Works
How
Life Insurance
Savvas Christoforou CLU FLMI MBA LUTCF
Chartered Insurer
‘’Love insurance, the other name for Life Insurance, because people do it mainly for the people they love the most’’ Savvas Christoforou CLU FLMI LUTCF Chartered Insurer
A brief Bio Savvas Christoforou is the Managing Director of Insurancelink. He studied at American College of Financial Services in America and has been awarded the title of Chartered Life Underwriter (CLU). He holds a civil engineering degree (Bsc Civil Engineering) and postgraduate degree in business administration (MBA) from University of New Haven in America. He also holds the title of Fellow (LUTCF), from the American professional body Life Underwriters Training Council, and the Fellow (FLMI) from the American professional body Life Management Institute. He has taught in America in Life Underwriters Training Council, as well as the Insurance Institute of Cyprus. He has worked for many years in in America in Hartford Connecticut the so-called capital Insurance of the world, in various giants of the insurance industry and has studied Insurance issues and field trained with them. He provides professional advice to selected individuals and businesses in Cyprus and abroad.
About this guide We have designed this guide to help you understand how Insurance works and why people buy it, so that you will be able to make an informed choice before you buy a policy. As well as this guide, the information you receive from Insurance companies will tell you more about the product’s that you are considering buying. They outline what is, and is not, covered. Remember that products from different companies will vary. If you have any questions, your financial adviser or insurance company will be able to answer them.
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Contents The idea behind Life Insurance ..............................................................
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Information needed to apply for life Insurance ............................
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Who Needs Life Insurance? .............................................................
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Types of Life Insurance ............................................................................ 11 Tax Advantages of Life Insurance .................................................. 11 How much life insurance do I need? .................................................... 12 For how long a term I need Life insurance? ......................................... 13 Can I buy a Life Insurance policy on someone else’s life? ................. 14 Insurable Interest of Family .............................................................. 14 Insurable Interest of Creditors .......................................................... 15 Insurable Interest of Business ............................................................ 15 Relationships ............................................................................... 15 Trusts ............................................................................................ 15 Personal Use of Life Insurance ......................................................... 15 Life Insurance Protection .......................................................... 16 Disability Insurance .................................................................... 16 Personal Accident Insurance ................................................... 16 Critical Illness Life Insurance ..................................................... 17 Money Accumulation Plans ..................................................... 17 College Savings Plans ............................................................... 17 Retirement Plans ........................................................................ 18 Investment Plans ........................................................................ 18
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Business use, of Life Insurance ............................................................... 19 Business Continuation Planning ...................................................... 19 Funded Buy-Sell Agreements .......................................................... 19 Key Person Insurance ....................................................................... 20 Living Buyouts .................................................................................... 21 Disability Buy-Out Insurance ............................................................ 21 Golden Handcuffs ............................................................................ 21 Group Life Insurance ........................................................................ 22 Group Disability Insurance ............................................................... 22 Group Personal Accident Insurance .............................................. 23 Group Retirement Plans ................................................................... 23 Life Insurance Settlement options .......................................................... 24 Life Income With No Certain Period ............................................... 24 Life Income With Certain Periods .................................................... 25 Joint And Last Survivor Income Option .......................................... 25 Interest Income Option .................................................................... 26 Fixed Period Income Option ........................................................... 26 Fixed Amount Income Option ........................................................ 26 What Information Is needed for a Life Insurance Claim? .................... 27 Insurance Claim Form ...................................................................... 27 Death Certificate .............................................................................. 27 Policy Holder or Beneficiary ............................................................. 28 Autopsy or Police Report ................................................................. 28 7
will need to keep working, which means the kids will need a nanny or day care. You might not need a huge life insurance policy, but you can buy a policy that fits the financial needs of your family. Some people buy life insurance policies when they get married, particularly if the insured person makes considerably more money that the spouse, or if either the insured or the spouse have other financial dependents, like parents or siblings. Most people buy life insurance when they get pregnant with their first child. Once you’ve reached retirement age, there’s less of a need for life insurance. Now your children are most likely financially independent and you’re already living on retirement savings and investment income. One reason for an older person to keep a life insurance policy is to provide extra money for his or her spouse to cover unexpected medical and long-term care expenses later in life. Some older people hold onto life insurance policies as a way to pay for “end of life” expenses like the cost of settling an estate. But the most basic reason for retaining a life insurance
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policy later in life is also the oldest reason: to cover the cost of your funeral and burial. Another reason to buy life insurance to is to pay for a particular expense. If you buy a home, it’s common to sign up for a 30-year mortgage. But what if you die in 10 years? There are special life insurance policies that are tied directly to mortgages, decreasing in value as you continue to pay off the mortgage debt.
