Chapter 12 Life Insurance
Chapter Objectives <ul><li>Describe the types of life insurance  that are available </li></ul><ul><li>Identify the factors...
Chapter Objectives <ul><li>Explain the possible settlement options  that are available for beneficiary payments </li></ul>
Background on Life Insurance <ul><li>Life insurance:  insurance that provides  a payment to a specified beneficiary when t...
Types of Life Insurance <ul><li>Term insurance:  life insurance that is provided over a specified time period and does not...
Types of Life Insurance <ul><li>Decreasing-term insurance:  a form of term insurance in which the benefits that will be pa...
Types of Life Insurance <ul><li>Term insurance options </li></ul><ul><ul><li>Renewability option:  allows you to renew you...
Life Insurance Premiums Exhibit 12.1: Example of Quoted Term Life Insurance Premiums Offered over the Internet
Financial Planning Online: Buying Term Life Insurance <ul><li>Go to:  http:// moneycentral .msn.com/ </li></ul><ul><li>Cli...
Types of Life Insurance <ul><li>Whole life insurance:  life insurance that continues to provide insurance as long as premi...
Determining the Amount  of Life Insurance Needed <ul><ul><li>Annual living expenses  </li></ul></ul><ul><ul><li>Special fu...
Types of Life Insurance <ul><ul><li>Comparison to term insurance </li></ul></ul><ul><ul><ul><li>Whole life has higher prem...
Financial Planning Online: Should You Buy Whole Life or Term Insurance? <ul><li>Go to:  http://www. financenter .com/produ...
Financial Planning Online: Return on Your Whole Life Insurance Policy <ul><li>Go to:  http:// financenter .com/products/ s...
Types of Life Insurance <ul><li>Universal life insurance:  life insurance that provides insurance over a specified term an...
Determining the Amount  of Life Insurance Needed <ul><li>Income method:  a method that determines how much life insurance ...
Determining the Amount  of Life Insurance Needed <ul><li>Income method:   a method that determines how much life insurance...
Life Insurance Premiums <ul><li>Factors that affect your insurance premiums </li></ul><ul><ul><li>Amount of insurance </li...
Life Insurance Premiums <ul><li>Using the Internet to price term insurance can be very efficient and may be less expensive...
Financial Planning Online: How Much Life Insurance Do You Need? <ul><li>Go to:  http:// moneycentral .msn.com/investor/ ca...
Settlement Options on a Life Insurance Policy <ul><li>Settlement options:   the alternative ways a beneficiary can receive...
Settlement Options on a Life Insurance Policy <ul><li>Installment payments settlement:  the payment of the benefits owed t...
Settlement Options on a Life Insurance Policy <ul><li>Interest payments settlement:   a method of paying the benefits owed...
How Life Insurance Fits  within Your Financial Plan <ul><li>Key decisions about life insurance for your financial plan are...
Integrating Key Concepts
Integrating Key Concepts <ul><li>Part 1: Financial Planning Tools </li></ul><ul><li>Part 2: Liquidity Management </li></ul...
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Chapter 12

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Chapter 12

  1. 1. Chapter 12 Life Insurance
  2. 2. Chapter Objectives <ul><li>Describe the types of life insurance that are available </li></ul><ul><li>Identify the factors that influence the amount of insurance needed </li></ul><ul><li>Review the factors that affect life insurance premiums </li></ul><ul><li>Examine the decision of whether to purchase life insurance </li></ul>
  3. 3. Chapter Objectives <ul><li>Explain the possible settlement options that are available for beneficiary payments </li></ul>
  4. 4. Background on Life Insurance <ul><li>Life insurance: insurance that provides a payment to a specified beneficiary when the policyholder dies </li></ul><ul><li>Role of life insurance </li></ul><ul><ul><li>Maintain financial support for dependents </li></ul></ul><ul><ul><li>Leave money for heirs </li></ul></ul><ul><li>Role of life insurance companies </li></ul><ul><ul><li>Provide coverage in exchange for premiums </li></ul></ul>
  5. 5. Types of Life Insurance <ul><li>Term insurance: life insurance that is provided over a specified time period and does not build a cash value </li></ul><ul><ul><li>Premium dependent on your health, age, gender, and length of term of the insurance </li></ul></ul><ul><ul><li>Usually renewable, but premiums will increase </li></ul></ul>
  6. 6. Types of Life Insurance <ul><li>Decreasing-term insurance: a form of term insurance in which the benefits that will be paid to the beneficiary are reduced over time and the premium remains constant </li></ul><ul><li>Mortgage life insurance: life insurance that pays off a mortgage in the event of the policyholder’s death </li></ul>
  7. 7. Types of Life Insurance <ul><li>Term insurance options </li></ul><ul><ul><li>Renewability option: allows you to renew your policy for another term once an existing policy expires </li></ul></ul><ul><ul><li>Conversion option: allow you to convert your term insurance policy into a different type of policy that will be in effect the rest of your life </li></ul></ul>
  8. 8. Life Insurance Premiums Exhibit 12.1: Example of Quoted Term Life Insurance Premiums Offered over the Internet
