MR. WATSON: The bottom horizontal line represents age and premiums.
MR. WATSON: So as you move from left to right along that line and get older, the premiums never change. Do you agree?
STUDENTS: Yes.
MR. WATSON: The bottom of the vertical line is zero. At the top we will put $100,000. We'll angle the line down. And anywhere on this horizontal line we come over to his age, say 40, up, and then over, and how much is his death benefit? It's less than $100,000? Do you agree?
STUDENTS: Yes.
MR. WATSON: At age 50 the benefit would be even less. At age 55 it's even less. It's decreasing term. And the premiums, they stay the same. I'm just going to make up a number for the premium. All of our numbers are just conceptual. They don't mean anything, except to compare one thing to another. Does that make sense?
STUDENTS: Yes.
MR. WATSON: So a $100,000 decreasing term policy might be $200 a year. Every year it's $200, even though the amount of insurance is going down. Don't try to understand anything yet. You don't need to. Next to that, we have a level term policy for comparison, let's say for 30 years, up to age 60. A 30-year-old guy buys a 30-year level term policy. The horizontal line represents age and premiums, and the premiums stay the same. The vertical line represents the death benefit. But instead of it going down, you can see that it stays level. So anywhere I die on this line, what's the death benefit? $100,000. So the premiums would be what? Make up a number. Whatever number you want. They are going to be higher than the premiums for the decreasing term policy. Let's say $500. Do you all agree?
STUDENTS: Yes.
MR. WATSON: With both of these policies, the decreasing term and the level term, if I died the first year what would my beneficiary receive? $100,000. Everybody agree?
STUDENTS: Yes.
WOMAN: What about contestability?
MR. WATSON: Both policies are contestable for the first two years.
MR. WATSON: If I die in the first year with no fraud involved, what would the company pay under both policies?
STUDENTS: $100,000.
MR. WATSON: Now, what is your first name?
WOMAN: Jamie.
MR. WATSON: Jamie and I just returned from the beach where we bought a condominium for half a million dollars. We financed a hundred thousand. All Jamie wants if I die is to have money to pay off the condominium. Which one of these policies would accomplish that? Both of them would. Do you agree?
STUDENTS: Yes.
MR. WATSON: Which one should I use? Which one would be more economical? Decreasing term. Because the term would follow an amortization schedule of the note that I owe the bank. Does that make sense?
ALL: Yes.
MR. WATSON: In other words, each year the policy would decrease in the same amount as the note I owe the bank or the mortgage company. Does that make sense?
STUDENTS: Yes.
MR. WATSON: So you would have no money left over. If I died, it would only be a sufficient amount to pay off the mortgage. But how much is she paying for that, for a decreasing term policy? $200. Instead of how much for the level term? $500.