How Life Insurance Works

by the time we’re finished with this presentation you are going to know more than the average life insurance agent about how life insurance works anybody think that’s cool yeah all right so here we go so there’s two types of life insurance there is permanent insurance in there’s term insurance there’s two kinds of permanent terminate insurance there’s whole life and there’s universal life there’s a couple types of term insurance as well there is one year renewable term and there is level premium term insurance but what are these things mean other than just words we’ll look at the concepts now behind them and see why they’re named these different names and you’ll understand what products are good what products are not and why you would either want to buy or stay away from them so the first type of insurance we’re going to look at it’s term insurance it’s called term insurance because it’s a type of life insurance policy that pays a death benefit price right
provides coverage for a certain amount
of period or a specified term of yours
term insurance will look at the one-year
renewable term first and what it looks
like is you have a death benefit that
you’re purchasing and you have premiums
and the premiums rise based on your age
and the amount of coverage so if you’re
really young you’ll get in at a low rate
premiums are like next to nothing for
someone young buying term as the years
progress and you get older the premiums
go up accordingly with one-year
renewable term insurance when you buy
the policy you have a certain fee for
that year and then next year if you want
to renew and keep your coverage you have
any other premiums pay and it’s higher
this year so you’re always paying on a
stair step pattern there’s another type
of insurance now that’s called
level premium term insurance and what it
does is it takes an average of the
amount of term that you want so if you
want 10 15 20 years it’s going to
average the amount of premiums that
you’ll pay and then give you a little
discount it’s very nice and you know the
premiums if you buy 20 years you know
for 20 years your premium is going to be
X it’s not going to be x plus plus plus
plus plus plus each year and this is
nice level premium term insurance also
has something that we really really
really like and it’s called a
convertibility option the convertible
term insurance is such a beautiful thing
and we’ll go into it more later but
remember it’s convertible term insurance
that we like it’s convertible level term
insurance that we love now let’s talk
about Universal Life Insurance and
Universal Life Insurance has been around
for a while it’s a kind of the new
insurance and insurance companies love
it because the universal life insurance
takes the risk from the insurance
company and it puts it on you as the
client and they’re kind of a fan of that
because insurance companies you know
insurance takes is supposed to take risk
away from you but insurance companies
can make more money if they put the risk
back onto you right so they’re kind of a
fan of this they like their agents to
sell this because it’s taking the risk
from them and that makes sense so
Universal Life Insurance offers the low
cost protection of term insurance with a
cash or savings element that provides
access to cash and this is how it looks
you have a death benefit when you buy a
universal life policy plus you have a
cash fund that will grow over it over
the years and they say and for this you
can have a flexible Preem so for example
if you want to buy in this year at X and
next year you want to pay a little more
you can that’s nice
well maybe the next year you know it’s
not doing so well or you want to use the
money elsewhere you can just pay a
little tiny bit and you’ll still have
all your coverage isn’t that nice
flexible premium Universal is talking
about the coverage amount flexible
premium talks about the premium and they
said this is a nice policy but let’s
look at inside now and see what actually
is happening inside the universal life
policy and why it may not be such a nice
policy
the universal policies work like this
you pay your premiums and those premiums
go into your cash account inside the
policy from the cash account the money
is taken out and put into these
different investments especially if it’s
index this is exactly what it’s doing it
goes out into these investments a wide
variety and then the investments make a
return and they return back to the cash
account so this money is going from you
into the cash account over to the
investments coming back oftentimes the
universal policies also have a percent
cap rate inside the policy so let’s say
for example you pay your premiums and
they go invest in these different
investments well if the investment does
really well that should be good news for
you right if the investment does bad
that could be bad news but the insurance
company says oh no 0% cap your captain
zero so if the investment does bad you
won’t lose you know you won’t have to
pay anything for it so if it goes
negative but they also put a cap on the
top as well so if the investment does
super well and your capped at 7-7
percent is what you get back even if the
investment did well at fifteen or
sixteen percent then once the money
comes back in from the investment to the
cash account they take premiums for the
death benefit so they take the money out
there and this is also the cash account
it takes the fees and surrender charges
that the policy may have so now what
happens with these insurance policies
that we see that are recently requiring
more premium why would that be I mean if
this is happening and the investments
are working like they should shouldn’t
it be okay well the investment this is
what this is what we have to remember
with the universal life policies but
life insurance policy is here with the
universal products the death benefit is
based actually sorry I got ahead of
myself so we have death benefit Plus now
we’ll look at the way they really
