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					      FIL 351
 LIFE INSURANCE


   Prof. George Flanigan
Insurance Industry Professor.
         HLV
         Needs Approach

              Single People.
              Single Parent Families
              Two income Earners
              Traditional Families
              Blended Families
              Sandwiched Family.

Summer 2005                    Life Insurance   1
              NEEDS ANALYSIS CHART




Summer 2005          Life Insurance   2
                          FEDERAL ESTATE TAX
         The federal estate tax, also known as a death tax, is a tax
              imposed on wealth transfers made at the holder’s death.

         Virtually from the time it was enacted in 1917, there has
              been pressure for repeal of the federal estate tax.

         Congress enacted legislation to repeal the tax in 2000,
              but President Clinton vetoed the bill.




Summer 2005                         Life Insurance                      3
                  PRE-EGTRRA - 2001 ESTATE TAX
         The federal estate tax applies to one’s taxable estate –
              the gross estate minus allowable deduction, but any tax
              payable is subject to a unified credit that reduces the
              actual tax payable.

         The unified credit was $229,550 in 2001, which exempted
              $675,000 from the estate tax.

         The equivalent exemption was scheduled to increase to
              $1 million in 2006.




Summer 2005                         Life Insurance                      4
                  PRE-EGTRRA - 2001 ESTATE TAX

         Estates in excess of the exempt amount were taxed at
              rates from 37 percent to 55 percent (applicable to estates
              in excess of $3 million).

         A 5 percent surtax applied to estates from $10 million to
              $21 million.




Summer 2005                         Life Insurance                         5
Summer 2005   Life Insurance   6
               ESTATE PLANNING STRATEGIES
         Marital Deduction.

         Maximizing effect of unified gift-estate tax credit.

         Reduce value of the estate by gifts prior to death.




Summer 2005                      Life Insurance                  7
              PROBABILITIES OF DEATH AND DISABILITIES


                   Probability of Death              Probability of 90-Day
      Age          Before Age 65                     Disability Before Age 65
         35                 22%                                  50%
              40            21%                                  48%

              45            20%                                  44%
              50            18%                                  39%

              55            15%                                  32%

              60             9%                                   9%



Summer 2005                         Life Insurance                              8
                ELIGIBILITY AND QUALIFICATION
             Quarter of coverage – one quarter for $870 in earnings
              in 2002.

             Fully insured status – 40 quarters of coverage.

             Currently insured status – 6 of the last 13 quarters.




Summer 2005                       Life Insurance                       9
                                FINANCING

             FICA tax: originally 1%, 7.65% by 2002 (payable by
              employer and employee).

             The tax base: originally $3,000, $84,900 by 2002.

             Medicare tax is not subject to the wage base. It applies
              to total earned income without limit.




Summer 2005                      Life Insurance                          10
                      AMOUNT OF BENEFITS
             All benefits are based on Primary Insurance Amount
              (PIA).

             PIA is amount to which worker would be entitled for
              retirement at age 65.

             PIA is based on worker’s average earnings during
              period of employment, subject to certain adjustments.




Summer 2005                      Life Insurance                       11
                       COMPUTING THE PIA
             Computation period:
              year worker reaches age 22 until year before worker
              reaches age 62, dies, or is disabled.
             Up to 5 years may be dropped. Minimum 2 years in
              computation.
             Earnings are indexed to determine Average Indexed
              Monthly Earnings (AIME).
             Primary Insurance Amount is computed from AIME by
              formula.




Summer 2005                     Life Insurance                      12
          LOSS OF BENEFITS – DISQUALIFYING INCOME

             Disqualifying income is not a “needs” test but a
              retirement test.

             Beginning in 1999, loss of benefits for
              disqualifying income applies only to persons
              under age 65.

             Under age 65, $11,280 was exempt in 2002.

             If earnings exceed exempt amount, benefit is
              reduced by $1 for each $2 the exempt amount is
              exceeded.
Summer 2005                    Life Insurance                    13
        TAXATION OF SOCIAL SECURITY BENEFITS
             Amount of benefits subject to tax depends on combined
              income and filing status.

             “Combined income” is the sum of adjusted gross
              income, tax exempt interest, and one-half the social
              security benefit.

             If combined income is between $25,000 and $34,000,
              up to 50% of social security benefits may be taxed.

             If combined income is over $34,000, up to 85% of the
              benefits may be taxed.

             For those filing joint returns, break points are $32,000
              and $44,000.
Summer 2005                       Life Insurance                         14
                      FUTURE PROJECTIONS
             Trust funds have increased from about $45 billion in
              1982 to more than $1 trillion in 2001.

             Based on intermediate assumptions, trust funds will
              peak at about $3.5 trillion in 2016.

             After 2016, deficits will deplete the Trust funds by 2038.




Summer 2005                       Life Insurance                           15
                    PROPOSALS FOR CHANGE
             Change in system of financing.

             Change in benefit levels
                 Original retirement age was 65.
                 It is scheduled to increase to 67 by 2022.
                 Some have recommended further increase.

             Proposal for “privatization” would allow workers to
              invest in private alternatives to social security (i.e.
              invest in the private sector).



Summer 2005                        Life Insurance                       16
         PRINCIPLES OF WORKERS COMPENSATION

             Negligence is no longer a factor in determining liability.

             Indemnity is partial but final.

             Periodic payments are made to workers.

             Cost of the program is made a cost of production.

             Insurance is required.




Summer 2005                        Life Insurance                          17
         OVERVIEW OF WORKERS COMPENSATION LAWS

             Persons covered

                   None of the laws cover all employees.

                   Most frequently excluded classes are agricultural
                    and domestic employees.

                   Laws permit employer of persons excluded to
                    bring these workers under the law voluntarily.




Summer 2005                       Life Insurance                        18
              WORKERS COMPENSATION BENEFITS
              Medical Expenses.

              Total Temporary Disability.

              Partial Temporary Disability.

              Total Permanent Disability.

              Partial Permanent Disability.

              Survivors’ Death Benefit.

              Rehabilitation Benefits.
Summer 2005                        Life Insurance   19
          SOME UNIQUE CHARACTERISTICS OF LIFE INSURANCE

             The event insured is an eventual certainty and the
              probability of loss increases from year to year.

             Life insurance does not violate requisites of an
              insurable risk; it is not the possibility of death that is
              insured, but of untimely death.

             No possibility of partial loss. All policies are cash
              payment policies.




Summer 2005                         Life Insurance                         20
              LIFE INSURANCE NOT A CONTRACT OF INDEMNITY

              Principle of indemnity applies on a modified
               basis in the case of life insurance.

              When person taking out the policy is the
               insured, insurable interest is not an issue.

                   every individual has an unlimited insurable interest in
                    his or her own life.

                   that insurable interest may be freely assigned.


              Persons other than insured must have an
               insurable interest only at inception of policy.
Summer 2005                         Life Insurance                            21
                  TYPES OF LIFE INSURANCE

         Term Insurance                Cash Value Insurance
         Pure Protection               Insurance and Savings

       Term Insurance               Whole Life Insurance
                                    Endowment Insurance
                                    Universal Life
                                    InsuranceVariable Life
                                    Insurance




Summer 2005                Life Insurance                      22
              RATIONALE FOR DIFFERENT FORMS

        1.    Premium eventually becomes unaffordable for person who wants to
              continue coverage:


                          age 21               $ 1.07
                          age 30                 1.35
                          age 40                 2.42
                          age 50                 4.96
                          age 60                 9.47
                          age 70                22.11
                          age 80                65.99
                          age 90               190.75

        2.    Insurers developed the principle of the level premium as a practical
              method of providing lifetime insurance.



Summer 2005                             Life Insurance                               23
        COMPARISON OF TERM & WHOLE LIFE PREMIUMS


                                                 Level premium reflects an
                                                  overcharge during the early
              Increasing term                     years of the policy, which is
                                                  offset by an undercharge in
              premium
                                                  later years.
                                                 Reserve does not increase
                                                  and then diminish, because
                                                  overpayments by those who
                                                  die are forfeited to the
                                                  reserve for the survivors.

