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How Life Insurance Works

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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 gon na 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 gon na call those preferred people and we found some that were even healthier than the preferred people, so we’re gon na call. This super preferred, but there were also some that weren’t quite into the standard category and so we’re gon na 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 gon na 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 gon na, 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 gon na 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 gon na 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 gon na 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 gon na 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. [ Applause, ]

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