Chapter 12: Life Insurance Planning Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

Chapter 12:Life Insurance Planning

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

Copyright ©Houghton Mifflin Company. All rights reserved. 12 - 2

Learning Objectives

1. Understand the reasons why you might need life insurance and calculate the appropriate amount of coverage.

2. Distinguish among the types of life insurance.


Learning Objectives

3. Explain the major provisions of life insurance policies.

4. Apply a step-by-step strategy for implementing a life insurance plan.


Introduction

• Risk of dying too soon

• Risk of living too long


How Much Life Insurance Do You Need?

• The primary reason for buying life insurance is to allow the family members of the deceased to continue with their lives free from the financial burdens that death can bring.

• Beneficiary: The person named in the policy to receive the funds.


What Needs Must Be Met?

• Final expenses: One-time expenses occurring just prior to or after a death.

• Income-replacement needs

• Readjustment-period needs



• Debt-repayment needs

• College expense needs

• Other special needs



• Government benefits can reduce the level of need.– Social Security survivor’s benefits– Social Security blackout period

• Existing insurance and assets reduce the level of need.


What Dollar Amount Do You Need?

• The Multiple-of-Earnings Approach: easy but flawed.

• The Needs-Based Approach: a better method


Two Basic Types of Life Insurance

• Term Life Insurance (or Pure Protection)– Face amount

• Cash-Value Life Insurance– Cash-Value: Represents the value of the

investment element in the life insurance policy.


Term Life Insurance

• Guaranteed Renewable Term Insurance

– Protects you against the possibility of becoming uninsurable.

• Level-Premium Term Insurance– Level-Premium Term Insurance– Reenter Provision


Term Life Insurance

• Decreasing Term Insurance

• Convertible Term Insurance

• Group Term Life Insurance

• Credit Term Life Insurance


Cash-Value Life Insurance

• Some forms of cash-value life insurance pay a fixed return:– Cash-Value Life– Permanent Insurance– Whole (or Straight) Life Insurance– Limited-Pay Whole Life Insurance– Adjustable Life Insurance– Modified Life Insurance– Endowment Life Insurance


Cash-Value Life Insurance

• Some forms of cash-value life insurance pay a variable return:– Universal life insurance– Variable life insurance– Variable-Universal (or Flexible-Premium)

life insurance

• Don’t be fooled by vanishing-premium or return-of-premium policies.


Understanding Your Life Insurance Policy

• Life Insurance Policy

• Owner (or Policyholder)

• Insured

• Contingent Beneficiary


Policy Terms and Provisions Unique to Life Insurance

• Life Insurance Application: The policyholder’s offer to purchase a policy.

• Lives Covered– First-to-Die Policies: Cover more than

one person but pay only when the first insured dies.

– Survivorship Joint Life Policy: Pays when the last person covered dies.



• The Incontestability Clause

• The Suicide Clause

• Cash Dividends– Insurance Dividends– Participating Policies– Nonparticipating Policies



• Death Benefit: Amount that will be paid to beneficiary when the insured dies.

• Grace Period– Lapsed policy

• Multiple Indemnity– Multiple Indemnity Clause


Settlement Options

• Lump sum

• Interest income

• Income of a specific amount

• Income for a specific period

• Income for life


Policy Features Unique to Cash-Value Life Insurance

• The Policy Illustration– Guaranteed Minimum Rate of Return– Current Rate

• Nonforfeiture Values– Cash-Surrender Value


Policy Features Unique to Cash-Value Life Insurance

• Policy loans– Automatic Premium Loan– Living Benefit Clause– Viatical Companies

• Waiver of premium

• Guaranteed Insurability (or Guaranteed Purchase Option)


Step-by-Step Strategy for Buying Life Insurance

1. First ask whether or not, and for how much, your life should be insured.

2. Then properly integrate your life insurance into your overall financial planning.

3. Buy term and invest the rest.• Layering term insurance policies


Where and How to Buy Your Life Insurance

• You can easily buy life insurance online.

– Premium Quote Service: Offers computer-generated comparisons among 20 to 80 different companies.

• Or you can use a local insurance agent.


Where and How to Buy Your Life Insurance

• Compare costs among policies– Net Cost Method– Interest-Adjusted Cost Index Method– Interest-Adjusted Net Payment Index

Method


The Top 3 Financial Missteps in Life Insurance Planning

People slip up in when they do the following:

1. Let their life insurance agent convince them how much and what type to buy.

2. Buy their life insurance during their childbearing years through cash-value life insurance.

3. Ignore their changing need for life insurance as their life progresses.


Good Money Habits in Life Insurance Planning

• Calculate your life insurance needs every three years or when major life events occur, such as the birth of a child.

• Avoid being talked into buying types and amounts of life insurance that you do not need.



• Shop for term life insurance on the internet to obtain the lowest possible rates.

• Employ the principle of “buy term life insurance and invest the rest” with guaranteed renewable or level-premium term life insurance.



• Contribute the money saved by purchasing term rather than cash-value insurance into your retirement plan.

• If you decide that you need a cash-value life insurance policy, get one with a guaranteed insurability option.

Chapter 12: Life Insurance Planning Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

Documents

life insurance policy

renewable term insurance

universal life insuran

special needs slide

long slide

forms of cash

edition ppt slide program

level of need