Bảo hiểm - Chapter 13: Buying life insurance

Chapter 13Buying Life InsuranceAgendaDetermining the Cost of Life InsuranceRate of Return on Saving ComponentTaxation of Life InsuranceShopping for Life InsuranceDetermining the Cost of Life InsuranceThe cost of a life insurance policy is the difference between what you pay and what you get backWhen determining the cost of life insurance, four major factors must be considered:Annual premiumsCash valuesDividendsTime value of moneyDetermining the Cost of Life InsuranceUnder the traditional net cost method, the cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figureThis method does not consider the time value of moneyExhibit 13.1 Traditional Net Cost Method Determining the Cost of Life InsuranceThe interest-adjusted cost method is more accurate because it considers the time value of moneyInterest-adjusted cost indices come in two forms:The surrender cost index is useful if the owner expects to surrender the policy after some time periodThe net payment cost index is useful if the owner expects to keep the policy in forceExhibit 13.2 Surrender Cost Index Exhibit 13.3 Net Payment Cost Index Determining the Cost of Life InsuranceInterest-adjusted cost indices can be used to compare policies across insurersThere is a wide variation in costs indices across insurers – it pays to shop around!Most consumers use premiums as a basis for comparison, but agents will supply cost indicesExhibit 13.4 Whole Life Actual Historical Performance $250,000 Male Nonsmoker Preferred Class, Age 45 Policy Issued 12/31/1988. Last Day 12/31/2008.Determining the Cost of Life InsuranceThe Life Insurance Policy Illustration Model Act requires insurers to present certain information to applicants for life insuranceThe goal is to reduce misunderstanding of policy values by policyowners, and reduce deceptive sales practices by agentsA narrative summary describes the basic characteristics of the policyA numeric summary shows the premium outlay, value of the accumulation account, cash surrender values and death benefitThe act also prohibits certain sales practices and requires the insurer to provide an annual reportRate of Return on Saving ComponentThe annual rate of return earned on the savings component of a policy is an important consideration if you intend to invest over a long period of timeThe Linton yield is the average annual rate of return on a cash value policy if it is held for a specified number of yearsCurrent information is not readily available to consumers, so the method has limited useExhibit 13.5 Average Annual Rates of Return for 109 Cash-Value Policies by Year of PolicyRate of Return on Saving ComponentThe yearly rate of return method is based on a formula:The information needed for the calculation is readily available to consumersExhibit 13.6 Benchmark PricesTaxation of Life InsuranceLife insurance proceeds paid in a lump sum to a designated beneficiary are generally received income-tax freeThe interest component of periodic payments is taxable as ordinary incomePremiums are generally not deductibleDividends are not taxable, but interest on dividends retained is taxableIf a policy is surrendered for its cash value, any gain is taxable as ordinary incomeTaxation of Life InsuranceProceeds from a life insurance policy are included in the gross estate of the insured for federal estate-tax purposes if:the insured has any ownership interestthey are payable to the estate The proceeds may be removed from the gross estate if the policyowner makes an absolute assignment of the policy to someone elseThe policyowner must make the assignment more than three years before deathTaxation of Life InsuranceA federal estate tax is payable if the decedent's taxable estate exceeds certain limitsA tentative tax on the taxable estate value is calculatedThe gross estate includes property you own, one-half of the value of property owned jointly with your spouse, life insurance death proceeds in which you have ownership interestThe gross estate may be reduced by certain deductions, such as a marital deduction, in determining the taxable estateThe taxable estate may be reduced or eliminated by a tax credit called a unified creditThe amount of property exempt from taxation will increase in the futureFederal estate taxes are scheduled to expire in 2010Tax will be reinstated in 2011 unless Congress actsExhibit 13.7 Calculating Federal Estate Taxes*Exhibit 13.8 Shopping For Life InsuranceExhibit 13.9 Rating Categories for Major Rating Agencies