Personal Finance Chapter 9

CHAPTER 9 – LIFE, HEALTH, AND DISABILITY INSURANCE Planning an Insurance Program What is the impact on your financial plan of; 1. Health risk: Medical expenses incurred to get health and / or stay healthy 2. Disability risk: Loss of ability to earn an income due to illness and / or injury 3. Risk of Death: Loss of income and potential expenses incurred to death 4. Critical Illness: Expenses incurred following diagnosis of a critical illness 5. Long Term Care: Expenses incurred to cover costs of long-term care             The Purpose of Life Insurance Primary Purpose is to protect someone who depends on you from financial loss related to your death. Proceeds may be needed for; Lump-sum payments Pay off home mortgage or debts at time of death Final expenses; funeral costs Provide education fund for children Income Replacement For spouse and children dependent on your income Estate Purposes Wealth Transfer Pay Estate costs Life insurance is one of the few ways to provide liquidity at the time of death The Principle of Life Insurance Life expectancy: remaining years expected to live, or • the average duration of life remaining for a person of a given age and sex Rate of mortality: probability of death, or • the ratio of the number of deaths in a given group in a year's time to the total number of individuals in the group • factors that affect the rate of mortality include: • age and gender • country and area of residence • occupation and socio-economic class Determining Your Life Insurance Needs    Do you need life insurance? Do you have people you need to protect financially? Do you have a partner who works?           Estimating Your Life Insurance Requirements The Income Replacement Method Assumes you will need 70% of your salary for seven years while family adjusts Assumes a “typical” family with NO liquid assets available that would otherwise reduce your life insurance needs Not always realistic as Survivors can not necessary “adjust” within 7 years Does not consider individual circumstances such as debt levels, income producing assets, current insurance The “Detailed” Method Factors in Income Replacement needs, Lump sum payment needs, Any income producing assets and current life insurance Life Insurance Needs Analysis – Detailed Method 1) What are the survivors income needs? 2) What are the Lump Sum needs? 3) What income producing assets can be used? 4) What current life insurance benefits are in place?       Types of Life Insurance Policies Your insurance plans should meet your current needs Types of insurance Term Life Insurance Permanent Term 100 Whole Life Insurance Universal Life Insurance A good financial planner will recommend the best type of insurance for achieving the stated goals and objectives of the individual         TERM Life Insurance “You die…your family gets paid” Death protection A cost effective way to cover your needs for a specified length of time (5, 10, 20 or 30 years) Generally used to cover a specific temporary need Premium remains level for the term Death Benefit remains level for the term Death Benefit is paid to beneficiary usually within 30 days of death Death Benefit is tax free Protection for a specified period of time       If you don’t pay premiums, coverage stops A renewability option means that at the end of the term you can renew the policy without having a physical. Conversion option allows you to change your policy from term to whole life without a physical. Term to 100 – remains in effect to age 100 Level premium costs significantly less than permanent insurance With decreasing term insurance your premium stays the same, but the amount of coverage decreases as you age.          Whole Life Insurance Death protection – permanent insurance Provides life insurance for as long as you live Premiums A level premium (for life or a specified period of time) Premiums in the early years are greater than is needed to cover the policy, but less than is needed in the later years Cash values The excess premium in the early years creates a cash value inside the policy Policy reserve or Accumulating fund (not insurance companies profits) Universal Life Insurance • Permanent: Lasts for a whole life • Flexible coverage • increase/decrease face amount of ins. • add additional lives • Substitute one life insured for another • Flexible deposits • Flexible investments • Based on the concept of buying term insurance and investing the difference • Investments grow tax free • Death benefit is tax free WHOLE LIFE INSURANCE • Whole Life and Universal Life Insurance: Common Uses – Estate Costs – Capital Gains taxes on investments at death – Leave a legacy • Children • Charity  Life Insurance Contract Provisions Naming your beneficiary, and contingent beneficiaries.           Length of grace period for late payments. Usually 28 – 31 days Reinstatement of a lapsed policy if it has not been turned in for cash Must again qualify as an acceptable risk Incontestability clause stipulates that after the policy has been in effect for a period of time the company cannot dispute its validity Suicide clause during first two years Death benefit equals amount of premium paid Automatic Premium loan uses the cash value to pay the premium if you do not pay it Misstatement of age provision Will pay benefits premium would have bought if age were correct Health Insurance & Financial Planning What is the impact on your financial plan of; 1. Health risk: • Medical expenses incurred to get health and / or stay healthy • Provincial Health Care • Extended Health Care Insurance • Emergency Travel and Long-term Care Insurance 2. Government Plans do not cover: • Prescriptions drugs for those under age 65 • Dental care • Vision care • Specialists and therapists • Semi-private or private hospital rooms • And more…   Emergency Medical Travel Insurance When traveling outside Canada your Provincial Health covers: Cost of treatments as though they occurred in Alberta. Actual costs for treatment outside Canada are substantially higher than what Provincial Health care will pay         Disability Income Insurance Protects your most valuable asset - your ability to earn an income Provides payments to replace income when an insured person is unable to work (due to accident or illness) Disability defined; Own Occupation – the inability to perform the duties of your normal occupation Full benefits paid even if you return to work in another capacity Regular Occupation – the inability to perform the duties of your ordinary occupation Benefits reduced if you return to alternate occupation Disability defined;    Any Occupation – full benefits are paid only if you cannot perform the duties of any occupation for which your experience or education qualifies you Total Disability – unable to work at all Residual or Partial Disability – benefits apply if you are able to work but at a reduced workload       Disability Insurance Trade-offs Waiting or Elimination Period the longer the waiting period the lower the premium Duration of Benefits Amount of Benefits Accident and Sickness Coverage Guaranteed Renewability