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Steps to determine life insurance needs under capital retention approach

  1. preparing a personal balance sheet that lists all assets and liabilities
  2. determining the amount of income producing capital 
  3. determining the amount of additional capital needed (if any)


 What restrictions are present in group term life insurance regarding the designation of a beneficiary?

 The only restriction is that the insurance must benefit someone other than the employer.


 permanent insurance that provides lifetime protection

whole life insurance


what is cash value

the cash amount offered to the policyowner by the issuing life carrier upon cancellation of the contract.


Uses of term insurance

  • If a policy owner’s income is limited and substantial amounts of life insurance are needed, a term insurance policy can be effectively used. 
  • Term insurance can also be used if the need for protection is temporary.
  • Finally, term insurance can be used to guarantee future insurability if purchased with a conversion option.


 Variable universal life insurance is similar to a universal life policy but with two major exceptions:

  • the policy owner has a variety of investment options for investment of cash values and can move money from one fund to another

  • there is no minimum guaranteed rate of interest and the cash value is not guaranteed.


may be offered either as part of the basic group term life insurance plan or as optional additional coverage. The growth has been relatively slow, partly because of the federal income tax status of amounts greater than $2,000 .

 Dependent group life insurance


 There are several factors that should be considered in deciding the amount of insurance to include in an employee group term benefit schedule. These include:

  1. the employees’ needs
  2. the overall cost of the plan
  3. the nondiscrimination requirements of the law
  4. the ability of the employees to pay if the plan is contributory.


The most common type of group term life insurance benefit schedule currently in use bases the amount of insurance on ______

the employee’s earnings


Basic characteristics of term life insurance

  • The insurance protection provided is for a temporary period of time such as one, five, ten, 15, 20, 25 or 30 years.
  • If the insured is still alive after the period expires, and the policy is not renewed, the contract expires.
  • If the insured dies within the term period, the face amount of the policy is paid to the beneficiary. To protect the insurability of the insured, most term insurance policies are renewable, that is, the policy can be renewed for additional periods without evidence of insurability. Term insurance usually has no cash value or savings element and the insurance consists of pure protection.


 five (5) essential features of group insurance.

  1. makes use of group selection under which an entire group is insured without medical examination or other evidence of individual insurability.

  2.  Premiums generally are subject to experience rating under which the cost of insurance reflects the group’s own loss experience.

  3. Economies of administration are possible in the form of administrative efficiencies such as payroll deduction and the like

  4. makes use of a master contract containing all conditions concerning coverage. 

  5. The existence of the master contract indicates that the plan may last long beyond the lifetime (or participation in the group) of any one individual


 provide for the payment of all or part of the death benefit in the event of the insured’s terminal illness

accelerated death benefits


 The (4) advantages to employers of group term life insurance as an employee benefit are:


  • (1) Increased employee morale and productivity
  • (2) Use of group term life insurance as a competitive tool with other employers
  • (3) Enhanced public and employer-employee relations
  • (4) Employer relieved of moral obligation when employees are adequately covered.


Provide life insurance for only 1 year.  Insured is permitted to renew the policy for sccessive one-year periods with no EOI showing that the insured is in good health.  Yearly premiums increase as the individual gets older (gradually to sharply with time).  If the insured wants lifetime protection, this method is impractical because premiums become prohibitve.  

yearly renewable term method


Human Life value limitations

  1. sources of income after death are not considered (soc sec survivor benefits)
  2. work earnings and expenses are assumed to remain constant and employee benefits ignored
  3. amount of income allocated to family is critical in determining human life value, and this can quickly change
  4. assuming a lower discount ratecan substantially increase the human life value
  5. inflation on earnings and expenses is ignored


A policy in which the death benefit and cash surrender value vary according to the investment experience of a separate account maintained by the insurer. The amount of life insurance and cash surrender value may increase or decrease with the investment experience of the separate account

  • Premium is level and gauranteed not to increase
  • reserve is held in seperate account

 A variable life insurance contract


Focused on having an amount that is sufficient, along with other sources of income and financial assets, to meet basic family needs of dependent survivors of the insured.  

Needs Approach for estimating the amount of life insurance to own. 


 If an employee’s life insurance ceases because of termination of employment, termination of membership in a classification eligible for coverage, or retirement, he or she may convert the group term insurance to an individual permanent life insurance policy.

 group term life insurance policy conversion provision


Common features of variable life insurance contracts

  • whole life contract with a fixed premium. The premium is level and is guaranteed not to increase

  •  the entire reserve is held in a separate account and is invested in equities or other investments. 