performed death benefit yes plus a cash
fund that actually grows more
like this so it grows for a while and
then it drops off and when it does that
look what happens to the premiums so we
asked why why does this happen to the
premiums the cash account did well and
then it started going down and suddenly
you’re having to pay premiums why it’s
based on the foundation that this policy
is built on and that foundation is the
one year renewable term which is the
most expensive kind of term insurance so
you could possibly purchase this term
insurance as you go through the years of
the policy and you have your flexible
premium the premiums coming from that
cash fund every year it increases the
premium amount you may not be increasing
what you’re paying in you may actually
be decreasing because you’re using that
flexible option but the premium for the
coverage is increasing and so what
happens when all the money in the cash
account is used up you either have to
make the payments or your coverage goes
away we have a sad example to look at
now of exactly what happened with the
universal life insurance policy that one
somebody brought to our office that did
just this here’s the actual illustration
this came to the office I took out the
company name and the clients name and
all the personal information but this is
what he brought to us he’s 45 when you
purchased this policy he’s paying $4,000
a year into this policy for a million
dollars of coverage that’s pretty good
now he’s 62 17 years later he comes to
us because he says my insurance wants me
to pay more premiums to keep my coverage
and I can’t afford the premiums so can
you do something to help me so we took a
look at his policy total premiums that
he has paid to this point are 61 almost
62,000 he has a fund value in his policy
of 14,000 almost $15,000 that he could
access if he wanted to take money from
this policy he has a surrender value of
five thousand five hundred twenty four
dollars so that means if he decided to
get rid of the
see and said I’m done with it just give
me what you know I can get they would
send him a check for 55 24 he has a
death benefit of a million dollars next
year though and this is why he was
concerned if he came to us he’ll be 63
years old he’ll have paid almost sixty
six thousand dollars in premium by that
time he’ll have a fund value with zero a
surrender value of zero and a death
benefit of zero is this a good deal for
the insurance company he’s he was 45
when he purchased his pulse and he was
in good health when he purchased this
policy he got the very best rating
possible when he purchased this policy
he’s 17 years older now he goes to apply
for a new policy his health has changed
he does not get a good rating now he has
to pay a lot more for this coverage he
wanted this coverage for his kids we
went to underwriting we tried to get him
a policy the premium that came back he
said I can’t afford it
guess what there’s no legacy for the
kids it’s really sad and New York Times
had something to say about this in 2016
about why insurance premiums are
skyrocketing and they said by the way
here the guarantees guaranteed zero
non-guaranteed even if it performed well
still zero but New York Times said the
money in the accumulated cash account
can be used to help pay the policies
prune but there is a risk because if the
money runs out the policy lapses there’s
no coverage left and the article went on
to say not to be morbid and don’t take
this the wrong way but your mother
really needs to die because she was the
one insured her premiums are increasing
so you know I guess you have two options
when you purchase Universal Life
Insurance you can either purchase it
knowing that the coverage will go away
someday that you’ll pay a lot of money
into these policies that aren’t worth it
or you could
plan to die before the policy runs out I
don’t think he wants to be dying at age
62 hi what end and so contacting the
insurance company they tell us lots of
people exchange their universal life
policies that aren’t performing to
permanent insurance whole life insurance
lease say it happen every day but it’s
sad all the same so it comes there’s the
question why do people sell these kinds
of products if they’re so horrible and
it really comes down I think to
Commission’s so let’s talk a little bit
about how Commission’s are made and how
Commission’s are earned and so you can
understand exactly how they work you’ll
know where they’re coming from and I’ll
help you maybe to get a little clearer
picture what’s happening Commission’s
unlike when you sell or when you
purchase a home or you purchase a car
are different with the insurance company
when you purchase a home or car you pay
the money and then a portion of that
goes to the agent or the sales rep
whoever sold you the car that’s their
Commission
right so you’re paying higher to pay
them that’s fine with the insurance
company it’s a bit different the
insurance company has these products
that they offer when you buy a policy
you pay the money to the insurance
company and they put it directly into
whatever product you bought all the
money that you paid is purchasing you
insurance then the insurance company has
also has something that they call their
general fund this general fund is what
they use to help pay the utilities so
that they can have lights at the
insurance company’s office they can have
computers to calculate the transactions
or to you know set up program so you can
see your policy online they use this
fund to pay their employees that are
there running the insurance companies
helping you to take loans or processing
paperwork they also pay their
underwriters out of this they also pay
their agents out of this so when
commissions when your policy is
purchased they look at the policy they
look at the amount they look at the type
of policy that it is and they say to
their agent out of our general fund this
is what you earned
now Commission’s with the insurance
company of the products that they sell
the highest the products that pay the