Types of Life Insurance The most basic type of life insurance is term life insurance. Term life insurance policies cover the policyholder for a set number of years, anywhere from 1 to 30. For younger, healthy people, term life insurance is the least expensive option. You pay relatively low rates for a fixed number of years with a high level of coverage. Something to consider if you choose term life is that the premium is only fixed for the length of the policy. If the policy expires and you want to renew, you’ll pay a higher premium because you’re older now, and maybe less healthy. Term life policies have no cash value of their own. They don’t accrue interest and you can’t borrow money against them. Basically, they’re “pure” insurance products. If you don’t die, you can’t collect. All of the other types of life insurance fall under the heading of permanent life insurance. As the name implies, the policy is good from the day you buy it until the day you die, no matter when you die. Permanent life policies can either have a fixed or flexible premium, and they can be used as an investment or savings plan to provide for Children Education or for Retirement. The biggest difference between term and permanent life policies is that permanent policies include a cash value component. This means that the insurance company invests your premium payments to build up cash reserves in your account.
Tax Advantages of Life Insurance The advantage of Life Insurance is that you aren’t taxed on investment earnings, and the final cash Value its Tax Free. The Biggest advantage is that the premiums you pay for Life Insurance are TAX DEDUCTIBLE up to a certain limit. You can also borrow from your cash reserves tax-free. 11
How much life insurance do I need? If you’re going to buy life insurance, make sure you’ve got enough. There is no simple answer to how much coverage is enough. Some financial planners say you need enough insurance to replace five to seven years of your salary. If you have young children or significant debt, you should bump up your coverage so you have enough to replace as much as 10 years of your salary, they say. That would mean a person making €50,000 a year should have anywhere from €250,000 to €500,000 worth of coverage or more. Remember, the sole purpose of life insurance is to replace your income in case you die, so that your dependents can maintain their current lifestyle. Factors to consider include whether the surviving partner will have child care expenses if one partner is out of the picture. Do you have other assets on which to draw? Will your children be out of the nest soon? These, and many other factors, influence the decision on how much coverage you need. Buying a whole-life policy doesn’t necessarily mean you are fully insured. Because of the investment component of whole life, the policies are much more expensive than term. Don’t simply buy less coverage, as it defeats the purpose of buying insurance in the first place: to cover dependents.
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For how long a term I need Life insurance? The secret to buying a policy with the right term is figuring out how long you need to be insured. You start by estimating when your children will be out on their own and no longer in need of your financial support. Life insurance is not a substitute for a retirement plan. You want to plan So if your children are 3 and 5 now, so that you’ll have enough to live on you’d probably want a policy that when you retire, and you won’t have covers you at least until the youngest to keep paying insurance premiums. is 22, so that’s about a 20-year term. But this depends somewhat on your There are exceptions, however. age as well. People who start families late in life, Say you also want to cover your spouse for your lost income until what would be your normal retirement age, 65, and you’re only 35 now. Then you would want a 30-year policy. Keep in mind that insurance gets expensive as you leave your 50s. So you may pay more to cover yourself until 65, even if you lock in a level-premium, 30-year policy when you are 35. Coverage past age 70 or so may be unattainable.
or who have complex estate-planning issues, may well have a need for life insurance beyond the customary retirement age. One more thing: Steer clear of socalled mortgage insurance policies, which pay off the balance on your mortgage if you die. The problem is that you are paying for a steadily declining amount of coverage, as you pay down your mortgage. It’s best to include the mortgage payments in your calculations when d termining how much coverage you need.