                                LEVEL PREMIUM




Summer 2005                      Life Insurance                                   24
               INCREASE IN RESERVE ON WHOLE LIFE POLICY

              $1,000


                        Decreasing Amount
                          of Protection




                                               Increasing
                                               Savings Element



                              Insured’s Age
Summer 2005                   Life Insurance                     25
                  TAX TREATMENT OF LIFE INSURANCE

        Life insurance policies are granted favorable tax treatment in
        two ways:
               Amounts payable to beneficiary at the death of the
                insured are not generally included in taxable income.

                 Income earned on the cash surrender value is not
                  taxed until the policy is terminated and the gain is
                  received.

                 Further, the cost of life insurance is deductible as part
                  of the basis in computing taxable gain.



Summer 2005                         Life Insurance                            26
               TAX TREATMENT OF LIFE INSURANCE

             Favorable tax treatment is allowed only for contracts
              that meet the Internal Revenue Code definition of life
              insurance.

             Internal Revenue Code establishes two tests to
              determine if a contract is “life insurance.”

             If the contract fails to meet one of the two tests,
              earnings on the cash surrender value is currently
              taxable to the insured.




Summer 2005                       Life Insurance                       27
                CASH VALUE ACCUMULATION TEST

             Cash Value Accumulation test will be met if cash
              surrender value of the policy does not at any time
              exceed the Net Single Premium that is required to fund
              future benefits, assuming maturity no earlier than age
              95.

             Computation uses the greater of a 4% interest rate or
              the rate guaranteed by the contract.

             CASH VALUE CORRIDOR TEST




Summer 2005                      Life Insurance                        28
              PERCENTAGES FOR CASH VALUE CORRIDOR TEST

                      Insured’s Age                                Percentage

              More than       Not More Than                 From                To
                 0                    40                    250                 250
                 40                   45                    250                 215
                 45                   50                    215                 185
                 50                   55                    185                 150
                 55                   60                    150                 130
                 60                   65                    130                 120
                 65                   70                    120                 115
                 70                   75                    115                 105
                 75                   90                    105                 105
                 90                   95                    105                 100

Summer 2005                                Life Insurance                             29
               CURRENT LIFE INSURANCE PRODUCTS

             Renewable term: guarantees the insured the
              right to continue coverage for a number of
              additional periods.

             Convertible term: guarantees the insured the
              right to exchange the policy for some type of
              permanent insurance.

             Advantages and disadvantages of term
                provides greatest amount of protection for
                  given dollar outlay.
                temporary protection only.
Summer 2005                    Life Insurance                 30
              CURRENT LIFE INSURANCE PRODUCTS

        Whole Life

             Straight whole life provides protection for
              insured’s entire lifetime (until age 100) with
              premiums payable for lifetime.

             Limited-pay whole life provides protection for
              entire lifetime (until age 100) with (higher)
              premiums payable for a shorter time.

             Single Premium Life.
Summer 2005                     Life Insurance                 31
              CURRENT LIFE INSURANCE PRODUCTS

        Universal Life

             Introduced in 1979 by a brokerage firm.

             Subject to specified limitations, premium, cash value,
              and level of protection can be adjusted up or down to
              meet insured’s needs.

             Premiums are credited to a fund, which is credited with
              policy’s share of investment earnings.

             Fund provides source of funds to pay cost of pure
              protection (term) under the policy.

Summer 2005                       Life Insurance                        32
              CURRENT LIFE INSURANCE PRODUCTS

        Variable Life Insurance

             A whole life contract in which insured has the right to
              direct how cash value will be invested.

             Insured bears the investment risk in the form of
              fluctuations in cash value and amount of protection.

             Amount of premium is fixed, but cash value and face
              amount vary, subject to a minimum.

             Variable universal life combines features of universal
              and variable life insurance.



Summer 2005                       Life Insurance                        33
                CURRENT LIFE INSURANCE PRODUCTS

        Endowment Life Insurance

             Endowment contracts no longer meet the Internal
              Revenue Code definition of life insurance.

             Endowment policies are issued for a term period such
              as 10 or 20 years.

             Endowment policies promise to pay face amount if the
              insured dies during the policy period and also to pay the
              face amount if the insured survives the policy period.


Summer 2005                       Life Insurance                          34
              PARTICIPATING & NON-PARTICIPATING LIFE INSURANCE


               Participating policies pay dividends.

               Originally issued only by mutual insurers.

               Dividend varies from margin built into premium.




Summer 2005                      Life Insurance                   35
        GENERAL CLASSIFICATIONS OF LIFE INSURANCE

        Ordinary life – 58.8% of insurance in force.

             Industrial – less than 1% (0.2%) today, compared with
              10% at one time.

             Group life – 40% of life insurance in force.

             Credit life insurance – about 1.2%.

        Total life insurance in force exceeds $15 trillion.



Summer 2005                       Life Insurance                      36
                  OTHER TYPES OF LIFE INSURANCE

             Besides life insurance issued by legal reserve insurers,
              a small amount (about 2.5%) of life insurance is written
              by other types of insurers.

             Savings bank life insurance (NY, Mass, Conn).

             Fraternal life insurance.

             Veterans life insurance.

             Wisconsin state life insurance fund.


Summer 2005                       Life Insurance                         37
              LIFE INSURANCE PREMIUM COMPUTATION

             Mortality – 1980 CSO Table (separate tables for
              male/female).

             Interest – time value of money.

             Loading – for insurer expenses, taxes, profit.




Summer 2005                     Life Insurance                  38
          COMMISSIONERS 1980 STANDARD ORDINARY MORTALITY TABLE

                              Males                          Females

                    Deaths Per      Life           Deaths Per       Life
              Age     1000       Expectancy          1000        Expectancy

              30       1.73             43.24         1.35             47.65
              31       1.78             42.31         1.40             46.71

              32       1.83             40.46         1.45             45.78

              33       1.91             39.54         1.50             44.84

              34       2.00             38.61         1.58             43.91




Summer 2005                       Life Insurance                               39
                             ONE YEAR TERM POLICY

        Alive at age 21                                         9,810,509
        Number who will die:                                       10,497

        1 year term policy without interest:

                                 $10,497,000
                                   9,810,509                    =     $1.07

        1 year term policy with interest

                           $10,497,780 x 0.95694
                                  9,810,509                 =       $1.02




Summer 2005                                Life Insurance                     40
                       ANNUAL TERM FOR FIVE YEARS


              Age 21       $10,497,780 x 0.95694
                                 9,810,509         =   $1.02

              Age 22       $10,682,000 x 0.95694
                                 9,800,012         =   $1.04

              Age 23       $10,866,000 x 0.95694
                                 9,789,330         =   $1.06

              Age 24       $11,147,000 x 0.95694
                                 9,778,464         =   $1.09

              Age 25       $11,330,000 x 0.95694
                                 9,767,317         =   $1.11


Summer 2005                       Life Insurance               41
               NET SINGLE PREMIUM: 5-YEAR TERM POLICY


                               Amount of                                   Present Value
         Years       Deaths     Claims                 Discount              of Claims

              1      10,497    $10,497,000             0.95694                  $10,044,999
               2     10,682    10,682,000              0.91573                    9,781,828
               3     10,866    10,866,000              0.87630                    9,521,876
               4     11,147    11,147,000              0.83856                    9,347,428
               5     11,330    11,330,000              0.80245                    9,091,890
                                                                                $47,787,890

              5-year term net single premium

                                    $47,787,890
                                     9,810,509            =      $4.8710

Summer 2005                           Life Insurance                                          42
                NET SINGLE PREMIUM: 5-YEAR ANNUITY DUE

                  Number                                             Present Value
       Age         Alive          Claims               Discount        of Claims

