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Life_Insurance_and_Annuities (part 1) stdt

Why bundle death protection coverage with why savings

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Unformatted text preview: avings Budget reasons Permanent life insurance protection Potential tax advantages with some products Whole Life Insurance Death benefit is generally a fixed amount for the Death duration of the policy (the face amount). Options for Face amount Decreasing face value Decreasing Indexing Indexing Guaranteed insurability Premium payment Single premium whole life policy Limited pay whole life Continuous premium (Straight) Permanent Insurance Savings Accumulation Pre-pay for increasing probability of death Pre-pay generates Cash Value generates The Cash Value in a whole life policy belongs to the The policyholder policyholder Policy surrender can occur due to: Terminate the policy Lapses (early surrender) Non-forfeiture or Surrender Options Cash Reduced paid-up insurance (CSV is used as a single premium to buy the same type of insurance); Extended term insurance (use CSV to purchase extended term insurance for face amount of policy). Whole Life Insurance Death benefit: Amount the beneficiary receives Face amount: Stated amount of coverage Face purchased by the policyholder purchased Death benefit = face amount (for Term and Whole Death Life) Life) Beneficiaries receive the face amount (death Beneficiaries benefit), NOT the cash value + the face amount NOT Whole Life Insurance Amount of death protection varies inversely with Amount the policy’s cash value the Cash value grows each year while death Cash protection (but not face value) declines protection Net amount at risk (insurer’s perspective) or Net Net death protection (insured’s perspective) Net Net Death protection = Net Death benefit – Cash value Death Face amount – Cash value Whole Life Insurance Expense Loadings Generally front-end load expense charges Causes return earned on the savings Causes component to be relatively low for the first few years years Implications of Front-end Loading: Implicit returns on savings accumulated through Implicit life insurance will be low or even negative if the policy is dropped early policy Insurers with lower lapse rates can offer policies Insurers with higher returns with Participating Whole Life Insurance Participating policies: Participating Pay annual dividends Treated as return of premiums, not taxable Conservative assumptions regarding operating Conservative experience and rates of return experience Caution! Use of illustrated dividends Dividend Options Cash Purchase paid-up additional insurance Typically the default option on...
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