SECTION I- LIFE INSURANCE

Life insurance plays an important role in the financial security of many families. More than 80 percent of American households have purchased individual life insurance policies. Over the years, life insurance policies have evolved from contracts that only provided death benefits into complex contracts that often include numerous types of benefits and features. New products have frequently been introduced in response to changing economic conditions and consumer preferences, and that trend is expected to continue in the future.

This course will examine the field of life insurance, including the role of underwriting and rating, types of policies in the marketplace, life insurance riders, policy options, policy provisions, and some of the ways that life insurance is used in financial planning.

Reasons for Buying Life Insurance - Personal Loss Exposures

A personal loss exposure can be defined as any condition or situation that presents the possibility of a direct financial loss to a human being. Certain personal loss exposures can result in great financial difficulty for individuals and their family members. Important personal loss exposures include premature death, poor health, unemployment, and insufficient income during retirement. Personal loss exposures can be reduced or even eliminated by life and health insurance, disability income insurance, private and public retirement plans, and an effective saving and investing program.

When selling life insurance, agents should assist applicants in determining the types and amounts of coverage to purchase. While consumers are usually aware of a general need for life insurance, many of them may not be aware of the full range of their needs for coverage.

Death Benefits

Death benefits are the one thing that all types of life insurance contracts have in common. In the purest sense, life insurance is a contract that pays a death benefit to someone when an insured person dies. This concept is easily understood. We buy fire insurance to protect against the risk of fire damage, we buy flood insurance to protect against the risk of flood damage, and we buy life insurance to protect other family members against the financial risk of our premature death.

1 It is the risk of premature death that motivates most purchases of life insurance protection. Anyone who knew for certain that they would live to a very old age would be foolish to waste money on life insurance. If a long life was a certainty, and it would only be necessary to set aside a small sum for the eventual funeral.

However, none of us can be certain that we will live for a long time. There is always the possibility that a disease or accident will end our life. Any of us could become a victim of a natural disaster, an accident, or an act of violence. A long life cannot be guaranteed, even for those whose ancestors have a record of longevity and those who follow a healthy lifestyle.

The risk of an early death is evident to most of us, particularly when we have family obligations, dependent minor children to provide for, and unpaid debts.

Financial Consequences of Dying

The expenses and loss of income associated with premature death are the main reason for buying life insurance as well as the major factors in determining the overall need for life insurance.

The needs that may arise due to premature death depend upon the prospective insured's individual situation, such as family structure, marital status, and financial obligations. These needs may include one-time expenses (such as funeral costs), as well as a variety of continuing expenses and income needs. Some needs may be immediate and some may arise in the future.

In order to help applicants plan for all possible contingencies, agents should be familiar with the wide range of costs and financial needs that may arise. Consumers may overlook some contingencies, and do not always realize that multiple contingencies could occur. They may not be aware of the large amounts that these needs represent. Potential costs and needs create opportunities during sales presentations for agents to stimulate thought, and to expand the applicants understanding of the need for life insurance.