        21       9,810,509         $1 due now           $1.000            $9,810,509
        22       9,800,012    $1 due in 1 year         0.95699             9,378,023
        23       9,789,330   $1 due in 2 years         0.91573             8,694,383
        24       9,778,464   $1 due in 3 years         0.87630             8,568,868
        25       9,767,317   $1 due in 4 years         0.83856             8,190,481
                                                                         $44,912,264

              5-year annuity due premium

                                    $44,912,264
                                     9,810,509         =   $4.5779


Summer 2005                           Life Insurance                                   43
                NET SINGLE PREMIUM: WHOLE LIFE POLICY

                                Amount of                              Present Value
       Age        Deaths         Claims                Discount          of Claims

        21        10,497      $10,497,000              0.95694                $10,044,999
        22        10,682        10,682,000             0.91573                   9,781,828
        23        10,866        10,866,000             0.87630                   9,521,876
        **         *****          ******                 *****                        *****
        99        30,698        30,698,000             0.03087                    947,647
                                                                            $1,052,972,752

              Whole Life net single premium

                                   $1,052,972,752
                                    9,810,509     =              $1.07.33


Summer 2005                           Life Insurance                                          44
                     NET LEVEL PREMIUM CONVERSION

        $4.5779 is the actuarial equivalent of
                        $1 now and a $1 payment.
                        every year for 4 years.

        Therefore,

              $4.5779 : $4.8710 = $1 : X
              X = $1.064




Summer 2005                                Life Insurance   45
              RESERVE ON LIFE INSURANCE POLICIES



        Reserve   =   Present Value of            -    Present Value of
                      Future Benefits                 Future Premiums




Summer 2005                      Life Insurance                           46
              POLICY RESERVES – VARIOUS CONTRACTS




Summer 2005                 Life Insurance          47
                     BENEFIT CERTAIN CONTRACTS

             Benefit Certain Contracts are those under which, if the
              insured persists in premium payments, the policy will
              eventually mature and benefits will be payable.

             Cash value policies, under which benefits are payable
              whether the insured lives or dies are benefit certain
              contracts.

             Ignoring the interest on premiums paid, the net single
              premium on benefit certain policies equals the face of
              the policy.



Summer 2005                       Life Insurance                        48
                   BENEFIT UNCERTAIN CONTRACTS



             Benefit uncertain contracts are those under which, if the
              insured persists in premium payments for the entire policy
              period, the insurer may or may not be obligated to make
              payment.




Summer 2005                       Life Insurance                           49
                                 One year term rate

              Number              Discount             Discounted             Net
    Age        Dying    Claims      Rate                 Claims            Premium
      21        10     $10,000      .90                  9,000      $ 9,000/1,000 = $ 9
      22        20      20,000      .90                 18,000      18,000/990    = 18.18
      23        30      30,000      .90                 27,000      27,000/970    = 27.83
      24        40      40,000      .90                 36,000      36,000/940    = 38.29
      25        50      50,000      .90                 45,000      45,000/900    = 50.00




Summer 2005                           Life Insurance                                        50
                                  Five year term rate

              Number
   Age         Dying   Claims    Discount Rate       Discounted Claims Net Premium
    21          10     $10,000        .90                 9,000

    22          20     20,000         .80                 16,000
    23          30     30,000         .70                 21,000
    24          40     40,000         .60                 24,000
    25          50     50,000         .50                 25,000
                                                          95,000      95,000/1000
                                                                      =$95.00




Summer 2005                         Life Insurance                                   51
                                Five Year Endowment


        Age   Dying   Claims     Discount Rate         Discounted Claims   Net Premium
         21    10     10,000          .90                   9,000
         22    20     20,000          .80                   16,000
         23    30     30,000          .70                   21,000

         24    40     40,000          .60                   24,000
         25    50     900,000         .50                  450,000
                                                           520,000         $520,000/1000
                                                                           =$520




Summer 2005                           Life Insurance                                       52
                          Five Year Annuity due
              Number                                                        Net
     Age       Alive     Claims   Discount Rate     Discounted Claims    Premium
        21    1,000      $1,000        1.00              1,000
        22     990        990            .90              891
        23     970        970            .80              776
        24     940        940            .70              658
        25     900        900            .60              540
                                                         3,865          $3,865/1000
                                                                        =$3.865



  Annual premium 5-year endowment:

  3.865: $1    =      $520: X
      X        =      $134.50

Summer 2005                        Life Insurance                                     53
        GENERAL PROVISIONS IN LIFE INSURANCE CONTRACTS

           Entire contract clause.
           Ownership clause.
           Beneficiary clause.
           Incontestable clause.
           Misstatement of age clause.
           Grace period clause.
           Reinstatement clause.
           Suicide clause.
           Aviation exclusions.
           War clause.
Summer 2005                       Life Insurance         54
                         OWNERSHIP CLAUSE

             Ownership rights
                right to assign or transfer the policy.
                right to receive cash value and dividends.
                right to borrow against the policy.

             Usually, the insured is the owner.

             In the event of the death of the insured, the beneficiary
              becomes the owner.




Summer 2005                       Life Insurance                          55
                  INCEPTION OF THE LIFE CONTRACT

             If the application is submitted without the initial
              premium, the insurer makes an offer to the insured and
              no contract until offer is accepted.

             If the initial premium is submitted with the application,
              the insurer acknowledges receipt of the premium with a
              conditional binding receipt.

             Conditional binding receipt makes the policy effective at
              date of application if the applicant is found to have met
              the insurer’s underwriting standards.



Summer 2005                       Life Insurance                          56
                    BENEFICIARY DESIGNATIONS




             Primary             Contingent



             Revocable           Irrevocable




Summer 2005                Life Insurance       57
                             REINSTATEMENT
             If a lapsed policy has not been surrendered for its cash
              value, it may be reinstated within 5 years from the date
              of lapse.

             Reinstatement requires that the insured
                 provide evidence of insurability.
                 pay overdue premiums plus interest.
                 reinstate any indebtedness with interest.




Summer 2005                       Life Insurance                         58
                        SETTLEMENT OPTIONS

             The interest option.

             Installments for a fixed period.

             Installments for a fixed amount.

             Life income options.




Summer 2005                      Life Insurance   59
        TABLE 14.1 Installments for a Fixed Period
              Minimum Monthly Installments for Each $1000 of Net Proceeds

      Period         Monthly    Period         Monthly      Period    Monthly
      (Years)        Payment    (Years)        Payment      (Years)   Payment

       1             $84.65        11             $9.09       21        $5.56
       2              43.05        12                8.46     22         5.39
       3              29.19        13                7.94     23         5.24
       4              22.27        14                7.49     24         5.07
       5              18.12        15                7.10     25         4.93
       6              15.35        16                6.76     26         4.84
       7              13.38        17                6.47     27         4.73
       8              11.90        18                6.20     28         4.63
       9              10.75        19                5.97     29         4.53
       10              9.83        20                5.75     30         4.45

Summer 2005                               Life Insurance                        60
                         LIFE INCOME OPTIONS

             Straight life income.

             Life income with period certain.

             Life income with cash refund.

             Life income with installment refund.

             Joint and survivor income.




Summer 2005                       Life Insurance     61
        CHAPTER 14 THE LIFE INSURANCE CONTRACT – GENERAL PROVISIONS




Summer 2005                     Life Insurance                        62
                  JOINT AND SURVIVOR LIFE INCOME OPTION
              Minimum Monthly Joint and Survivor Life Income with Payments Certain for 10 Years per $1000 of Proceeds


       Male                                               Female Adjusted Age
      Adjusted                                                                                                    85
                          55             60             65                70          75            80
        Age                                                                                                     and over
          55            $4.16          $4.34          $4.51              $4.65      $4.76         $4.84          $4.88
          60             4.26           4.51           4.75              4.98       5.16           5.29           5.37
          65             4.35           4.65           4.98              5.31       5.61           5.84           5.98
          70             4.41           4.76           5.17              5.62       6.07           6.44           6.68
          75             4.46           4.84           5.32              5.88       6.48           7.03           7.42

          80             4.48           4.89           5.41              6.05       6.79           7.52           8.07

        85
      and over           4.50           4.92           5.46              6.15       6.99           7.85           8.53




Summer 2005                                             Life Insurance                                                     63
                    TAXATION OF POLICY PROCEEDS
             Benefits under a life insurance policy are not subject to the
              federal income tax, except for post-death interest on the
              policy proceeds.

