‘What are the main topics covered in the chapter? Life insurance adresses a major loss exposure for individuals and families. ‘This chapter describes the fundamentals of life insurance, including the need for life insurance, methods for determining the amount of insurance to purchase, and the major types of life insurance. Examine the types af ie insurance and the way that they meet spedicneeds, + How do the various types addess specific loss exposures? + How do the contract provisions differ from those in property and liability insurance contracts! ‘Whyis itimportant to learn about these topics? Life insurance provides a vital safety net for families. The loss of a working family member can create significant financial uncertainty for the surviving family metabers, Consider the need for continued incorne by most families, + How does life insurance replace the flow of inenme? * How can life insurance provide funds for college and retirement? “How can you tise what you will learn? Se Assess your lf insurance needs: * Who depends on yau for the income that you generate now and the income that you will probably generate in the future? ‘+ How can life insurance help you accumulate cash values as an investment ot for future income?life Insurance Premature death of a working person isa devastating personal loss exposure that should receive high priority in a financial plan. Ifa working member of a family dies premanurely, the surviving family mernbers might be exposed considerable financial insecurity. For example, ssume that Jennifer, age thitey- five is the major source of financial support for her disabled husband and ewo small children, She ears $25,000 snnually and has saved only $10,000. Ifshe is killed suddenly in an auto accident and has only $25,000 of life insurance, could her family survive on the $35,000 left to them? Although Social Security survivor benefits might be available, other financial needs must be considered, such as nancial support for the disabled spouse, paving off the mortgage, ancl providing a college education for the children. The $35,000 left co the family wil not go far. Jennifer's suekden death would create financial difficulty forthe surviving family members. Additional life insurance could have been used 0 restore the family’ share of she income lost because of her death. This chapter discusses the fundamentals of life insurance, 2 major technique for reducing or even eliminating the adverse financial consequences of prema- ture death. Topics include premature death, the need for life insurance based on the type of amily steucture, the amount of life insurance to own, and che characteristies of the major types of life insurance sold today, The chaprer also discusses important contractual provisions of life insurance policies and addi- tional benefits that can be added. The chapter concludes with a discussion of life insurance underwriting and group life insurance. PREMATURE DEATH Chapter 10 notes that premature death can be defined as the early death of a working person with outstanding or unfulfilled fnactial obligations, such as dependents to support, children to educate, or a mortgage and other installment debts to pay off. If replacement income from other sources is inadequate, or if the assets already accumulated by the family are relatively small, the surviving fernily members will be exposed to financial hardship. Accleast four costs are associated with premature death: * The income earned by the deceased cerminates, and the farnily’s share of thar income is lost forever.* Additional costs are incurred for funeral expenses, uninsured medical Bills, probate and estate settlement costs, child-care expenses for young dependent children, and federal and state taxes for large estates. * Because of insuficiene replacement income, some families might experience a reduction in their standard of living * Certain emotional and noneconomic costs are incurred, such as the grief of surviving spouse and the loss ofa role model and moral guidance for the children. NEED FOR LIFE INSURANCE Life insurance is economically justified if a family member earns an income and if others ace dependent on that income for pazt or all of eheir financial support. However, the financial impact of premature death is not uniform for all families but varies enormously depending on the type of family structure! Singles ‘The number of single people in the United States has increased over time Many people are delaying marriage, often beyond age thirty or thirty-five; many adules are single because of divorce; and adults often become single 1 ‘once again because their spouses die. Ifa single person dies leaving no dependents or outstanding financtal obligations, that death is not likely to create a financial prablem for others ‘Thus, such a person needs only a modest amount of life insurance for funeral expenses and uninsured medical bills. However, single persons should realize that their insurance needs could change in the future, and they might be ‘wise to purchase life insurance early in life. Premiums will be lower and insurance might be more easily available chan later in life when the need might be greater, | Single-Parent Families ‘The number of single-parent families with childseni under age eighteen has increased substantially in recent years because of the Jarge numbers of children born outside of marriage, widespread divorce and separation, and the incarceration or death of a parent. In most cases, single-parent families are headed by women. Premature death of an income earner in a single-parent family can result in great financlal insecurity for the surviving dependent children despite the possibility of receiving Social Security survivar benefits Thus, the need for life insurance is great. However, many single-parent families have low incomes, and their ability to purchase large amounts of life insurance is limited