[MUSIC] So one of the topics that is extremely uncomfortable for most people to talk about is there own mortality. However as we get older, and we start to begin families thinking about what might happen if we do die is a very important topic. So let's take a few minutes to talk about life insurance. So what is life insurance? Life insurance, like many insurance policies, is a simple concept. Life insurance is a policy that's going to provide coverage if the insured passes away. So basically, a life insurance policy outlines a death benefit to the policy's beneficiary or beneficiaries. But who's a beneficiary or beneficiaries? Well typically, the beneficiaries are family members and life insurance is thought of something that provides some level of financial protection to offset the losses that occur when somebody in that family does die. So the first thing that's going to happen when you sit down with the insurance specialist, insurance salesman or a financial planner and you start talking about life insurance, is you're going to go through a needs analysis and what that means is determining what level of death benefit you actually need when you go ahead and purchase a life insurance policy. And there's two main steps that are part of that needs analysis process. First, you're going to go through an estimate the amount needed to cover any immediate expenses in the event that you do die. And again it's not a fun topic to talk about, but this expenses would include things associated with your funeral and your burial. And then second, you really going to sit down and think about what level of income replacement and other future financial needs you want to provide for those beneficiaries in the event you do die. Now just like everything that we talk about from a financial planning perspective, everything that we talked about in risk management module. Your needs are going to be very specific to you. So don't let anyone tell you that, this is exactly the amount of courage that you need. It's going to be very specific to your situation and how you would like things to play out in the event that you do pass away at some point in the future. So here's a very simple example with just a couple of numbers that I put together for a sample life insurance needs analysis. So we take a look at this table here, in step one, I've got the estimated funeral and burial costs, and I've listed those at $10,000. Now that may seem like a lot of money to you, but the national average actually falls somewhere between $7,000 and $10,000. In terms of the cost, the total cost of funeral and burial. And then on the second line I've included ten years of lost family income. And I've just thrown out the number of a $50,000 after tax salary over the next ten years. Not considering inflation and not worrying about discounting and taking the present value of that income stream and coming up with the number of $500,000. If we add those up, that would be a total death benefit need, on your insurance policy, of $510,000. Again, that is intended to cover the immediate expenses associated with the funeral, and burial, as well as some of that replacement income that you want to provide, the equivalent of the income level, over the next ten years. Which is the $500,000 component of that death benefit. Now, when you sit down and actually go through this with a financial planner or insurance agent, there's going to be other things that they talk about. There's going to be other potential needs that you might also want to include here. You might want to consider any existing debt that you or your family is carrying, for example the mortgage on the home. If you want to include that. Something that your family members don't have to worry about paying that debt off in the future. You include that in your death benefit. And any other future expenses that you might want to take care of. I know, when I sat down with my insurance agents. We've talked about if I intended to have children and if I wanted to include in my death benefit. The cost associated with sending that child to school, so my wife wouldn't have to worry about that in the future. So there's other things you can include here, this is just a very simple example of an approach to thinking about coming up with that dollar amount for the death benefit on your policy. All right, the other thing I wanted to cover in the few minutes her that we're spending on life insurance is comparing and contrasting the two broad main categories of life insurance. And those would be term coverage and permanent coverage. And in this table I've outlined some of the specifics of each type of policy and categorized them in terms of coverage and pros as well as coming up with some bullet points in the area of cost and cons associated with each policy type. So let's start out with term life. Term life is probably the most simple and basic, form of life insurance coverage that exists. Term life, has a fixed coverage period. So when you buy term life term life insurance, you pick a term or a period for which that insurance covers. You might buy a ten year policy or a 20 year policy or a 30 year policy, all that means is the policy is only covering over that term so for the policy to pay out there has to be a death within that term coverage period. Once the policy expires, the coverage no longer exists. Again, the death benefit level is going to be part of that term policy. That's typically going to be a fixed death benefit that's going to stay the same throughout the term. And it's also typically going to be federally tax free in terms of the payments being made to the beneficiary. Again, term coverage is relatively simple and it's also sold in a very competitive marketplace. Because of its simplicity it's very easy to compare term life policies to one another. So you can go out and get multiple quotes and find the most reasonable or lowest cost term policy that you can find. Now on the other side, if we talk about some of the coverage issues and pros associated with permanent life, whole life coverage is exactly that. That's going to still have a defined death benefit. It's still going to have a most likely federally tax-free payment that is made if the death occurs. But the term period is literally for the rest of your life. So at some point this policy will pay out. It's not a fixed-term, like in the case of term coverage. The other thing with permanent life coverage is that, that separates it from term life coverage is that in addition to the death benefit. A permanent life policy is also going to accumulate some cash value. Now this cash value is going to be something that is going to grow over time. And depending on where you're at in the policy, you may be able to access that cash. In the form of a loan or cancel out