             Monthly proceeds for 10 years on a $100,000 death benefit
              will be $983, or $11,796 annually.

                   $10,000 annually is the tax-exempt death benefit.

                   The $1,796 annually represents taxable interest.

             When proceeds are payable under a life income option, the
              taxable interest is determined based on the beneficiary’s life
              expectancy using IRS mortality tables.




Summer 2005                          Life Insurance                            64
                                  TABLE OF GUARANTEED VALUES

END OF                                                                     $100,000
POLICY                    CASH                        PAID-UP         EXTENDED TERM
 YEAR         JANUARY 1   VALUE                     INSURANCE          INSURANCE TO

       1        1987      $        0                     $        0
       2        1988           1,078                          5,000
       3        1989           2,201                          9,800
       4        1990           3,371                         14,400
       5        1991           4,588                         18,700

       6        1992           5,852                         22,900
       7        1993           7,165                         26,800
       8        1994           8,528                         30,500
       9        1995           9,942                         34,100
      10        1996          11,411                         37,400

      11        1997          12,933                         40,600
      12        1998          14,515                         43,700
      13        1999          16,156                         46,600
      14        2000          17,860                         49,300
      15        2001          19,629                         51,900

      16        2002          21,466                         54,400
      17        2003          23,370                         56,800
      18        2004          25,341                         59,000
      19        2005          27,380                         61,100
      20        2006          29,486                         63,100

AGE 60          2011          38,328                         71,800
AGE 65          2016          47,545                         78,800
AGE 70          2021          56,741                         84,400




Summer 2005                             Life Insurance                                65
                       POLICY LOAN PROVISION

             Insured may obtain a loan from the insurer equal to the
              policy cash value.

             Loan is subject to a “delay clause,” up to 6 months.

             Interest of 5% or 6% on older contracts, 8% on newer
              contracts.

             Since 1980, NAIC rules allow variable interest rate on
              policy loans.




Summer 2005                       Life Insurance                        66
                        DIVIDEND PROVISIONS

             Cash.

             Applied to payment of current premium.

             Purchase paid up additions.

             Left to accumulate.




Summer 2005                         Life Insurance     67
   $500,000 90 Life
   For Joe Client Age 30       Male

   Contract Premium $6,210.00
   Premiums                            Annual            Mo. ISA          Annual Income*
                                                                           @60 $39,084
                                                                           @65 $64,306
                                                                           @76 $187,750
    Insurance                         6,210.00#           540.27        Based on current (2-16-03)
                                                                      Installment Refund rates & may change

    Indexed Protection                  370.00             32.19
    Disability Waiver                   150.00             13.05
    IPB Waiver                           85.00              7.40
    300,000 Accidental Death              216.00           18.80
    100,000 Additional Purchase           150.00           13.05
     Subject to underwriting limits



   # Premium included throughout
   *Non-guaranteed illustrated values and benefits include dividends. Dividends assume no loans;
             loans may reduce dividends. Illustrated dividends reflect current (2003 scale) claim,
             expense and investment experience and are not estimates or guarantees of future results.
             Dividends actually paid may be larger or smaller than those illustrated.


Summer 2005                                        Life Insurance                                             68
Summer 2005   Life Insurance   69
                   DISABILITY WAIVER OF PREMIUM

             Insurer agrees to waive all premiums coming due
              after the insured has become totally and permanently
              disabled as a result of sickness or bodily injury.

                 Disability must commence before some specified age,
                  usually age 55 or 50, but as high as 65 in some
                  contracts.

                 Disability must have lasted for six months.

                 Premiums are waived from commencement of the
                  disability, including the first six months.




Summer 2005                         Life Insurance                      70
                   DISABILITY WAIVER OF PREMIUM

             One of the most important aspects of the disability
              waiver of premium provision is the definition of
              disability.

                 Disability usually defined as the inability of the insured to
                  engage in his or her own occupation during the first two
                  years of incapacity.

                 Thereafter, disability is defined in terms of an occupation
                  for which the insured is reasonably fitted by education,
                  training, or experience.




Summer 2005                          Life Insurance                               71
                     ACCIDENTAL DEATH BENEFIT

        Commonly known as double indemnity

                 Pays an additional sum equal to the face of the
                  policy if the death of the insured is caused by
                  accident.

                 Death must result, directly and independently of all
                  other causes, from accidental bodily injury and within
                  90 days after the injury.

                 The accidental bodily injury and death must occur
                  before a specified age, usually age 70.


Summer 2005                        Life Insurance                          72
                    GUARANTEED INSURABILITY OPTION

                 Permits an insured to purchase additional amounts of
                  insurance at stated intervals without providing evidence
                  of insurability.

                   The customary option dates are at ages 25, 28, 31,
                    34, 37, and 40.
                   The option amount is limited to the face amount of
                    the basic policy or a specified option amount,
                    whichever is the smaller.
                   The maximum amount of each option was originally
                    $10,000, but limits of $25,000 and higher are now
                    available.



Summer 2005                           Life Insurance                         73
                     COMMON DISASTER CLAUSE

             Uniform Simultaneous Death Act provides that where
              the insured and the beneficiary have died and there is
              no evidence that they died other than simultaneously,
              life insurance proceeds shall be distributed as if the
              insured survived the beneficiary.

             Where there is evidence that the beneficiary survived
              the insured, even for a short time, the life insurance
              proceeds go to the beneficiary and then to his or her
              estate.




Summer 2005                       Life Insurance                       74
                          SPENDTHRIFT CLAUSE

              The Spendthrift Clause denies the beneficiary the
               right to commute, alienate, or assign his or her
               interest in the policy proceeds.

               Used only in conjunction with an installment
                settlement option.

               Provides some protection against the beneficiary’s
                extravagance that might result in the dissipation of
                the policy proceeds.

               Also provides some protection against claims made
                by creditors of the beneficiary.
Summer 2005                       Life Insurance                       75
                        COST-OF-LIVING RIDERS

              Under a cost-of-living rider, the insurer offers the
               insured additional coverage (for which the insured pays
               an added premium) when the Consumer Price Index
               Increases.

               Principal advantage is that the additional insurance
                is offered without evidence of insurability.

               If the insured rejects any of the increases, the
                insurer may require evidence of insurability for the
                next increase.



Summer 2005                       Life Insurance                         76
              MORTGAGE REDEMPTION POLICY




Summer 2005            Life Insurance      77
              JOINT MORTGAGE REDEMPTION POLICY

             Decreasing term, written on two lives.

             Designed to cover mortgage obligation of a two-income
              couple in the event one dies.

             Premium is slightly less than separate individual mortgage
              protection policies on each partner.




Summer 2005                       Life Insurance                           78
                     SURVIVORSHIP WHOLE LIFE

             Also called “second-to-die” policy.

             Insures two lives and pays only at the time of the
              second death.

             Designed to cover estate taxes payable at the death of
              a surviving spouse, since marital deduction will not be
              available under the federal estate tax.




Summer 2005                       Life Insurance                        79
                        OTHER SPECIAL POLICIES

             Return of Cash Value Policy.

             Return of Premium Policy.

             Family Protection Policy.

             Family Income Policy.

             Family Maintenance Policy.




Summer 2005                       Life Insurance   80
                         MODIFIED WHOLE LIFE

             Premium for first 3 to 5 years is slightly higher than
              premium for term.

             At end of 3-to-5 year period, premium increases to
              slightly more than premium for whole life at inception,
              but less than whole life premium at the attained age.

