(Information for question 1 and 2 is from MetLife)
1. Explain how term life insurance works.
Term life insurance is often the most affordable because it offers coverage for a specific number of years. You may want to go with term life insurance when you need help covering specific financial responsibilities like a mortgage or college expenses. Of you may want term life insurance to supplement a permanent policy or work policy. There is Simplified Issue Term Life Insurance that has a simple application process with same day approval where you can get coverage listing until you're age 90. It builds cash value nominally , no medical exam is required, and the coverage amount is anywhere from $5,000 to $100,000. Then there is Level Term Life Insurance that is affordable protection for a specific number of years (10-30) at a set price. It does not build cash value, it does require a medical exam, and the coverage among available is $100,000+.
2. Explain how whole life insurance works.
Whole life insurance features guaranteed premiums, death benefits, and cash value. Whole life insurance policies also give you the potential to receive dividends, which can increase the value of the policy when the insured is living or provide an increased death benefit for your beneficiaries. You want to purchase a whole life insurance policy if you want protection for life, payments that stay the same each year, to be able to put money into the policy on a tax-favored basis, and cash value you can use while you are living. Beneficiaries will receive at least face amount of the policy upon the death of the insured, assuming that you do not have outstanding policy loans and that the policy premiums are paid on time. Your cash value will grow each year, tax-deffered,until it matches the face value of you policy. When its needed most you will have access to your cash through loans and withdraw options. A medical exam is required and it does build cash value. Coverage amounts available are $10,000 - no maximum.
3. Explain how variable life insurance works. . What are the advantages and disadvantages of variable life insurance?
Variable life insurance is a type of permanent life insurance, it provides permeant protections to the beneficiary upon the death of the policy holder. This insurance it most of the time the most expensive form of each-value insurance because it allows you to allocate a portion of your premium dollars to separate and account comprised of various instruments and investments funds within the insurance company's portfolio such as stocks, bonds, equity funds, money market funds, and bond funds. Variable policies are considered securities contracts and are regulated under the federal securities law so they must be sold with prospectus. Variable policies allow you to participate in various types of investment options while not being taxed on your earnings. You can also apply the interest earned on these investments toward the premiums, potentially lowering the amount you pay. However, when the invested funds perform poorly , less money is available to lower the premiums meaning that you might have to pay more than you can afford to keep the policies in force. Poor fund performance also means that the cash and/or death benefits may decline. Also, you can't withdraw from the cash value during your lifetime.
5. Compare term life and whole life insurance. What are their advantages and disadvantages?
Term Life - is primarily for when people need insurance but can't afford permanent life insurance or only want coverage for a certain number of years. Term insurance has a guaranteed death benefit but no cash value and the premiums will increase at pre-determined intervals. Term conversion privileges are available with most policies. That privilege allows users to convert to a permanent policy that builds cash value , with not additional medical underwriting. Extending coverage is expensive, to continue to have coverage after your term period is up your options aren't nearly as affordable as your original term life insurance policy. Also, though there is conversion privileges a number of term life policies expire prior to the term periods midpoint.
Whole life - provides life-long insurance protection. Once you've been approved for the coverage the insurance agency cannot revoke your insurance as long as premiums are being paid when they are due. Regardless of your heart, the insurance will stay force. Whole life builds guaranteed cash value , this amount can be used in the future for any purpose you wish via a policy loan. Premiums are higher initially but remain level, regardless of age, for the life of the policy. Also, premiums are guaranteed for the life of the policy. Because whole life policies are designed to last a lifetime , the premiums are far more expensive than those for term life insurance. Also, there's no flexibility. The amount of coverage you buy at the outset is the amount of coverage you're stuck with.
6. If you die, the insurance company has to pay your beneficiaries a lot of money. How do life insurance companies make money?
Insurance companies can make money by underwriting income . Underwriting income is derived from the difference between how much money is collected for all policies sold versus how much money is paid out in insurance claims for these policies in any given time period. For example, insurer "A" may collect $1,000,000 for polices issued or renewed in a given year. If they pay less than $1,000,000 in claims then they have made a profit. If they pay more than $1,000,000 in claims then they have suffered a loss. Then there is investment income. This situation allows insurance companies to invest money while its not being used. Huge profits can be reaped or loss in this situation. On a side note, insurance agencies can enter a new state and purposely charge less than their competitors and after some time raise their rates and hope to hold on to some of the business they collected.
7.Which life insurance is right for you and your family? Which one will you choose and why? For the purpose of this class, use either term life or whole life.
For my future, hypothetical family I believe that I would go with the Whole Life life insurance. I will hopefully be making a lot of money after about 10 years of working and my significant other will hopefully be working as well. That means we would be able to afford spending a little bit more for permanent coverage that will last a lifetime. Also, Whole Life has cash value and if I ever get to a desperate point in my life then I will be able to delve into that cash and use it as needed.
8. Deduct the monthly expense from your budget. Update your budget with he cost of life insurance. Your teachers have the fees for you.
This is a link to my spreadsheet
9. Calculate the amount of money you will spend after 20 years.
One year expense: $250 x 12 = $3,000
20 years expense: $3,000 x 20 = $60,000
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