highest commission are the products that
decrease the insurance company’s risk
obviously because they know that if you
purchase a permanent whole life policy
they have a longer amount they have to
guarantee right they have to guarantee
it for your whole life and they know
they’re gonna be paying a death benefit
someday so they need to keep them on it
use the money wisely so that it’s there
when they need it
so commissions are highest on the
products that carry less risk pose less
risk to the insurance company term and
the Universal Life products I have
something to show you who would like to
see a universal life policy like a
contract an actual contract I have one
here this we received this from someone
from one of our clients who was didn’t
buy this to her office but she sent it
to us and I have it here to show you
guys this is a universal life contract
right here
and see all these these are all the
places that I’ve marked with things that
they can do to change your policy or
fees they can do after you purchase the
policy things they can do to change it
decrease your death benefit increase
your premium change your guarantees
change all kinds of things after the
policy’s purchased these are the flags
for that look how sick this thing is
this is not an application this is just
the policy would you want to read this
we did and we highlighted it and we
marked it who would like to see a whole
life policy I have one here – this is a
whole life policy right here there’s one
flag this page here this little
highlight it’s a writer and it says they
can charge $150 if you exercise the
writer one-time charge when you use the
writer that’s it otherwise it’s all
solid guarantees a little bit thinner –
huh which one do you think you might
prefer the big fat one with lots of
things you can change or they can change
on you or the thin one with just the one
change on the writer Vita so now let’s
talk about the whole life insurance and
see exactly how its built and how it
works so whole life insurance is a type
of life insurance that pays a benefit on
the insured when the insured dies and it
also accumulates a cash value whole life
insurance looks like this as illustrated
there’s a death benefit there’s a cash
value and there’s a premium and it’s a
level premium for life whole life that’s
the reason it has its name it’s got a
level premium for life whole life the
cash in the policy also has to rise to
equal the death benefit at the time the
policy in doubt and when I say in dows
that means either age 100 or age 121
based
on the tables insurance company is using
to write the policy so this is the the
basic structure of the whole life
policies permanent insurance as long as
you pay the premium the level premium
each year you have the coverage there’s
also something called paid up additions
and paid up additions is something that
we add to all the life insurance
policies the whole life insurance policy
is that we write and this is a very neat
feature because what it does is it
increases the amount of cash value
available to you because with
traditional whole life policies the
policies start out with no cash value at
all because it has to take time to their
buying you mostly insurance and then
over time as the costs of that insurance
they’ve recouped that they can add to
the cash value those paid up additions
you fund it specifically to buy that
paid up insurance which creates the cash
value so look what happens you buy a
paid-up addition paid up additions and
your death benefit increases slightly
which means cash value has to increase
right it has to meet and it starts out a
little sooner so exactly that’s exactly
what it does
now there’s something also called
participating for life insurance and I
love this part because participating
whole life insurance means that the
company is a mutual company and you can
participate in the earnings of the
company so some companies are stock held
companies some companies are mutual
companies stock held companies they earn
they make earnings and they can show
growth profit and they share it with all
their stockholders mutual companies earn
a profit and they share it with all
their owners the owners of the insurance
company as a policy owner you are a part
owner in the insurance company so guess
what you can share in their profits so
participating whole life insurance buys
on winners means you can participate and
when you participate it’s called a
dividend they’ll get a bit to you and
the dividends purchase
we haven’t purchased paid-up insurance
paid up additions make sense because
it’s going to increase your death
benefit and increase your cash value and
that’s done with dividends now dividends
work kind of an especially dividends are
paid to the owners of the insurance
company based on how much of an owner
you are so for example Jane let’s say
you and I are twins and we both purchase
policies I purchase you know let’s say
we purchase policies for $10,000 each
and we’re twins we’re both healthy we
get the same rating we have identical
stuff however I am a pilot and you’re
not so I impose more risk to the
insurance company right and so my
dividends are going to be less because
I’m a more risky person therefore most
of my cream iam or more of my premium I
should say is going to satisfy the
insurance company that they can pay a
claim if need be
so my policy is going to start out a
little bit different than yours even
though we pay identical premiums so
dividends when dividend time comes
around because Jane has more ownership
in the company she’s less risky to them
they pay her a higher dividend we had
the same premium so that’s how it works
and there’s other kinds of types of
things that they calculate those
dividend changes on some of those are
you know tobacco use marijuana hike
extreme hiking skydiving again you see
flying snowmobiling really hazardous
exercises and activities so now we have
to talk a little bit about ratings and
how the insurance company decides what
rating to give you do they just draw it