              First 5 Years                                  Thereafter
              5-year term converted to whole life 4.23            14.99
              Modified Whole life                 4.58            13.54
              Convertible Term




Summer 2005                        Life Insurance                         81
                   GRADED-PREMIUM WHOLE LIFE

             Initial premium is quite low, but gradually increases and
              levels off sometime between the 10th and 20th year.

             Cash values do not develop until year 10 and are
              relatively low, even by year 20.




Summer 2005                        Life Insurance                         82
                                          Modified Whole
                               Graded Premium Whole Life
                                              Whole Life




Summer 2005   Life Insurance                               83
                             SINGLE PREMIUM LIFE
             Single premium creates an immediate cash value that is sufficient
              to fund cost of benefits over the life of the policy.

             Written on both traditional whole life and variable life basis.

             Rate of return on traditional policies may be guaranteed for
              1 to 5 years.

             Earnings accumulate tax-free until the policy is cashed in.

             Usually no front-loaded commission, but subject to surrender
              charge that diminishes and disappears after from 7 to 10 years.

             Beware corridor rules.




Summer 2005                             Life Insurance                            84
         PROTECTION AND CASH VALUE PER $100 PREMIUM

        At age 25, a $100 premium will purchase

                                                   Cash Value
                                    l     Protection        in 20 years   l

        Yearly-renewable term           $78,000          $       0
        Ten-year term policy             57,000                  0
        Whole life policy                11,300              1,671
        Paid-up at age 65                10,250              1,695
        Twenty-pay life policy            7,400              1,798




Summer 2005                             Life Insurance                        85
              BUY TERM AND INVEST THE DIFFERENCE

             The choice between term and cash value life insurance
              is usually not a risk management decision, it is an
              investment decision.

             The choice is not between term and cash value life
              insurance, but between cash value life insurance and
              other investments.

             In making this choice, cash value life insurance should
              be judged against the same standards as other
              investments.




Summer 2005                       Life Insurance                        86
               LIFE INSURANCE AS AN INVESTMENT

             A considerable amount of literature – much from vendors
              of competing investments – condemns life insurance as
              an investment.

             Much of this literature oversimplifies a complex issue.

             There are some situations in which life insurance
              compares favorably with other investment alternatives.




Summer 2005                        Life Insurance                       87
                    LIFE INSURANCE AS AN INVESTMENT

             Compulsion: often cited as an advantage but not
              particularly compelling.

             Tax treatment is more persuasive
                 Increments to cash value not taxed until received.
                 Insured allowed to deduct cost of protection in
                  computing taxable gain.

             Complementary function of protecting against
              premature death at the same time it provides an
              accumulation.



Summer 2005                       Life Insurance                       88
                              SAMPLE POLICY

      Face Amount             $100,000
      Premium                   $1,533
      CV20                     $29,486
      20 x 1,533               $30,660

      Net Cost                  $30,660
                              - $29,486
                                 $1,174         (Net Cost)

      Per year           $58.70
      Per year, per $1,000      $0.59

      Compare to Cost of Term

              Year 35         $2.50       per $1,000
              Year 45         $4.46       per $1,000
              Year 54         $7.79       per $1,000



Summer 2005                           Life Insurance         89
                   ALLOW FOR TIME VALUE OF MONEY




      PV      1st Premium                       $1,533.00
      PV       of following 19 premium     + $18,526.79
                                             $20,059.79

      PV      CV in 20 years                - $11,112.98 *
                                                $8,946.81

      Per year                                     $447.34
      Per year, per $1,000                          $4.47

      Compare to Cost of Term
            Year 35                        $2.50        per $1,000
            Year 45                        $4.46        per $1,000
            Year 54                        $7.79        per $1,000

      *Financial Calculator; Using table 179: 0.37689 x $29,486 = $11,112.98



Summer 2005                                         Life Insurance             90
          LIFE INSURANCE AS AN INVESTMENT - NEGATIVES

             Life insurance policies have a relatively high expense
              component.

             Front-loaded commissions make return during early
              years negative and in the long-run less attractive than
              alternatives.

             Actual rate of return depends on the time for which the
              policy is held.

             If insurance is considered as an investment, it should
              be considered only as a long-term investment.

Summer 2005                       Life Insurance                        91
              MARKETING REFORM IN LIFE INSURANCE

             In the mid-1990s, many segments of the life insurance
              industry were subject to extensive criticism for their
              market conduct.

                   Headlines referred to practices such as churning,
                    or improper replacements.

                   Vanishing premiums that did not vanish.

                   Misrepresentations during the sales process.

                   Many insurers were subject to class action
                    lawsuits and regulatory actions.

Summer 2005                       Life Insurance                        92
        MARKETING REFORM IN LIFE INSURANCE
             Two areas of concern were illustrations used in marketing
              and the replacement of older policies with the newer
              interest sensitive contracts.

             In response, the NAIC developed new model regulations
              to address life insurance marketing practices.




Summer 2005                       Life Insurance                          93
              LIFE INSURANCE AND DIVORCE AGREEMENTS

         A divorce proceeding may require purchase of new
               insurance or may require continuation of existing
               insurance, or the transfer of existing insurance
               policies to a former spouse.

                    These transactions can have tax implications.
                    In general, tax treatment of premiums paid for life
                     insurance follow the rules applicable to alimony
                     payments.
                    Spouse who is obligated to pay alimony can fund
                     future alimony payments through the purchase of
                     an annuity for the spouse to whom the payments
                     are due.

Summer 2005                        Life Insurance                          94
          ANNUITIES AND PENSION BENEFITS AND RETIREMENT
      ANNUITIES
             Reverse application of the law of large numbers.
             Lifetime guaranteed income to annuitant.
             Persons who live longer offset those who live shorter.
             Every payment to annuitant is part interest, part principal,
              and part survivorship benefit.
             Fixed versus Variable.
             Immediate versus Deferred.
             Single Premium versus Installment.
             Single Life versus Two or More Lives.
             Pure Life Annuity versus Annuity Certain.

Summer 2005                            Life Insurance                        95
                      THE IMPORTANCE OF ANNUITIES
             If Roy Peabody is 65 years old, has saved over the
              years $200,000, and the current rate of interest is 6%,
              he has the following options:

         OPTION 1
        Live off the interest income for the rest of his life and at the time of death his
        children inherit $200,000.


                Years                     Principal                      Withdrawal
                  1                        200,000                         12,000
                  2                        200,000                         12,000
                  3                        200,000                         12,000
                  4                        200,000                         12,000
                  5                        200,000                         12,000