  • cash surrender values are not guaranteed, and there are no minimum guaranteed cash values. Although the risk of excessive mortality and expenses is borne by the insurer, the investment risk is retained entirely by the policy owner.


Limitations of term insurance

  • Since term insurance premiums increase with age and eventually reach prohibitive levels, term insurance is not suitable for individuals who need large amounts of life insurance beyond the age of 65 or 70.
  • Term insurance is also inappropriate for saving purposes since there is no buildup of policy cash value.


Can be viewed conceptually as a flexible  premium policy that provides lifetime protection under a contract that unbundles  the protection and saving components.

Except for the first premium, the policy owner determines the amount and frequency of the premium  payments, which can be monthly, quarterly, semiannually, annually or a single payment. The premiums, less any explicit expense charges, are credited to a cash-value account from which monthly mortality  charges are deducted and to which monthly interest is credited based on current rates that may change over time.

Universal life insurance


gives a terminated employee an additional 31 days of protection while evaluating the conversion privilege or awaiting coverage under the group life insurance plan of a new employer

 The 31-day continuation-of-protection provision


 Life insurance coverage requirements for active employees after the age of 40 are strongly influenced by the _________

Age Discrimination in Employment Act (ADEA).


 Under this type of provision, the disabled person’s life insurance remains in force without further premium payment if disability, as defined in the provision, commences while the person is covered under the group plan. Coverage continues until the date of recovery or death, whichever is earlier, if proof of total and continuous disability is presented at least once every 12 months.

 The waiver-of-premium disability benefit provision


Death (life insurance) benefits are provided in several ways (4):

  •  social insurance benefits, such as workers’ compensation and Social Security
  • through private pension plans and group life insurance plans
  • accidental death and dismemberment (AD&D) insurance
  • travel accident insurance plans


Holds that the policy will remain in force for a certain number of years, such as 15 or 20 years, if at least the minimum premium is paid. The minimum premium is specified in the policy and, depending on the insurer, may be less than or equal to the target premium. The target premium is a suggested level of premium that will keep the policy in force for a specified number of years.


no-lapse guarantee


Two types of whole life insurance

  • ordinary whole life
  • limited-payment whole life insurance.


Human Life value calculation

  1. ​est avg annual earnings over an individuals productive lifetime
  2. deduct federal and state income taxes, soc sec taxes, life and health insurance premiums, & the cost of self maintenance.  The reamining is used to support the family
  3. determine number of years from individuals present age to the contemplated age of retirement
  4. using reasonable discount rate, determine PV of the familys share of earnings for the period determined in step 3


Major advantage of Needs Based Approach


Major disadvantage of Needs Based Approach

reasonably accurate method for determining the amount of life insurance to own when specific family needs and objectives are recognized. 


require numerous assumption and detailed calculations 


Preserves the capital needed to provide income to the family.  Income producing assets are then available for distribution later to their heirs.  

capital retention approach


How do employers provide group term life insurance coverage for retired employees?

 continue reduced amounts of group term life insurance on retired employees under various types of reduction formulas.


Establishes a level, or fixed, premium that does not increase with age, and the insured may obtain lifetime protection. Under this method, premiums paid during the early years of the policy are higher than is necessary to pay current death claims, while those paid in the later years are inadequate for paying death claims.

 The level premium method for providing life insurance to individuals


 There are several disadvantages associated with group term life insurance:


  • (1) The employee usually has no assurance the employer will continue the group policyin force from one year to the next.
  • (2) Another limitation exists when employees change employers, because group term life insurance is rarely portable. 
  • (3) Group term life insurance provides pure protection only, while some employees may have needs for a savings or cash-value feature.
  • (4) With salary-related plans, coverage may be lowest when it is most needed.


The monetary difference between the death benefit paid by a permanent life insurance policy and the accrued cash value. 

