Class of 2010 Indebtedness

30 of 37 have debt, or 81%

The range is $4,850 to $200,000
The mean for those with debt is $86,877
To pay this amount in 5 years at 6.8%
interest will cost $1,712 a month or
$20,544 a year

Life Insurance

Insurance is an important component of both

financial and estate planning. Care must be taken to
ensure that insurance products achieve the protection
desired, and that they will be available when needed.
For this reason, resources should always be consulted
when making insurance decisions.
See www.insure.com to get
online ratings from
Standard & Poor's as well
as comprehensive reports
on individual insurers (even
online premium quotes).

Life insurance is used to provide a death

benefit: a stipulated sum (the face amount of
the policy) is paid to a beneficiary upon the
demise of the policyholder (who has paid the
premiums).
Remember: a beneficiary who receives life
insurance payments due to the death of the
insured pays no income tax on the amount
received.

Because policies are taken out without the

insurance company knowing when payment
of the policy will be required, companies may
issue:
participating policies, in which the company
shares the costs of coverage with policyholders;
if premiums exceed costs, a policy dividend is
issued
nonparticipating policies, in which the company
does not share profit (or loss) with the
policyholders; the premiums for these
companies tend to be lower

There are 2 types of insurance companies:

stock companies are owned by the company
stockholders and usually sell nonparticipating
policies
mutual companies are run by the company
policyholders and usually sell only participating
policies

Life insurance policies account for about 25% (by

premiums paid) of the insurance sold in the US, nearly
$165 million in 2006; by comparison, annuities
accounted for 50% of insurance premiums, or about
$310 million.
Type of Insurance
Ordinary Life (individual)
Group Life
Annuities (individual)
Annuities (group)
Accident and health (individual)
Accident and health (group)
Other Types
Total

Net Premiums Written

$129,241,600
$35,255,000

Percent of Total
20.9%
5.7%

$193,432,600
$117,152,700

31.2%
18.9%

$57,169,300
$84,235,700

9.2%
13.6%

$3,226,000
$619,712,900

0.5%
100.0%

Life insurance is typically used to secure

business loans, for partnership buy-sell
agreements, and as security for families.
There are 2 types of life insurance sold: term
and permanent.
Term policies provide coverage for a period of
years, typically 1 or 5 (but this is changing)
policies provide insurance only
premium costs increase with age
coverage is not offered after age 65 to 70

There are 2 types of term policies:

Yearly renewable term has premiums that are
initially low; however, the premiums increase
substantially as the insured gets older. These
policies have diminished in popularity due to the
introduction of level premium term life insurance.
Level premium term has premiums which remain
unchanged over a specified period of time.
Coverage is purchased for a period of 5, 10, 15, 20,
25, or even 30 years. After the initial level period
expires, the annual premium will increase for the
next level (but there is usually a guaranteed
maximum increase).

Yearly renewable term insurance premiums

increase rapidly with age, whereas level term
insurance premiums only change over a period of
years (e.g., every 10 or 20 years). Over the 20 years,
level term premium costs are about one third those
of yearly renewable term.

The newest product in term life insurance is called

the return of premium (ROP) policy.
A level term policy is purchased, usually for 20 or 30
years, and if the policyholder makes it through the 2
or 3 decades, the insurer pays back the premium
payments (tax free). So the premium cost is zero.
However, the premiums are 30% to 40% higher than
with regular level term policies (the 30 year policies
have the least increase in cost).
And the insured has to stay the course for the time
period involved.

Permanent insurance policies provide coverage for a

persons whole life, hence also the name whole
life; policies provide both insurance coverage and
investment return.
The policy premium does not change substantially
over time, even though payments can be made for
many decades.
Also, the policy accumulates cash value that can be
borrowed (usually at a set interest rate). So at the
death of the insured, both the policy face amount and
the cash value are paid to the beneficiary.