Summer 2005                                Life Insurance                                    96
                                          OPTION 2
        Roy has decided that he has had enough of saving for the kids. He wants to
        live the good life in Florida, but will require $4,000 more annually to do so.
        Year      Principal    Interest            Withdraw    Remaining   From principal
          1      200,000        12,000              16,000     196,000          4,000
          2      196,000        11,760              16,000     191,760          4,240
          3      191,760        11,506              16,000     187,266          4,494
          4      187,266        11,236              16,000     182,502          4,764
          5      182,502        10,950              16,000     177,452          5,050
          6      177,452        10,647              16,000     172,099          5,353
          7      172,099        10,326              16,000     166,425          5,674
          8      166,425        9,985               16,000     160,410          6,015
          9      160,410        9,625               16,000     154,035          6,375
         10      154,035        9,242               16,000     147,277          6,758
         11      147,277        8,837               16,000     140,113          7,163
         12      140,113        8,407               16,000     132,520          7,593
         13      132,520        7,951               16,000     124,471          8,049
         14      124,471        7,468               16,000     115,940          8,532
         15      115,940        6,956               16,000     106,896          9,044
         16      106,896        6,414               16,000      97,310          9,586
         17       97,310        5,839               16,000      87,148         10,161
         18       87,148        5,229               16,000      76,377         10,771
         19       76,377        4,583               16,000      64,960         11,417
         20       64,960        3,898               16,000      52,858         12,102
         21       52,858        3,171               16,000      40,029         12,829
         22       40,029        2,402               16,000      26,431         13,598
         23       26,431        1,586               16,000      12,017         14,414
         24       12,017          721               16,000       (3,262)       15,279
          25
Summer 2005       (3,262)        (196)                16,000
                                          Life Insurance       (19,458)        16,196       97
                                       OPTION 3
        Roy decides to move to Florida and discovers the joys of golf
        and fishing. He figures that he will not live much longer so
        $20,000 annually seems like a better retirement income.
         Year   Principal   Interest             Withdraw   Remaining   From principal
          1     200,000     12,000                 20,000   192,000          8,000
          2     192,000     11,520                 20,000   183,520          8,480
          3     183,520     11,011                 20,000   174,531          8,989
          4     174,531     10,472                 20,000   165,003          9,528
          5     165,003      9,900                 20,000   154,903         10,100
          6     154,903      9,294                 20,000   144,197         10,706
          7     144,197      8,652                 20,000   132,849         11,348
          8     132,849      7,971                 20,000   120,820         12,029
          9     120,820      7,249                 20,000   108,069         12,751
          10    108,069      6,484                 20,000    94,554         13,516
          11     94,554      5,673                 20,000    80,227         14,327
          12     80,227      4,814                 20,000    65,040         15,186
          13     65,040      3,902                 20,000    48,943         16,098
          14     48,943      2,937                 20,000    31,879         17,063
          15     31,879      1,913                 20,000    13,792         18,087
          16     13,792        828                 20,000     (5,380)       19,172
          17     (5,380)      (323)                20,000    (25,703)       20,323
Summer 2005                            Life Insurance                                    98
                                      OPTION 4
        Roy has decided to see some of the world, in addition to golfing
        and fishing. He needs to increase his retirement income to
        $25,000 annually.
      Year     Principal   Interest              Withdraw       Remaining   From principal
       1       200,000      12,000                     25,000    187,000         13,000
       2       187,000      11,220                     25,000    173,220         13,780
       3       173,220      10,393                     25,000    158,613         14,607
       4       158,613      9,517                      25,000    143,130         15,483
       5       143,130      8,588                      25,000    126,718         16,412
       6       126,718      7,603                      25,000    109,321         17,397
       7       109,321      6,559                      25,000     90,880         18,441
       8        90,880      5,453                      25,000     71,333         19,547
       9        71,333      4,280                      25,000     50,613         20,720
       10       50,613      3,037                      25,000     28,650         21,963
       11       28,650      1,719                      25,000      5,369         23,281
       12        5,369        322                      25,000    (19,309)        24,678
       13      (19,309)     (1,159)                    25,000    (45,468)        26,159

Summer 2005                           Life Insurance                                         99
                                    OPTION 5
              Roy decides to buy an annuity. An investment of
               $200,000 made with Non-Qualified funds will provide an
               income under the following annuity options, age 65 male:
          Annuity Option   Monthly Income             Annualized   Exclusion Ratio
                                                       Income
        Life                  1,625.62                 19,507          51.3%

        Cash Refund           1,483.27                 17,799          52.2%

        Installment
        Refund                1,509.38                 18,113          51.3%
        10 Year Period
        Certain               1,525.10                 18,301          79.2%
        20 Year Period
        Certain               1,385.51                 16,626          60.1%
        Joint and 100%
        to Survive            1,304.58                 15,655          51.1%
Summer 2005                          Life Insurance                                  100
                  ANNUITY CERTAIN CONTRACTS

                 Pure life annuity.

                 Life annuity with period certain.

                 Life annuity with installment refund.

                 Life annuity with cash refund.




Summer 2005                      Life Insurance           101
                    SPECIALIZED ANNUITIES

        Single-Premium Deferred Annuity

               Increased popularity since TRA-86
                eliminated
                 many tax shelters.

               Currently taxed same as other annuities:
                earnings accumulate on tax-deferred basis.

               Some insurers sell SPDAs with deposit
                premium as low as $2,500, but more
                common minimum is $10,000.
Summer 2005                 Life Insurance                   102
                         VARIABLE ANNUITY

                 Designed as a means of coping with inflation.

                 Premiums invested in common stocks or similar
                  investments.

                 Based on assumption that the value of a diversified
                  portfolio of common stocks will change in the same
                  direction as price level.

                 Variable annuity may be variable during accumulation
                  period and fixed during payout period or variable
                  during both periods.


Summer 2005                      Life Insurance                          103
                    QUALIFIED RETIREMENT PLANS

             A “qualified” retirement plan is one that conforms to the
              requirements of the Internal Revenue Code (I.R.C.) that
              must be met for favorable tax treatment.

                   Contributions tax-deductible by the employer
                    when made.

                   Contributions and investment earnings both
                    accumulate without tax until distributed to the
                    employee, usually at retirement.




Summer 2005                       Life Insurance                          104
         CONTRIBUTORY AND NONCONTRIBUTORY PLANS

             Retirement plans may be noncontributory (entire
              cost paid by the employer) or contributory (with
              contributions added by the employee).

                  Employee contributions may be voluntary,
                   or they may be required for participation.

             Employee contributions not usually deductible
              by the employees, but investment income on
              such contributions is not taxed until distributed.


Summer 2005                     Life Insurance                     105
              FEDERAL REGULATION OF PRIVATE RETIREMENT PLANS

               The Employee Retirement Income Security Act (ERISA)
                of 1974 was the most sweeping overhaul of private
                pensions in the history of the country.

                   ERISA prescribes which employees must be
                    included in a plan, sets minimum vesting
                    requirements, specifies contribution limits, and
                    sets minimum funding requirements.

                   ERISA also requires extensive reporting and
                    disclosure information about pension and welfare
                    programs to the Secretary of Labor, the IRS, and
                    to those covered by the plan and their
                    beneficiaries.

Summer 2005                        Life Insurance                      106
                        VESTING REQUIREMENTS

             Vesting refers to the right of an employee to benefits
              accrued if employment terminates before retirement.

             ERISA requires that a qualified plan meet one of the
              following schedules:

                   No vesting for 3 years, with 100% vesting after 3
                    years (called cliff vesting).

                   20% vesting after 2 years of service, with 20% per
                    year thereafter, so that 100% vesting exists after
                    6 years of service.


Summer 2005                       Life Insurance                         107
              TYPES OF QUALIFIED RETIREMENT PLANS

               Defined Contribution.

               Defined Benefit.

               Qualified Profit-Sharing Plan.

               Keogh Plan.

               401(k) Plans.

               Employee Stock Ownership Plan.
Summer 2005                     Life Insurance      108
              SURS PLAN FOR YOUR PROFESSORS
      2.2% * years of service * Average High Four
      Professor Tom
           1. Taught for 30 years
           2. His highest gross income was:
                     27             67,200
                     28             69,900
                     29             70,600
                     last year       72,000 l
                     Average        $69,925

              Pension Benefit 2.2
                                 * 30
                                 * 69,925
                                 $ 46,150
Summer 2005                     Life Insurance      109
                     PREMATURE DISTRIBUTIONS

        10% penalty prior to age 59 1/2 except for

             Deductible medical expenses.

             In form of lifetime annuity.

             At age 55 by worker who meets plan requirements for
              retirement.




Summer 2005                         Life Insurance                  110
                     TAXATION OF DISTRIBUTIONS

             Retirement benefits traditionally paid to participants in
              form of a lifetime annuity although many offer lump sum.

             Installment distributions taxable only to the extent they
              exceed employee’s investment in the contract.

             Lump-sum distributions may be rolled-over into an annuity
              and taxed under installment rules.




Summer 2005                        Life Insurance                         111
              TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS

               Anyone with earned income less than 70 1/2 might be
                eligible to contribute to IRA account.

               Limit is $3,000; spousal is $3,000 as well.

               Contributions fully tax deductible if (1) not covered by a
                company sponsored or (2) covered by a pension plan
                but income less than $33,000 ($50,000).

               Phase out in 2001: $33,000 - $43,000.

