FIN1 FTU - Stage 10

F1 – Project-Stage 10: Insuring your life TCHE322 Lawrence et al (2011). Chapter 8 George Rejda and Michael McNamara (2021). Principles of risk management and insurance. Chapter 11 CFA Level III, Volume 4 Tillery & Tillery (2017). Chapter 8 1 Schedule of lectures Project topic covered • Life insurance • Benefits and costs Groupwork project activities • Illustrating and analyzing life insurance packages • Making decision 2 Life insurance • Life insurance protects against the loss of human capital for those who depend on an individual’s future earnings. • Benefits of life insurance: • Financial protection for dependents • Protection from creditors • Tax benefits • Vehicle for savings • Do you need life insurance? • If yes, consider a life insurance policy. 3 Basic elements of a life insurance policy • the term and type of the policy (e.g., a 20-year temporary insurance policy) • the amount of benefits (e.g., ￡100,000), • limitations under which the death benefit could be withheld (e.g., if death is by suicide within two years of issuance), • the contestability period (the period during which the insurance company can investigate and deny claims), • the identity (name, age, gender) of the insured • the policy owner, • the beneficiary or beneficiaries, • the premium schedule (the amount and frequency of premiums due), and • modifications to coverage in any riders to the policy. 4 Recall the concept of risk and premature death risk "Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for." "At its most general level, risk is used to describe any situation where there is uncertainty about what outcome will occur. Life is obviously risky." The degree of risk refers to the likelihood of occurrence of an event. It is a measure of accuracy with which the outcome of a chance event can be predicted. • Financial and Non-Financial Risks • Pure and Speculative Risks • Fundamental (group/undiversifiable) and Particular (individual/diversifiable) Risks 5 Premature death risk Certain costs are associated with premature death. •The family’s share of the deceased breadwinner’s future earnings is lost forever. •Death results in additional expenses such as funeral costs, uninsured medical bills, higher childcare expenses, estate settlement costs, and other final expenses. •Because of insufficient income, some families will experience a substantial reduction in their standard of living. •Survivors face certain noneconomic costs such as intense grief, loss of a parental role model, and counselling and guidance for the children. 6 Economic (Holistic) balance sheet Human capital Pension value 7 Financial impact of premature death on different types of families Single people Single-parent families: cause great economic insecurity for the surviving children The need for large amounts of life insurance on the family head is great. Two-income earners with children: the death of one income earner can cause considerable economic insecurity for the surviving family members, because both incomes are necessary to maintain the family’s standard of living. Traditional families (one-income earner): only one parent in the labor force, other parent staying at home to take care of dependent children. for the working parent for the non-employed spouse: the cost of child-care services and a handful of other tasks Blended families: a divorced spouse with children remarries, and the new spouse has children. Also, additional children may be born after the marriage. Sandwiched families: a son or daughter with children provides financial support or other services to one or both parents. Thus, the son or daughter is “sandwiched” between the younger and older generation. 8