Net amount at risk


Continues group term life coverage for one year while the employee remains totally and continuously disabled

 The extended death benefit approach


 The specific family needs that are considered under the needs approach include the following types:

  •  An estate clearance fund or cleanup fund for burial expenses, uninsured medical bills, installment debts, estate administration expenses, as well as estate, inheritance and income taxes 
  • Income during the readjustment period that follows the death of a family primary wage earner and typically is needed for one or two years
  • Income during the dependency period that follows the readjustment period and lasts until the youngest child is 18 years of age
  • Life income to the spouse which takes into consideration both the Social Security benefit blackout period and the income necessary to supplement Social Security benefits after the blackout period. The blackout period refers to the period from the time that Social Security survivor benefits terminate to the time that the benefits are resumed.
  • Special needs such as a mortgage redemption fund, an educational fund and an emergency fund for various unexpected living and medical expenses

  • Retirement needs in the event that the family primary wage earner survives to retirement and requires income in addition to Social Security and private pension benefits.


When is whole life appropriate (2 reasons) and what are its limitations (1):

  1. when lifetime protection is needed and
  2. When additional savings are required.


The major limitation of this type of coverage is that it leaves some individuals underinsured because of the relatively high cost.


Allows the employer to continue the employee’s group term life insurance in force for a limited period, on a basis that precludes adverse selection during temporary interruptions of continuous, active, full-time employment

 The continuation-of-insurance provision


Provides lifetime protection to the age of 121, and the death claim is a certainty.

  • premiums are level and do not increase with age.
  • Also has an investment or savings element called a cash surrender value. 
  • Because of the overpayment of insurance premiums during the early years of the policy, the policy owner builds a cash equity in the policy. The policy may be surrendered for its cash value, or the cash value may be borrowed under a loan provision.

 Ordinary whole life insurance


 The two most common types of disability provisions used in group term life insurance policies are as follows:

  1. The waiver-of-premium disability benefit provision (most common)
  2. The extended death benefit approach (second most common)


 two basic forms of universal life insurance.

  • One form pays a level death benefit during the early policy years.

  • The second form provides for a death benefit that is equal to a constant net amount at risk plus the accumulated cash value


Present value of the familys share of the decreased breadwinners future earnings

human life value


Approaches for estimating the amount of life insurance to own

  • human life value
  • needs approach
  • capital retention approach


  1. reduce an employee’s life insurance coverage each year starting at the age of 65 by 8% to 9% of the declining balance of the life insurance benefit, or
  2. make a one-time reduction in life insurance benefits at the age of 65 from 35% to 40% and maintain that reduced amount in force until retirement.

An employer also may be able to cost justify greater reductions in group term life insurance benefits on the basis of its own demonstrably higher cost experience in providing group term life insurance to its employees over a representative period of years

general guidelines that an employer must follow in providing life insurance coverages for active employees after the age of 40


 The advantages to employees of group term life insurance as an employee benefit are:


  • (1) It provides an additional layer of low-cost protection to personal savings, individual life insurance and Social Security benefits.
  • (2) It helps reduce anxiety associated with the consequences of premature death.
  • (3) The employer’s contributions generally are not reportable as taxable to the insured employee for federal income tax purposes unless the total amount of group insurance from all sources exceeds $50,000.
  • (4) If employees are contributing toward the cost, their contributions are withheld automatically, increasing convenience.
  • (5) The conversion privilege enables terminated employees to convert their coverage to individual permanent insurance without evidence of insurability (but at a very high cost).
  • (6) Liberal underwriting standards provide coverage for those who might be uninsurable or only able to get insurance at substandard rates.


 This insurance is permanent, and the insured has lifetime protection. The premiums are level,but they are paid only for a certain period. The most common policies are ten, 20, 25 or 30 years, or life paid up at the age of 65 or 70.

 One drawback is the higher cost when compared to ordinary whole life so that the amount of permanent life insurance that can be purchased is substantially less than if an ordinary life policy were purchased.

 limited-payment whole life insurance policy


 the types of benefit schedules that can be used (group term benefit)

  • provide a flat benefit amount for everyone covered
  • relate benefits to earnings, occupation or position, or length of service.


Advantages claimed for the noncontributory approach to financing group term life insurance

  1.  All employees insured.
  2.  Tax advantages
  3.  Simplicity of administration.
  4.  Economy of installation.
  5.  Greater control of the plan


The contributory approach to financing group term life insurance has the following possible advantages:

  •  (1) Larger benefits. More liberal benefits are possible if employees also contribute.

  • (2) Better use of the employer’s contributions. Employer funds may be used more effectively by sharing the cost of benefits for the employees who have the greatest needs and who also are most likely to be long-service employees.

  • (3) Employees may have more control. Employees may be afforded a greater voice in the benefits since they are paying part of the cost. 

  • (4) Greater employee interest. Employees may have a greater interest in plans in which they are making a contribution.