out of a hat and say Oh preferred okay
here you go and let’s draw again Oh
stand out here you go no they have a
very systematic way of doing this and
it’s a beautiful process so ratings are
determined and they’re based on a large
group of people large loss numbers
so they take this group of people and
they assess them and they say okay out
of these people here we have a rate
chart now we found that some of these
individuals most of the individuals were
in standard health so this is our
standard rating they’re the average
American we found some people that were
actually healthier than the average
Americans so we’re gonna call those
preferred people and we found some that
were even healthier than the preferred
people so we’re gonna call this super
preferred but there were also some that
weren’t quite into the standard category
and so we’re gonna call those table two
or table B and then there were some that
were not even table B they were a little
bit less than that so we’re gonna call
those table C and likewise and so they
go d e f g h IJ as long as they need to
go they put all that into their chart
and then two people apply for a policy
and they look at that chart and they
assess their health and they measure it
to what they have the guidelines fer you
know what those the actuary said the law
of large numbers what they got from that
big group of people that they analyzed
and for this example let’s say that this
lady she got a super preferred rating
and the gentleman got a table B rating
the insurance companies always give
their best ratings possible and so even
if this gentleman this gentleman’s
standard below standard for some reason
maybe I don’t know maybe he maybe he
carries a few extra pounds then the
average American would and so that’s
okay he’s going to get his very best
rating possible the insurance company
always make sure that happens now let’s
say a few years down the road they apply
again this time some things have changed
with our health the insurance company is
all about giving the best reign this
lady gets a standard rating this time
when she applies something changed with
her health maybe she had somebody died
and her family and maybe a sibling died
of cancer and and maybe something
happened with her own health and now she
says the standard the average standard
that’s fine the gentleman also applies
and his health it was better so how
great is that he gets select this time
he’s better than standard we what
happens to his policy that he had
already
well if he’s applied with the same
company the insurance company is gonna
say oh look congratulations you qualify
for a better health rating maybe you
lost those few extra pounds maybe you’ve
been doing some exercises and and you’ve
really been working on your health and
we see that and that’s a great thing
we’re gonna move your policy up to
select so now both of his rates he gets
a rate change so his premium changes now
his policy is at the good rate do you
know the Selectric what happens to the
lady’s policy she was super preferred
now she’s standard nothing happens the
insurance company says back then you
were super preferred and we under it
rotates and that’s what we agreed upon
that’s where you’ll stay because they
always give you the very best that they
can so now we need to talk a little bit
about ratings and term insurance and how
the convertible term insurance that we
love so much comes into play so this
gentleman this is a true story
this gentleman applies to our office and
he gets some policies he is approved
super preferred so he purchased term
insurance he bought a million dollars of
coverage perfect now a few years later
he says you know I think I’m ready for a
whole life policy I’ve been saving my
money and I’ve been I’ve been working
and I think I can make these premium
payments just fine no problem so he
applies again to the insurance company
well this time something had changed
with his health and he got below
standard and the premiums for the below
standard you know he did an analysis and
he looked at those and says you know I’m
I just am not comfortable with that so I
don’t think I don’t think I’ll take that
policy instead what I want to do is I
want to convert some of my term
insurance so he has a million dollars of
coverage over here so what do we do we
tell the insurance company we would like
to have a whole life policy now for this
gentleman from his term insurance so
they split it out and they say okay you
can have six hundred thousand dollars of
term insurer
and we’ll give him the whole life policy
that he was looking for at the super
preferred rates because he qualified for
that when he first applied and so no
matter what changed in his house because
he had that million dollars of coverage
in term insurance he can have a million
dollars in whole life insurance by
converting that no problem he can
convert this policy now so you see he
converts some of it for hundred dollars
he still has six hundred thousand in
term so couple years go by and he wants
another policy guess what he can get
another policy at super preferred rates
just by converting the term and he could
do it again in the meanwhile he has a
chance to work on his health a little
bit and see if he can you know change
any ratings there if he can’t he has the
super preferred if he can that’s awesome
too so now there comes a question people
want to know how much insurance can I
have because are there maximums and
minimums yes there are so the insurance
company we’re going to do a little
exercise here about how much insurance
you can have and you’re going to figure
out how much insurance that you can have
based on the insurance company’s
guidelines there’s two factors that come
into play age and income so what I want
you to do on your paper right now is to
just jot yourself a little note about
how much you make just put it down just
personal to yourself and now here are
the ages and here’s the income factor
now based on your age or your age group
so if your age eighteen thirty forty