the policy and collect that cash value. So there is kind of an investment component that goes along with a permanent policy relative to a term policy which only provides that death benefit. There are some other tax benefits that are often associated with permanent policies. I'm not going to get into a lot specifics there because they vary so much across individual policies. And there's also the potential to receive dividends. So again, because there is an investment component to a permanent life policy of the company that you purchase a permanent life policy through, may also pay out dividends on a regular basis based on performance of the investments that are being financed by the premiums going into that permanent life policy. Now let's take a look at the cost side and some cons associated with both policies. We start again with term life, term is, in general, going to have a lower premium or lower cost for a given death benefit level. So if were comparing term life to whole life and were talking about a five hundred thousand death benefit on both policies, the term life premium is going to be much lower than the permanent life policy. That's because that permanent life policy's providing additional things. It's providing the cash value, it's covering a longer time period than the fixed term, in the term policy, so that's why that policy's going to be more expensive. Both policies should have a fixed, and guaranteed premium during the term. Again, this is something that can differ Across individual policies, but in general, the amount that you pay, every month, or every 6 months, or every year, in terms of premium costs, should remain the same throughout the term on your term policy as well as throughout the remainder of your life in a permanent life policy. Now obviously if you elect to change the death benefit, or make other types of changes to your policy, that can affect the premium. But if you don't change the policy, that premium level should stay constant over time regardless of whether we're talking about term or permanent life. Both types of polices at the time of application, at the time you start coverage are going to typically require some form of medical exam. Again, your general health, your age, other personal characteristics that are going to impact the likelihood of you dying during the term are going to affect the cost of that insurance. That's information that the insurance company's going to require to be collected at the time of application. The other point that I'll make on permanent life and is classified here in the con category is that permanent life or they do provide some additional coverage beyond that death benefit. They often do become much more complex than a standard term policy. So there is lot more options that you can include. There's a lot more additional thing that can impact that cash value, there is other tax benefits, that I mentioned, that can be involved in a permanent life policy. So with those additional options and that additional flexibility that also means more complexity. All right? So it's much harder to compare one whole life or one permanent life policy to another. Makes it a little bit harder to shop around and compare apples to apples so to speak in terms of different, permanent coverage from different companies. Again I know that I want to emphasize just once again is that individual policies do differ. So even though I've outlined some kind of broad general characteristics associated with these two different types of policies, individual policies will all differ and you should understand the specific rules outlined in any policy that you consider purchasing. All right so what are some of the factors that impact the premiums for life insurance. Regardless of whether we're taking about of term life or permanent life or one of the permanent life option that you might be able to purchase. Again, personal characteristics are going to be a big factor. So things that relate to your age, your gender, your overall health and fitness as well as whether or not you are a tobacco user. All of these things are going to be information that's collected and go in to determining your total premium cost as an individual. Like I said before, a medical exam will most likely be required. That may involve providing samples of blood, samples of urine that will be tested in the lab to assess our overall health. The amount of the death benefit that you elect as part of the policy, again, regardless of whether it's term or permanent life coverage, is going to affect the policy. A larger death benefit is going to be associated with a higher premium. The type of coverage that you purchase. Again, term life is going to be less expensive than whole life for the same death benefit. And then finally the term of the policy. Obviously whole life has kind of an open ended term. It covers the remainder of your life. Term policies you have some options. A 10 year policy or a 10 year term is going to be less expensive than a 20 year term or a 30 year term. Simply because the likelihood of the insurance needed to be used during those time periods is going to increase as the length of those time periods increases. Alright, so just some factors that are going to impact the cost of life insurance. So to summarize, again, life insurance is a very basic concept. It's designed to provide some financial security to your beneficiaries in the event of your death. Typically when you sit down and start looking at life insurance options, you're going to go through a needs analysis, particularly if you work with some sort of professional and that's going to be performed to determine the required size of the death benefit. Term and permanent are the two main categories or types of life insurance that we talked about, but just keep in mind that there's a lot of variation across individual policies. So make sure you do your homework and you know what's going on within those policies. We talked a little bit about the premiums and the cost of life insurance, and how those are impacted by personal characteristics, your overall health as well as characteristics and selections you make related to that policy. Again, my final point here that I've tried to make with all of the insurance topics, and all of the risk management topics that we've talked about, is that your preferences are exactly that, your preferences. Your preferences and needs are going to vary from others'. It's a very individual specific question in terms of whether you need to purchase insurance and how much insurance you need to purchase and what type of insurance you need to purchase. So just make sure that you do your homework and you're well aware of how the policies that you're considering work and what type of losses that they cover. [MUSIC]