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Can I buy a Life Insurance policy on someone else’s life? To prevent people from taking out a life insurance policy on the life of a stranger and then killing them to get the life insurance proceeds, or having life insurance become a gambling device persons purchasing a policy must have an “insurable interest” in the life of the person being insured. In dealing with life insurance, an “insurable interest” generally means a substantial interest engendered by love and affection in the case of persons related by blood, and a lawful and substantial economic interest in the continued life of the insured in other cases. People are always considered to have an insurable interest in their own lives, and generally also have an insurable interest in the lives of their spouses and dependents. Business partners may have an insurable interest in each other, and a corporation may have an insurable interest in its employees’ lives, particularly key employees. When purchasing a life insurance policy on somebody other than yourself, there is really just one requirement that needs to be met. That is one of insurable interest, which basically means it is in your best interest for the person to remain alive. Your interest in the person remaining alive can be for emotional or monetary reasons.
Insurable Interest of Family Purchasing life insurance on immediate family members such as a spouse, child, parent, sibling, grandparent or grandchild is typically accepted on grounds of insurable interest. More distant relatives such as nieces and nephews or aunts and uncles do not automatically create an insurable interest. Unmarried couples may be able to prove insurable interest through proving joint assets and wills. Some states recognize the insurable interest of engaged 14
Insurable Interest of Creditors Creditors are deemed to have an insurable interest in a person who owes them money and are allowed to take out life insurance up to the amount they are owed. Creditors also need the consent of the person to be insured before purchasing the life insurance policy.
a trust. Trusts also allow you greater control over your money, as you can determine who will benefit by how much and when, even leaving a trustee to manage it for you before it passes into the recipients hands.
Insurable Interest of Business Relationships The business world gives way to insurable interest; if it can be proved it’s in the best interest of the life insurance purchaser that the insured survive. These can include business partners, major stockholders or key employees of a company.
Somebody always pays for Life Insurance, ‘’either somebody while he/she is alive or the ones left behind if he/she goes suddenly without Life insurance!
Trusts Many experts strongly recommend that write your life insurance into a trust. The advantages of this are numerous. The major reason is that, the payout is likely to reach your loved ones much quicker, as the often lengthy legal process of probate (which asses the legal right of an executor to distribute money left to them) does not apply to funds left in
Personal Use of Life Insurance Life Insurance Protection Life Insurance it’s a bag of money for your family to use when they will need it the most, and you will not be there!!! It’s like a bank account that they can take money when they need it and the most important it’s that they don’t have to return it.
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Disability Insurance Disability Insurance can be added in Life insurance so to pay you your salary if you lost your ability to earn an income. It can happen in an instant, when a sudden accident or serious illness leaves you unable to work and earn money. Your other health insurance can help with the medical bills. But to replace lost income, you need disability income protection insurance, so you can continue to pay your bills and live with dignity. Personal Accident Insurance Millions of people around us have accidents every year whether it’s inside the home, playing sports, recreation events, at work, in the car etc and if you’re not prepared for it can be an inconvenience on your life but it can also have a devastating effect on your finances. With Personal Accident Insurance you will receive a monthly income which is free of income tax payable to you until you are fit enough to return to work Personal Accident Insurance is also known as Accident Sickness Insurance which not only covers you for accidents but also covers you should you have to stop working due to a sickness...