you’re going to write 25 down beside
your little note if you’re 41 for 50
you’re gonna write 20 down beside your
little note if you’re 51 through 60
you’re going to write 15 61 through 65
you’ll write 10 if you’re 66 to 70
you’re gonna write five if you’re over
70 write a little star because this
means you’re special and we will do a
consideration to know how much insurance
you can have and now what you’re going
to do is you’re going to multiply your
income by the little number that you
wrote down
is this surprising anyone at all about
how much insurance you could actually
have does anybody here underinsured
based on the insurance company it’s
anybody over insured you have too much
it’s kind of an the exercise the
insurance company will allow you to have
this much just for the asking if you’re
you know based on your health now I saw
when my mom asked how many business
owners are in the room a lot of hands
went up these are personal amounts so
this is what you can have based on your
personal income this is how much life
insurance you can have personally now
there’s some strategies we can do with
business that go on top of what you can
have personally which is cool as well
and now another question who should I
insure you know I’m I have a family I
have two little kids and I’ve noticed
that if we buy a policy on you know the
dad we’re going to pay about thirteen
thousand dollars for three hundred
dollars of our three hundred thousand of
coverage but if we buy it on the
ten-year-old we’ll just have to pay less
than half that for the same amount of
coverage shouldn’t I buy it on my child
because it’s less expensive good
thinking but here’s something to
consider when you pay a premium the
higher the premium is the more cash
value can grow in the policy also
because children there’s less premium
dollars
takes less money to insure a child’s
life because they’re so young it limits
the amount of cash build-up you can have
in that policy because you’re paying a
small premium you’re gonna have a small
cash value relative to the premium and
children’s insurance is based on how
much their parents have so if you don’t
have any insurance there’s no way the
insurance company is going to let you
have a policy for your child they say
what he doesn’t have any insurance they
don’t have any insurer
so on their life but they want to insure
their child what are they planning to do
with a child that’s the thinking and so
we come back to the analogy how many
flew here on a plane can I see your
hands lots of you very good when they
did the safety brief they talked about
the oxygen mask right if the cabin
should lose pressure and oxygen mask
will appear grab it pull it towards you
and secure it over your non mouth and
nose securing with the elastic straps
although the bag may not inflate oxygen
will be fine but place your own mask
first before assisting your child the
same is true in insurance by a policy
for yourself before buying on your
children it’s a rule of thumb good rule
of thumb because what happens if you’ve
purchased a policy for your child and
something happens to you what have you
left them premium payments premium
payments what happens if you purchase
policy on yourself and something
happened to you what have you left them
money to make premium payments so it’s a
good strategy also is to purchase a
policy for the parents and get then get
one for the children because now
something happens to you those premiums
are covered there’s a couple other
options that you can do there’s also
something called a family plan which
allows you as a parent to purchase a
policy and also add your minor children
as a writer onto the policy so you can
ensure everybody at the same time so dad
buys a policy and he adds the rider so
now all his kids are covered my all all
the minor children under 18 are covered
now what happens if they have another
baby or they adopt another child well
that child can just be added on to the
rider no extra cost all I have to show
is a birth certificate there’s also one
other thing for children and this is
cool because it’s like buying term
insurance for children did you know
something children cannot
term insurance it’s way too much
insurance for too little premium the
insurance companies won’t allow it and
so they can get something called a
guaranteed insurability option and what
that is is it’s basically term insurance
for kids and you add it on to the policy
it’s a little it’s a paid for rider so
you add it on and then the insurance
company will give you options and they
say okay when child is 21 years old you
can convert X amount of insurance you
can add this much more insurance on to
their policy or you can buy a new policy
for this amount of insurance no more
underwriting necessary and then when
they’re age 28 you can do the same thing
and when they’re age 34 you can do the
same thing and and so on and so that’s
nice because that gives children another
option it gives them some basic term
insurance for lack of a better word
because what happens if you insure your
child and something happens between the
time you insure them and the time
they’re 18 and they can no longer get a
policy that’s happened to some of our
clients so fortunately they had the
guaranteed insurability option Rider
and now they can continue to add
insurance on their lives even though
they are quote uninsurable it’s a very
nice option to have so what we like to
do here at life benefits is whenever
somebody comes to us a client comes to
us we like to give them as many options
as are available we don’t ever want to
set them down this narrow hallway and
say if you just go straight you’ll be
all right because little curves and and
bumps come up so we want as many options
on the table as possible so that you
know given a situation comes up that is
not desirable or a little less than what
was planned you can grab one of those
options and still have a very nice
policy that works well and a plan that
will keep your future solid that’s what
I have for now thank you very much