               Anyone with income over $43,000 is better off with
                Roth.



Summer 2005                         Life Insurance                           112
                                  NEW ROTH IRA

             Since January of 1998, contributions permitted to Roth IRA
                  Contributions made only on a non-deductible basis.
                  All earnings on the contributions compound tax-free as
                    long as they are not withdrawn for a least five years and
                    there are no taxes due when the funds are withdrawn for
                    retirement (i.e., after age 59 1/2).
                  Annual contributions of 100% of compensation up to
                    $3,000 per individual may be permitted.
                  Single taxpayers with income of up to $95,000 or couples
                    filing jointly with annual income up to $150,000 can
                    contribute full $3,000 annually.
                  No requirement that withdrawals commence at 70 1/2 and
                    contributions to a Roth IRA may continue after age 70 1/2
                    if the individual or spouse has earned income.

             Individuals can have a Traditional IRA and a Roth IRA, but cannot
              contribute more than combined total of $3,000 per year between
              both of these accounts.
Summer 2005                           Life Insurance                              113
                             CHAPTER 20

             HEALTH INSURANCE PERILS:

                Sickness.
                Accident.


             HEALTH INSURANCE LOSSES:

                Lost income (disability).
                Extra expenses (medical expense).




Summer 2005                   Life Insurance         114
              GROUP INSURANCE WORKS BEST WHEN

                  Insurance is incidental to group.

                  Flow of persons through group.

                  Benefits not selected.

                  Minimum participation requirement (100%
                   noncontributing).

                  Part paid for by third party (employer, etc.)

        MUCH OF HEALTH INSURANCE MARKET IS GROUP.
Summer 2005                      Life Insurance                    115
              NEED FOR DISABILITY INCOME INSURANCE

              Probability of disability at most ages before retirement
               is greater than the probability of death.

              Disability can be both total and permanent. Disability
               ranks with death in severity.

              When persons other than the disabled person were
               supported by the lost income, the problem is more
               severe.




Summer 2005                        Life Insurance                         116
               PROTECTION FROM OTHER SOURCES

             Workers Compensation for work-related disabilities.

             Compulsory Temporary Disability programs in
              California, Hawaii, New Jersey, New York, Rhode
              Island, and Puerto Rico.

             OASDI for total and permanent disability.
                Demanding test.
                Many applications rejected.
                Total and permanent.
                6 month wait.

             Employer-provided sick leave or cash benefits.

Summer 2005                      Life Insurance                     117
         DISABILITY INCOME UNDERWRITING AND PRICING

        Occupational Classes and Underwriting:
         Insurers divide risks into three general classes,
           in descending order of desirability
                      Professional.
                      White collar.
                      Blue collar.

             In life insurance, group policies tend to be
              more liberal; in disability income insurance,
              individual policies are generally more liberal.

             Taxation: if pay with after tax dollars,
              payments tax free.
Summer 2005                    Life Insurance                   118
              DISABILITY INCOME CONTRACTS: PERILS COVERED

              Accident only generally called “accident insurance.”

              Accident and sickness generally called “disability
               income insurance.”




Summer 2005                        Life Insurance                     119
                      DISABILITY INCOME CONTRACTS:
                     WAITING PERIODS AND LIMITATIONS

             Waiting Periods in disability income policies act like a
              deductible (60 or 90 days)

             Insurers generally limit percentage of individual’s
              income they will insure

                 About 60% of worker’s wage under short-term
                  policies (group).

                 67% under long-term disability Northwestern
                  Mutual.

                 To protect against possible malingering.

Summer 2005                       Life Insurance                         120
                   DEFINITIONS OF TOTAL DISABILITY
             Own occupation.
             Own occupation or occupation reasonably suited for on
              basis of background, training, experience, or income.
             Any occupation: social security definition.
             Two-tier definition:
                 Own (for 2, 5 years, or even until 65);
                 Then any or reasonably suited;
                 Prime contracts give insured “Your Choice”, so
                    after 2, 5 years can stop working altogether (no
                    more partial, see below) or stop getting benefits;
                 Lesser contract: the claims adjuster determines
                    whether you can go to work


Summer 2005                        Life Insurance                        121
              DEFINITIONS OF TOTAL DISABILITY continued

                Partial disability: insured cannot work as much as
                 used to before accident and can collect difference
                 (called Loss of Earnings approach).

                Pays partial on:                 earnings now l
                                                 pre-loss earning.




Summer 2005                     Life Insurance                        122
              DEFINITIONS OF SICKNESS: PREEXISTING CONDITIONS

               Sickness commencing after policy inception.

               Sickness first manifesting itself after inception.

               Group disability income plans tend to have no
                exclusions or less restrictive exclusions for preexisting
                conditions.

               Prim individually underwritten contracts check today
                and ignore pre-existing condition.




Summer 2005                          Life Insurance                         123
                  OPTIONAL BENEFIT PROVISIONS

             Guaranteed Insurability Option.

             Cost-of-Living Adjustment Benefit.

             Waiver of Premium (may be built in).




Summer 2005                      Life Insurance      124
            INDIVIDUAL HEALTH POLICY CONTINUANCE PROVISIONS

             Noncancelable: guaranteed renewable at guaranteed
              cost.

             Guaranteed renewable: cost can increase but only for
              entire group in rating category.

             Conditionally renewable: only if certain conditions like
              good health.

             Renewable at company option.

             Cancelable.


Summer 2005                       Life Insurance                         125
                   SELECTED UNIFORM PROVISIONS

             Entire contract: like life insurance.

             Time limit on defenses: incontestable.

             Grace period: similar to life but different days
              depending on frequency of payment period.

             Reinstatement: similar to life insurance.




Summer 2005                        Life Insurance                126
                 SELECTED OPTIONAL PROVISIONS

             Change of occupation changes benefit – not in prime.

             Misstatement of age changes benefit.

             Relation of earnings to insurance reduces benefit if
              making less than when policy written.

             Illegal occupation no coverage.

             Intoxicants and narcotics, no coverage.



Summer 2005                       Life Insurance                     127
              TAXATION OF DISABILITY INCOME BENEFITS

              Benefits from individual disability income policies not
               subject to federal income tax.

              Premiums paid by individuals for disability income
               insurance are not deductible for federal tax purposes.

              Sick pay and other disability income payments that
               have been paid for by the employer treated as wages
               and taxable.




Summer 2005                        Life Insurance                        128
              COST OF DISABILITY INCOME INSURANCE


             Premium for disability income depends on

                 Occupation, age, and sex of the insured.
                 Period for which benefits are payable.
                 Amount of the weekly or monthly benefit.
                 Length of the waiting period.


             Most disabilities are short-term; coverage for longer
              periods of disability more economical.

             Waiting period or “elimination period” significant
              influence on cost.

Summer 2005                         Life Insurance                    129
                            FEE FOR SERVICE
             The coverage provided by Blue Cross and Blue Shield
              and insurance companies came to be called fee-for-
              service coverage.

                 Under this approach, insureds were free to
                   choose doctors, hospitals and other health care
                   providers, without insurer approval.

                 The provider and insured agreed on the level of
                   care and the insurer would pay some or all of the
                   providers changes, directly or by reimbursing the
                   insured.




Summer 2005                       Life Insurance                       130
                              FEE FOR SERVICE


             Initially, most fee for service plans provided first-dollar
              coverage (without participation in cost by the insured).

             Eventually, insurers attempted to control costs through
              deductibles and share-loss coinsurance, under which
              the patient bears a part of the cost.




Summer 2005                         Life Insurance                          131
                                  MEDICARE

             In 1965, government entered the market when
              Congress established the Medicare program to provide
              medical expense insurance to persons over age 65.

             The same legislation created Medicaid, a state-federal
              medical assistance program for low-income persons.

             During the years immediately following Medicare in
              1965, the cost of health care (and of private health
              insurance) increased dramatically.




