Chapter 12: Life Insurance Planning
Objectives
Identify the purpose of life insurance and the reasons for buying it.
Recognize that the need for life insurance varies over the course of one’s life and identify the procedures used to calculate life insurance needs.
Objectives
Distinguish among the various types of term and cash-value life insurance policies.
Describe and explain the purpose of the major provisions of life insurance policies.
Discuss important points to consider when choosing and buying life insurance.
What is the Purpose ofLife Insurance?
To protect people who depend on you from financial loss related to your death 78% of all American households have it
To make charitable bequests upon your deathTo save money for retirement or children’s
educationTo leave as part of your estateTo pay off a mortgage or other debts at the
time of death
The Principle of Life Insurance
Mortality tables provide odds on your dying, based on your age and sex
Your premium is based on the projections for the payouts for persons who die
Determining Your Life Insurance Needs - Ask Yourself...
Do you need life insurance?do you have people you need
to protect financially?does your partner work?
What are your objectives for life insurance? to accumulate money for retirement? to provide funds when you die?how much can you afford?
Estimating the Amount ofLife Insurance You NeedThe Easy Method
typically, you will need to have enough insurance to cover 70% of your income for seven years
The DINK (dual income, no kids) MethodThe “Nonworking” Spouse MethodThe “Family Need” Method looks at
employer provided insuranceSocial Security benefits income and assets
Multiple-of-Earnings Approach
Determining Life Insurance Needs
CALCULATING DOLLAR LOSS:
Types of Life Insurance Policies
Term life insuranceprotection for a specified period of time if you don’t pay premiums, coverage
stops renewability option
at the end of the term you can renew the policy without having a physical
Types of Life Insurance Policies
Term life insurance (continued)
conversion optioncan change your policy from term to a whole
life policy without a physical decreasing term insurance
your premium stays the same, but the amount of coverage decreases as you age
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Types of Life Insurance Policies
Whole life insurance you pay a premium as long as you live amount of premium depends on your age when
you start the policy provides death benefits and accumulates a cash
value you can borrow against the cash value or draw it
out at retirement look carefully at the rate of return your money
earns
(continued)
Whole Life Policy OptionsNonforfeiture clause
if you stop paying premiums you can use the cash value in a variety of ways.
Limited payment policypay higher premiums during your earning
years only, keeping lifetime coverageVariable life policy
minimum death benefit guaranteed, but can be more depending on how your premium dollars are invested
Whole Life Policy Options
Adjustableyou can change your premium amount
and thus your coverageUniversal life
lets you pay premiums in almost any amount
combines term insurance and investment elements
(continued)
Decreasing Term Insurance
Comparison of Term vs. Cash Value
Types of Policies Issued in 1994*
10%*1997 Insurance Fact Book
8%
Term22%
Whole Life45%
Other Variable Universal
Universal
11%
Variable2%
Decreasing2.0%
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Other Types of Life Insurance Policies
Group life insuranceoften through an employerno physical requiredusually term insurance
Credit life insurancedebt is paid off if you die
mortgage, car, furniturealso protects lendersexpensive protection
Life Insurance Contract Provisions
Naming your beneficiary (one or more)Length of grace period for late paymentsReinstatement of a lapsed policy if it has not
been turned in for cashSuicide clause during first two yearsAutomatic premium loans
uses the accumulated cash valueto pay the premium if you do not
Life Insurance Contract Provisions Misstatement of age provision Policy loan provision
can borrow against your cash value Rider to add or alter benefits
cost of living protection Waiver of premium disability benefit Accidental death benefit
pays twice the policy face amount Guaranteed insurability option Accelerated benefits
(continued)
Buying Your Life Insurance
Look at your income, savings, group life insurance, and Social Security benefits
Compare policy costs which are affected bycost of doing business return on its investmentsmortality rate among policyholders features of the policycompetition from other companies
Buying Your Life Insurance
Use the interest-adjusted index to compare policies takes into account the time value of moneyhelps you make cost comparisons among
insurance companiesDetermine from whom to buy your policy
examine both private and public sources look up the company’s rating
(continued)
Choosing Your Insurance Agent
Ask friends, parents and neighbors for recommendations
Find out if the agent belongs to professional groups or is a CLU
Is the person willing to take the time to answer your questions and find a policy that is right for you?
Do they ask about your financial plan? Do you feel pressured? Are they available when needed?
Obtaining and Examining a Policy
Apply and provide medical history
Read all of the contract
After you buy it you have ten days to change your mind
Give your beneficiaries and lawyer a copy
Choosing Settlement Options
Options are the choices for how you want the money paid out
One lump-sum is most commonLimited installment plan
in equal installments for a specific number of years after your death
Income for life payments to the beneficiary for life
Proceeds left with the company pays interest to the beneficiary
Should You Switch Policies?
If benefits exceed costs of getting another physical and paying policy set up costs.
Are you still insurable?Can you get all the provisions
you want?
Financial Planning with Annuities
What is an annuity? a contract where you pay money in, and at
a certain date get regular payments back during your lifetime
Why do people buy annuities? to supplement retirement income and to
shelter income from taxes How are annuities taxed?
income deducted and interest earned is not taxed until you draw the money out