There are 3 types of whole life coverage:

ordinary lifepremium payments continue for the
policyholders whole life; there is usually a modest
guaranteed investment return for the cash value
limited payment lifepremium payments continue
to a certain age or for a stated number of years;
premiums are higher but cash value accumulates
faster because of the reduced years
variable lifeoffers a minimum death benefit, fixed
premiums, and investments in stocks, bonds, mutual
funds, or money market funds; the value of the
policy at death is primarily based on the return on
the investments

Universal life insurance provides both insurance

coverage and investment return, and both can be
changed over time as the policyholder wishes.
The investment return is usually greater than with
ordinary and limited payment life policies; the
policyholder may make tax-free withdrawals (up to
the amount contributed) or the annual return can be
used to pay for coverage, making it self-funding; there
is a maintenance fee, but annual statements are
provided to explain costs.
This is the preferred type of whole life policy
because of its flexibility.

Comparison of premium costs for a $500,000

life insurance policy (nonsmoker):
20 year term policy
30-year-old male
30-year-old female

20 year cash value

$600 is zero; total cost is
$400 $12,000/$8,000

20 year ROP term policy 20 year ROP is

-30 year-old-male $800 $16,000/$11,000; total
-30-year-old female
$550 cost is zero
Whole life policy 20 year cash value
-30-year-old male $1,600 is about $25,000; total
-30-year-old female
$1,300 cost is $7,000/$5,500
Universal life policy
30-year-old male
30-year-old female

20 year cash value

$2,400
is about $40,000; total
$2,000 cost is $8,000/$6,000

Life insurance coverage may vary from individual to

individual, but the usual progression is:
begin with term
add universal life (can be used to pay for college
expenses)
the coverage amount should be sufficient to allow
the family to adapt after death (typically 5 to 7
years equivalent of income)
To obtain a comparison of premium costs for
different types of insurance, go online to
www.accuquote.com

Life insurance coverage can be supplemented

by the use of riders:
guaranteed insurabilityguarantees periodic
increases in coverage
accidental deathpays double or triple the face
amount (double indemnity)
disabilitypays premiums of a disabled
policyholder

There are several payment options; it is left to

the policyholder to decide which one to use:
lump sumthe total value of the policy is paid to
the beneficiary
fixed periodpayments are made over a set
period of years
fixed incomepayments are made in equal
installments
interest incomeonly interest is paid to a (usually)
minor beneficiary until a certain age
life income (annuity)payments are made for the
life of the policyholder

Life insurance can be converted into an annuity.

An annuity pays a certain amount each month to the
policyholder (annuitant) until the policyholder
dies; thus it provides a life benefit.
For example, a policyholder may purchase a single
premium immediate annuity (payments begin
immediately) or single premium deferred annuity
(payments begin in years) for the cash value of the
policy.

Annuities can provide payments for the

policyholders life (straight life annuity) or for a
minimum number of years (life with period
certain); in the latter case, if the policyholder dies
before the minimum period, the beneficiary receives
the annuity proceeds for the remainder of the period.
Joint and survivor annuities pay benefits for the
life of the policyholder and spouse.
Only part of the annuity proceeds are taxable
(because after tax dollars were used to pay for the
insurance premiums).

Annuities can also be used strictly as retirement funds

[403(b) plans]. These annuities are plans into which
income is paid (usually with matching funds from the
employer), invested, and allowed to grow on a taxdeferred basis. Withdrawal without penalty may begin
after 59 years and before 70 years.
Fixed annuities pay a fixed interest rate, usually with
a guaranteed minimum return.
Variable annuities allow the investor to select the
investment fund and thereby determine the return.
The designated beneficiary receives the fund at the
death of the policyholder.

Annuity Example
A 65-year-old woman who is retiring decides to convert her life
insurance into an annuity.
The cash value of her life insurance policy is $165,000 and is
used to buy a Single Premium Immediate Annuity offering a
lifetime income and an installment refund.
The monthly income, for as long as she lives, is $1,524 (equaling
$18,293 yearly). Approximately 79% of this income will be
received tax-free for approximately 9 years (after which 100%
of the income will be taxable).
The installment refund guarantees that if she dies prior to
receiving the full $165,000 she paid as the premium, the annuity
will continue the payments to the beneficiary until this full
amount has been received.

Richard, Mr. Iduvudu, the insurance man,

is here to determine your life expectancy.