Summer 2005                        Life Insurance                      132
                    MANAGED CARE ORGANIZATIONS
             The solution was the concept of managed care, which
              represented a change not only in the financing of health
              care, but in its delivery as well.

                   New types of “insurers,” such as health maintenance
                    organizations, not only provide for the financing of
                    health care, it also delivers that care.

                   The insurance element in HMOs lies in the way they
                    charge, called capitation.

                   In return for a fixed monthly fee, the individual
                    receives virtually all required medical care, subject to
                    a nominal charge when visiting a physician.




Summer 2005                          Life Insurance                            133
              HEALTH MAINTENANCE ORGANIZATIONS

             Whatever the arrangement with the physicians, the fee-
              for-service system is replaced by a system of
              capitation.

             The subscriber chooses a primary-care physician
              (gatekeeper), who determines what care is received
              and when the patient is referred to specialists.

             Emergency services are provided outside the network
              in case of a sudden illness or injury, which, if not
              treated, could jeopardize the subscriber’s life or health.



Summer 2005                         Life Insurance                         134
              PREFERRED PROVIDER ORGANIZATIONS

             A preferred provider organization is a network of
              providers (doctors and hospitals) with whom an
              insurance company contracts to provide services.
                   The provider offers to discount those services and
                    to set up special utilization review programs to
                    control medical expenses.
                   In return, the insurer promises to increase patient
                    volume by providing higher rates of
                    reimbursement when the care is received from
                    the network.
                   The insured is permitted to seek care from other
                    providers, but pays a penalty in the form of
                    increased deductibles and coinsurance.

Summer 2005                        Life Insurance                         135
                       POINT-OF-SERVICE PLANS

             Eventually some HMOs adopted procedures that made
              them more like PPOs, adopting what are known as
              point-of-service plans (POS).

                 A POS plan operates like a PPO, since the
                  employee retains the right to use any provider,
                  but pays a cost when using a provider outside the
                  network.

                 At the same time, a POS plan is like an HMO,
                  since care received through the network is
                  managed by a primary care physician, or
                  “gatekeeper.”

                 Penalties for using a non-network provider are
                  usually greater than the penalties under a PPO.
Summer 2005                       Life Insurance                      136
                    DOMINANCE OF MANAGED CARE
             HMOs, PPOs, and POS plans all involve an
              arrangement between the insurers and a network of
              providers and offer insureds financial incentives to use
              the providers in the network.

                 Thirty years ago, 90 percent of insureds had fee-
                  for-service plans.

                 Today, 32% of employees are enrolled in PPOs,
                  33% are enrolled in HMOs, 17% are enrolled in
                  POS plans, and 18% are in fee-for-service plans.




Summer 2005                        Life Insurance                        137
                        ACCESS TO HEALTH CARE

             It is estimated that 44 million Americans have no health
              insurance.

                   About three-fourths of the uninsured are
                    employees and their dependents
                   About half of these workers have insurance
                    available at their place of employment but elect
                    not to purchase it.
                   Some of the uninsureds are unemployed and
                    about one-third have incomes at or below the
                    poverty level but do not qualify for Medicaid.



Summer 2005                        Life Insurance                        138
                        ACCESS TO HEALTH CARE

             The problem of access is not limited to the
              economically disadvantaged.

                   It also exists for persons who are unable to obtain
                    health insurance in the standard market.
                   Plans of small employers may exclude coverage
                    for some employees.
                   Persons who must purchase insurance
                    individually sometimes find that they cannot
                    obtain it.
                   It is estimated, however, that only 3 percent of
                    uninsured lack insurance because they are
                    unable to obtain it from a provider.


Summer 2005                        Life Insurance                         139
                     HIGH COST OF HEALTH CARE
             National expenditures for health care, as a percentage
              of GNP, have increased from 4.4 percent of GNP in
              1950 to over 13 percent by 2001.

                    The Aging Population.


                    Improved Medical Technology.


                    Excessive Capacity.


                    Defensive Medicine.


Summer 2005                       Life Insurance                       140
                                    COBRA

             Requires continuance of employer-sponsored group
              health insurance under specified circumstances

                   18 months for terminated employees.

                   36 months for spouses of deceased, divorced, or
                    separated workers or dependent children whose
                    eligibility for coverage ceases.

                   The COBRA participant pays a premium based
                    on the existing group rate.


Summer 2005                       Life Insurance                      141
          TRADITIONAL FORMS OF MEDICAL EXPENSE INSURANCE

             Base Plan Coverage

                   Hospitalization Insurance

                   Surgical Expense and

                   Physicians’ Expense Insurance

             Major Medical Insurance




Summer 2005                        Life Insurance          142
                     MAJOR MEDICAL INSURANCE
             High maximum (or unlimited).

             Deductible.

             Coinsurance or share-loss provision.




Summer 2005                       Life Insurance     143
                        MAJOR MEDICAL EXAMPLE
              Deductible                           500
                                                   80/20

              Stop Loss (not deductible)           3,000

              Expense                              19,000

              Insurer Pays                         14,800 & 700

              Insured Pays                         500 & 3,000

              (19,000 – 500) x 20% = 3,700

Summer 2005                       Life Insurance                  144
              EXCLUSIONS UNDER HEALTH INSURANCE POLICIES

             Individual policy exclusions tend to be more extensive
              than those in group policies and some group contracts
              contain more exclusions than others.
             Exclusions typical of those in individual or group
              contracts include:
                 Expenses payable under workers comp or any
                  occupational disease law.
                 Personal comfort items (e.g., television, telephone,
                  air conditioners).
                 Elective cosmetic surgery.
                 Routine medical care (e.g., annual physical, birth control,
                  well-baby care).
                 Hearing aids and eyeglasses.
                 Dental work.


Summer 2005                           Life Insurance                            145
              EXCLUSIONS UNDER HEALTH INSURANCE POLICIES

              Experimental procedures.
              Expenses resulting from self-inflicted injuries.
              Expenses resulting from war or any act of war.
              Expenses incurred while on active duty with the armed
               forces.
              Services received in government hospital received
               without charge.
              Expenses arising out of mental or nervous disorders.
               (Some policies cover mental and nervous disorders
               subject to a lower maximum or only for a percentage of
               the costs covered.)



Summer 2005                        Life Insurance                       146
              LIMITED HEALTH INSURANCE CONTRACTS

               Dread disease policies.

               Travel Accident.




Summer 2005                    Life Insurance      147
              SOME SPECIALIZED USES OF LIFE INSURANCE IN BUSINESS

              In addition to their use in fringe benefit programs and
               funding retirement benefits, life insurance serves
               several other functions in the business firm:

                  funding business purchase agreements.


                  protecting the firm against the loss of a key
                    employee.

                  additional compensation to executives and other
                    valuable employees.



Summer 2005                         Life Insurance                       148
                BUSINESS CONTINUATION INSURANCE

             Death or disability of an owner can create serious
              problems for remaining owners.

             Ideal solution is to arrange for sale of each owner’s
              interest prior to death through a buy-and-sell
              agreement:

                 cross purchase plan.
                 entity plan.

             Life insurance may be used to fund the buy-and-sell
              agreement.



Summer 2005                        Life Insurance                     149
                       KEY PERSON INSURANCE

             An employee who make a significant contribution to
              success of the organization is a “key person.”

             Death (or disability) of a key person can be a source of
              loss to the organization.

             Key person life insurance is designed to compensate
              for such loss.

             Greatest difficulty in insuring key persons is
              determining the amount for which they should be
              insured.



Summer 2005                        Life Insurance                        150
                     DEFERRED COMPENSATION
             Employer agrees to make payments to an employee after
              retirement, or to employee’s spouse if the employee dies,
              if the employee continues his or her employment with the
              firm to a specified age.

             Employee incurs no federal tax liability on the employer’s
              promise as long as there is no constructive receipt.

             Employers often fund deferred comp arrangements
              through cash value life insurance.




Summer 2005                        Life Insurance                          151
              Questions ??




Summer 2005     Life Insurance   152

				
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