Chapter 9

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Managing Life, Health, and Disability

Risks

Face value
Insurability: http://www.lifequote.com/Policy-Rate-Classifications/how-do-rate-classifications-work.html

2007 DF Institute, Inc.

Identifying Risks associated with

Premature Death
Bob: Age 55 (Doctor)
Risks.
Im worried
about

Cost/Benefit.
What are the
tradeoffs?

2007 DF Institute, Inc.

Mary: Age 45 (Homemaker)

Goals.
I want to

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Road Map.
How do I

Identifying Risks Associated with

Premature Death
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Inadequate financial resources loss of income

Income replacement & readjustment expenses
Dependents Who? Needs? Time frame? Quality of
life?
Funding for goals no debt, education expenses

Estate preservation Keep the wealth

Medical and other final expenses
Illiquid estates (farm land)
Estate settlement expenses
Probate
Fed, state estate taxes; fed, state income taxes, property
taxes

Repayment of debt
2007 DF Institute, Inc.

Measuring Needs Related to

Premature Death
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS
Human life value approach (Replace future
earnings)

Net income or FSE replacement based on an inflationadjusted, or real, rate of return and WLE

Financial needs approach(Cash Flow Based)

Summation of the PV of the inflation-adjusted cash flow

need by periods and the PV of lump sum goals/needs

Capital retention approach (factors in current assets

as a resource/maintains principal)
ROI based on CAI (Capital Available for Income), with the
CAI assets retained as principal available upon death
B/S = 1,000,000*.50 = 50,000

2007 DF Institute, Inc.

Human Life Value Approach

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Calculate the familys share of earnings

(FSE) Homework dont worry about
making this adjustment just calculate the
gross need. Discuss differences between
wages and life insurance proceeds.
Determine work life expectancy
Determine PV (present value) of workers
stream of expected earnings
Go through example in the book.
2007 DF Institute, Inc.

Financial Needs Approach

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Lump-sum (cash) needs

Final expenses and debts

Mortgage liquidation or payment fund
Education expenses
Emergency expenses

Income (cash flow) needs

Readjustment period
Dependency period
Spousal life income (pre- and post-retirement/Social Security
benefits)

Sum the PV of the cash flow needs based on an

inflation-adjusted, or real, rate of return and lump sum
cash needs less liquid assets & insurance proceeds
2007 DF Institute, Inc.

Capital Retention Approach

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Prepare a personal balance sheet

Calculate CAI (capital available for
income)
Determine the amount of additional capital
required to produce the projected return
(nominal rate) to meet the annual income
shortfall (deficit)

2007 DF Institute, Inc.