder’s death, or sometimes while they are still alive 1. Purpose of life insurance: Protect you and your dependent from losing the asset that you have acquired Shield you and your family from an interruption in your expected earnings Protect someone who depends on you from financial loss related to your death Other reasons are: Pay off a home mortgage or other debts at the time of death To leave as part of your estate To save money for retirement or for income or education for children Uncovered medical expenses and funeral costs Insurance Needs i. Auto and homeowner’s insurance Reimbursement for damages and destruction to existing assets
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ii. Life Insurance Replace income lost due to pre-mature death. iii. Disability Insurance Replace income lost due to disability iv. Hospitalization and health insurance Cover medical cost from illness and or accident 2. Concept of Risk Risk – uncertainty with respect to economic loss Insurance planning will not cause financial devastation. i. Risk avoidance – not participating in activities that have risk of loss Example: not driving to avoid risk of an auto accident. Risk avoidance is not always practical and possible. ii. Loss prevention reduces chance that loss will occur Example: Driving within speed limit reduces likelihood of accidents iii. Loss Control reduces the severity of loss once it occurs.
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Example: Wearing a seat belt can minimize the effect of an accident. iv. Assuming Risk Bear the loss yourself. Bearable if loss is not big Example: When your calculator is lost, you bear the cost out of pocket. v. Transferring Risk Pay someone else to bear your risk of loss. You transfer the risk to the insurance company when you buy an insurance policy. 3. Underwriting Is the process used by insurer to decide who can be insured and to determine applicable rate that will be charged for premiums. It is economically feasible for the insurance companies to assume risk because: Combine the loss experiences of large numbers of people Calculate the probability of frequency of occurrence and amount of loss using past experience. Charge rates in proportion of risk.
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4. Determine your life insurance needs DO YOU NEED LIFE INSURANCE? Do you have people you need to protect financially Do you have a partner who works?
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