Bring calculator for Chapter 3 6 groups, MIN 3 to a group – think about who you want to work with for the group case and

1. Bring calculator for Chapter 3 • 6 groups, MIN 3 to a group – think about who you want to work with for the group case and presentation. • We will pick the case the group presents next week • 4 groups 3, 2 groups 4 = 20

2. Motivation to Purchase Life Insurance • OVERVIEW • Needs-based purchase of life insurance • Permanent, temporary and savings needs • Economic theories and life insurance • Psychological theories and life insurance

3. Need is a Prime MotivatorNeeds-based Approach • Calculate financial needs assuming death occurs immediately • Subtract assets available to meet those needs • Purchase coverage for gap-filling - life, health, disability • Needs – classified as permanent or temporary or savings

4. PERMANENT Exist regardless of when death occurs Examples: Death Fund - funeral, probate costs, unpaid expenses, final illness expense Readjustment fund - time to sell house, lower standard of living, retrain for new job skills Emergency fund - dollars for unplanned events Permanent dependents - disabled children, spouse, parent Estate liquidity - estate taxes, equalizing bequests TEMPORARY Diminish and reduced to zero over time Examples: Mortgage fund Dependent's support - beware of S.S. blackout period for spouse of worker Education fund - offset by savings program; increases over time (PV terms) Permanent v. Temporary Needs

5. Saving Needs • Considered a permanent need • Generally unrelated to the need for life insurance • Reallocate lifetime consumption - what happens if one survives?

6. Economic Theory: Keynesian Theory • John Maynard Keynes - residual savings theory • Savings is a residual after consumption • To purchase life insurance a reduction in current consumption is required to add certainty to future consumption patterns

7. Economic Theory: Life-cycle Hypothesis • Franco Modigliani - multi period approach • Consumption is a function of a notion about the future • Early years savings are negative • Middle years - post dependency - savings positive • Retirement period - savings negative • Purchase of life insurance takes care of the human life contingencies that disrupt the pattern

8. Life Cycle Hypothesis Loans for home, car, credit cards College Loan Earned Income Consumption 25 43 50 65

9. Economic Theory: Human Capital • Investment people make in themselves should be insured • Similar to looking at machinery or other equipment

10. Economic Theory: Human Life Value • S.S. Huebner • Measures loss to the family if the wage earner were to die prematurely • i.e. actual future earnings or cost of service of an individual after subtracting self-maintenance expenses

11. Personality Types: Dominant • Characteristics • Ambitious • Driving • Decisive • Typical: Entrepreneurs, high-level managers • Goal Oriented, risk takers • Time important -- use numerical summaries

12. Personality Types:Interactive • Characteristics • Enthusiastic • Sociable • Outgoing • Willing to make decisions, but only after socializing, getting to know planner is important.

13. Personality Types:Steady • Characteristics • Orderly • Dependable • Modest • Likely to include family or business partners in decisions. • Makes decisions slowly and carefully, uses data.

14. Personality Types:Cautious • Characteristics • Introspective • Quantitative • Precise • Makes decisions slowly, after much thought • Doesn’t react well to changes, or new ideas

15. Stress - Reaction to External Excessive Force • Reactions to stress differ and include: • Denial • Stunned immobility • Apathy and depression • Docile dependency • Aggressive irritability and hostility • Lowers the level of anxiety felt due to adverse financial consequences of premature death or disability - relieves stress • Used in sales tactics

16. Motivation and Personality - Freud • Freud - development of personality in early life • id - immediate gratification • ego - individual responding to external world • superego - development of a conscious and internalizes society’s morals and norms • Purchase of life insurance is to satisfy needs • Which level of NEEDS?

17. Motivation and Personality - Pavlov and B. F. Skinner • If successful people purchase life insurance than to be successful I have to purchase life insurance

18. Motivation and Personality - Abraham Maslow • Identified hierarchy of needs • physiological • safety • love • esteem • self-actualization • Life insurance can – at a minimum - provide a sense of safety from financial harm

19. Reaction to Death • Denial - Life insurance should be called death insurance • Depends upon age, culture • “Does the person purchasing life insurance really acknowledge the possibility of immediate death?” • Freud says NO • Contemplation of one’s own death may lead to a financial solution - may also lead to inaction • Ernest Becker - it is an heroic purchase - a person can continue to do good after death – overcome death or extend influence beyond death