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Critical Illness Life Insurance Critical Illness insurance is an insurance product which covers the policyholder if he or she is diagnosed to have one of the critical illnesses that is named in the insurance policy, like Cancer, Stroke, Heart Attack, Coronary Artery Bypass Surgery, Kidney Failure, Major Organ Transplant, Multiple Sclerosis, Coma, Paralysis Dismemberment, Loss of Independent Existence, Aortic surgery, Blindness, Deafness, Muteness (loss of speech), Major Burns, Benign Brain Tumour, Motor Neuron Disease, Alzheimer’s Disease, Parkinson’s Disease, Cystic Fibrosis, Heart Valve Replacement Money Accumulation Plans Saving money is one of those tasks that’s so much easier said than done. How much money will you save, where will you put it, and how can you make sure it stays there? The best way it’s to be done in a systematic way by savings small amounts for long time, in an investment plan. This money can be used for funding college for children, savings for retirement or just accumulating money. College Savings Plans Your doctor calls to say you’re pregnant. Will it be a girl or a boy? Will your child grow up to be an accountant? Or a nurse? Or even an engineer? Can you afford to give your child the best possible education, right through to university, to ensure the best opportunities? As a parent, you don’t need any reminding of the urgency to start planning and saving today for your child’s future. The costs of a university degree, a car or deposit on a flat can frighten off anyone but you have to start somewhere. If you start early enough, you can turn hopes into reality. 17
Retirement Plans Your retirement can be an exciting and fulfilling time in your life. Perhaps you would like to start a new hobby, revel in outdoor life, watch birds or study astronomy, take up a sport such as golf or bowls, or even travel long distances to cement ties with family and friends. To do this you will need a Retirement Plan In general, a Retirement Plan is a financial arrangement set up ahead of retirement time in order to provide you with an income when you are no longer earning a regular income from employment.
Investment Plans Life Insurance can also be used as an investment plans to plan for various money accumulation plans that you may have, such as savings for a supplementary retirement plan, wealth creation buying a second house etc.
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Business use, of Life Insurance Business Continuation Planning Have you ever considered how your business would survive in the event a key employee, owner or partner suddenly died or became disabled? How would you continue to meet payroll and overhead expense obligations if a key revenuegenerating employee were suddenly unable to perform his or her duties. Life Insurance can be used as a financing tool in the following business applications. Funded Buy-Sell Agreements A buy–sell agreement, also known as a buyout agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business. It may be thought of as a sort of premarital agreement between business partners/ shareholders or is sometimes called a “business will”. An insured buy–sell agreement, (triggered buyout is funded with life insurance on the participating owner’s lives) is often recommended by business succession specialists and financial planners to ensure the buy–sell arrangement is well-funded and to guarantee there will be money when the buy–sell event is triggered. 19
A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement or a separate, freestanding agreement, and controls the following business decisions: • Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders); • What events will trigger a buyout, (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company) and; • What price will be paid for a partner’s or shareholder’s interest in the partnership and so on? Buy-sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan. For greater neutrality and effectiveness of the buy–sell arrangement, the service of a corporate trustee is recommended. Key Person Insurance Employees are the greatest asset a business has, and all businesses have key individuals without which there would be no business. Key Persons can be anyone from the Owner and partners, executives, a key sales person or anyone else that the business heavily depends on. If a Key Person were to die or become unable to perform their duties due to illness or disability the business will suffer a loss. This loss can come in the form of lower sales, increased overhead or loss of goodwill. Protecting your business against these potentially catastrophic losses is where Key Person Insurance provides a solution.
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Living Buyouts A means of providing a retiring business owner with a fair price for their business interest and ensuring the remaining owners have the funds to purchase and continue the business successfully, using a life insurance policy which will create income to buy out shares or other obligations while the insured is still alive Golden Handcuffs Disability Buy-Out Insurance
Golden handcuff agreements indeed tie an executive to the compaIf a Key Person is also a shareholder, ny, but the reward can be substantheir disability can greatly affect the tial and may even include a share of profitability of a business as they are ownership. not able to contribute to the revenue of the business, however, they can still For owners, a golden handcuff receive dividend payments from the agreement can be an expensive business indefinitely. In the case of a way to lock in top executives. Part prolonged disability, the remaining of the company’s assets will have to shareholders may wish to purchase be given up either through stock opthe disabled persons shares in the tions, deferred payments, phantom business. Rather than taking a bank stock, or a similar plan. However, if it loan; which may be difficult with a keeps the top employee on staff it’s a disabled shareholder, or using per- move that actually should enhance sonal assets to purchase the shares, revenue, and therefore should be a Disability Buyout Policy, would pro- seen as an investment and not an vide a onetime lump sum benefit expense. payable to the company to fund the purchase of the disabled shareholders shares. 21
Group Life Insurance
Group Disability Insurance
Group life insurance covers the lives of multiple persons such as some or all employees of a business, members of a labor union, or members of an association. Depending on the group life insurance policy, the insured person may receive life insurance coverage as an employee benefit, make a contribution to pay part of the cost, or may pay for the group life insurance
Group Disability insurance plans are designed to protect an employees’ ability to earn an income and allow him/her a stable income in the event of a disability which can terminate their employment. This enables an individual, despite of the disability, to secure a well financed future.
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Group Disability provides employees with an incentive to work in a more productive manner and provide a higher productivity to the organization. These solutions are designed optimally to ensure a higher profitability of the organization.
Group Personal Accident Insurance
to illness unless directly related to the accident. Not to be confused with life Group Personal Accident will pay insurance, PA and AD&D are more out a lump sum in the event of acci- specific about the circumstances in dental dismemberment, accidental which the policy will pay. death or other accidental injury. This differs from disability insurance, which pays out over an extended period of time, and is related to fitness to perform an occupation. An example for when Group Personal Accident cover would apply is if you lost a limb in a car accident. The dismemberment coverage can pay you a specified lump sum amount, while your medical insurance would cover hospitalization or other medical fees. In case you don’t have medical Insurance we can add a hospital cover for the Group Retirement Plans accident in the Group accident inYour retirement can be an exciting surance. and fulfilling time in your life. Perhaps Personal Accident insurance is simi- you would like to start a new hobby, larly meant to cover injuries result- revel in outdoor life, watch birds or ing in the loss of life or limb, but also study astronomy, take up a sport such can be further extended to less sig- as golf or bowls, or even travel long nificant losses, such as a fingertip or distances to cement ties with family toe. The lump sum payout is deter- and friends. To do this you will need a mined by the percentage indicated Retirement Plan In general, a Retirein the schedule, based upon the ap- ment Plan is a financial arrangement pendage lost or the portion lost. Both set up ahead of retirement time in policies react when the loss is deter- order to provide you with an income mined to be the direct result of a re- when you are no longer earning a cent accident, and neither responds regular income from employment.
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Life Insurance Settlement options Life Insurance Settlement Options are used to distribute the proceeds of a life insurance policy to a beneficiary. A life insurance settlement can be made in cash...that is in one lump sum...or it can be made in the form of an income. There are several ways the income can be paid. Let us look at what each life insurance settlement income option is all about and how they can apply to real life situations. • Life Income With No Certain Period. As the heading suggests, if you choose this option, you would receive whatever income the proceeds of the policy would provide for as long as you live. This income ceases upon your death. The amount of income would be more than the income provided with certain period option mentioned below. Let us suppose you are the beneficiary of a life insurance policy and you have no living relatives or dependents. You also need the maximum income you can receive to live on. This may be a good life insurance settlement option to choose because you will the largest life income available.
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• Life Income With Certain Periods. You may choose a life income just like the above example but with 10 years certain, 15 years certain 0r 20 years certain. What this means is that even if you should die after receiving the income for one year...or any period of time for that matter...a beneficiary you name would receive this income for an additional 9 years, 14years, or 19 years, depending on your income choice. Let us suppose a husband dies, who has a two year child. He set up his life insurance to provide an income to his wife for as long as she lives. He also has to consider his two year old child in case his wife should die in the child’s formative years. If the wife should die also the child would receive the same income for an additional 18 years, if he chose the Life income with a 20 year certain period. Of course, this case is more complex than that. A Guardian and a Trust would need to be set up. • Joint And Last Survivor Income Option. If you chose to use this life insurance settlement option the income would paid to two beneficiaries and would cease only after the last beneficiary died. Let us suppose a husband and wife is named beneficiary of a life policy set up by the husband’s parents. The income would be paid to them both and would continue even if one died. The income would cease on the death of the last to die. 25
• Interest Income Option. With this life insurance settlement option...upon the death of the insured... the principal would stay intact with the insurance company and the interest would be paid to the beneficiary in whatever manner they should choose. For example an income could be paid monthly or annually. Let us suppose the proceeds of the policy is $1,000,000 and is payable to a frugal wife. Let us also suppose the income derived from this $1,000,000 is 7% per annum. That is $70,000. Her house is paid off. She is receiving a pension. Her children are grown. This may be a good life insurance settlement option to choose. She could take the principal any time she chooses or her beneficiaries would receive the principal...$1,000,000...upon her death. • Fixed Period Income Option. The recipient of the income says to the insurance company, “pay me whatever these proceeds will provide over a period of say 10 years.” The beneficiary would receive equal payments on a monthly, quarterly, half yearly or yearly basis for 10 years. The amount paid to the beneficiary of the income would be considerably more than had the money been taken in one lump sum. • Fixed Amount Income Option. The beneficiary of the proceeds says to the insurance company, “Pay me $1,000 per month until the proceeds are exhausted.” Here this person decides how much income he or she needs. The actual payout will be considerably more than the principal as the balance held by the insurance company is always earning interest. 26
What Information Is needed for a Life Insurance Claim? When someone passes away, his or her family will have to pay for funeral arrangements as well as funeral plots and graves. The cost of death can be high, and insurance policies come in handy. Depending on the amount of a life insurance policy, the funds and benefits can be used beyond the funeral and burial arrangements. Before a life insurance policy is awarded, claims and other important documentation must be provided. Insurance Claim Form • The first step needed to file a life insurance claim is contacting the insurance carrier. The insurance carrier will give the policy holder or beneficiary the necessary claim forms needed to begin the process. If the insurance carrier who issued or sold the life insurance policy is unavailable, the holder and beneficiary may contact the insurance company directly. Death Certificate • Before a life insurance claim may be processed, the beneficiary will need to provide a death certificate for the insured person who has passed away. The death certificate must be legal and notarized. A copy of the death certificate can be obtained from the coroner, funeral home director or facility or the state health department where the death occurred. This certificate validates the death and insurance claim.
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Policy Holder Or Beneficiary • If an individual has taken out life insurance on an individual, he or she is the policy holder. In the event that someone passes away, and has their his life insurance policy, the policy will be awarded to the beneficiary. The beneficiary is the person in which the policy holder trusted to properly handle the benefits and funds awarded at the time of the policy holder’s death. Anyone who has not been named as the beneficiary will have legal troubles making a claim on the life insurance policy. Beneficiaries can be minors, however, the legal documents may not be signed until the minor reaches legal age. Autopsy Or Police Report • An autopsy or police report is needed when filing a life insurance claim. The reason being is suicide deaths are not covered under all life insurance policies. Some life insurance policies have what is called a suicide clause. The clause immediately terminates the life insurance benefits immediately. This insurance will be voided under the suicide clause whether the insured was sane or insane at the time the suicide was committed. If you want any clarification or have any questions , please feel free to contact me at 22 26 96 46 or drop me an e-mail at savvas@insurancelinkcyprus. com, or fill out the enquiry form below and I will be more than happy to answer you and give you a quotation if you are interested.
Disclaimer This information is only for information purposes and not for providing any professional or legal advice through it. Insurance link and its or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any decisions based on the contents of this guide. Use of this guide is at the user’s own risk. The user must make his own decisions based on his specific objective. Insurancelink does not warrant completeness or accuracy of any information published in this guide.
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