  9. 9. Financial Planning Online: Buying Term Life Insurance <ul><li>Go to: http:// moneycentral .msn.com/ </li></ul><ul><li>Click on: “Insurance” under the Planning heading, then click on “Life.” </li></ul><ul><li>This Web site provides step-by-step instructions on shopping for term life insurance. </li></ul>
  10. 10. Types of Life Insurance <ul><li>Whole life insurance: life insurance that continues to provide insurance as long as premiums are paid; not only provides benefits to the beneficiary but also has a cash value </li></ul><ul><ul><li>Nonforfeiture clause: allows you to receive the savings you accumulated if you terminated your whole life policy early </li></ul></ul>
  11. 11. Determining the Amount of Life Insurance Needed <ul><ul><li>Annual living expenses </li></ul></ul><ul><ul><li>Special future expenses like college education </li></ul></ul><ul><ul><li>Debt </li></ul></ul><ul><ul><li>Job marketability of spouse </li></ul></ul><ul><ul><li>Value of existing savings </li></ul></ul>
  12. 12. Types of Life Insurance <ul><ul><li>Comparison to term insurance </li></ul></ul><ul><ul><ul><li>Whole life has higher premiums </li></ul></ul></ul><ul><ul><ul><li>Whole life accumulates savings </li></ul></ul></ul><ul><ul><ul><li>Whole life premiums remain constant </li></ul></ul></ul>
  13. 13. Financial Planning Online: Should You Buy Whole Life or Term Insurance? <ul><li>Go to: http://www. financenter .com/products/ sellingtools /calculators </li></ul><ul><li>Click on: “Life Insurance,” then “Which is better: term or whole life?” </li></ul><ul><li>This Web site provides an opinion on which type of insurance you should buy. </li></ul>
  14. 14. Financial Planning Online: Return on Your Whole Life Insurance Policy <ul><li>Go to: http:// financenter .com/products/ sellingtools /calculators </li></ul><ul><li>Click on: “Life Insurance,” then “What is my return on a whole life policy?” </li></ul><ul><li>This Web site provides an estimate of the return you would earn </li></ul>
  15. 15. Types of Life Insurance <ul><li>Universal life insurance: life insurance that provides insurance over a specified term and accumulates savings for the policy holder over this time </li></ul><ul><li>Variable life insurance: life insurance that provides insurance over a specified term and allows policyholders to invest residual funds, after the term portion is paid, in various types of investments </li></ul>
  16. 16. Determining the Amount of Life Insurance Needed <ul><li>Income method: a method that determines how much life insurance is needed based on the policyholder’s annual income </li></ul><ul><ul><li>For example, 10 times your annual income, so, using this method, a person with an annual income of $40,000 would need $400,000 of life insurance coverage </li></ul></ul><ul><ul><li>Easy, but doesn’t consider individual circumstances </li></ul></ul>
  17. 17. Determining the Amount of Life Insurance Needed <ul><li>Income method: a method that determines how much life insurance is needed based on the policyholder’s annual income </li></ul><ul><ul><li>Does not consider your household situation </li></ul></ul><ul><li>Budget method: a method that determines how much life insurance is needed based on the household’s future expected expenses </li></ul>
  18. 18. Life Insurance Premiums <ul><li>Factors that affect your insurance premiums </li></ul><ul><ul><li>Amount of insurance </li></ul></ul><ul><ul><li>Cash value — term insurance is less expensive </li></ul></ul><ul><ul><li>Personal characteristics </li></ul></ul><ul><ul><ul><li>Age, health, gender </li></ul></ul></ul>
  19. 19. Life Insurance Premiums <ul><li>Using the Internet to price term insurance can be very efficient and may be less expensive </li></ul><ul><li>Focus on Ethics: Applying for life insurance </li></ul><ul><ul><li>A life insurance policy is a legal contract, so you must be truthful with all information you provide </li></ul></ul>
  20. 20. Financial Planning Online: How Much Life Insurance Do You Need? <ul><li>Go to: http:// moneycentral .msn.com/investor/ calcs /n_life/main.asp </li></ul><ul><li>This Web site provides a recommendation for the amount of life insurance you should have based on your financial situation. </li></ul>
  21. 21. Settlement Options on a Life Insurance Policy <ul><li>Settlement options: the alternative ways a beneficiary can receive life insurance benefits in the event that the insured person dies </li></ul><ul><li>Lump-sum settlement: a single payment of all the benefits owed to a beneficiary under a life insurance policy </li></ul>
  22. 22. Settlement Options on a Life Insurance Policy <ul><li>Installment payments settlement: the payment of the benefits owed to a beneficiary under a life insurance policy as a stream of equal payments over a specified number of years </li></ul>
  23. 23. Settlement Options on a Life Insurance Policy <ul><li>Interest payments settlement: a method of paying the benefits owed under a life insurance policy in which the company retains the amount owed for a specified number of years and pays interest to the beneficiary </li></ul>
  24. 24. How Life Insurance Fits within Your Financial Plan <ul><li>Key decisions about life insurance for your financial plan are: </li></ul><ul><ul><li>Do you need life insurance? </li></ul></ul><ul><ul><li>How much life insurance should you plan for in the future? </li></ul></ul>
  25. 25. Integrating Key Concepts
  26. 26. Integrating Key Concepts <ul><li>Part 1: Financial Planning Tools </li></ul><ul><li>Part 2: Liquidity Management </li></ul><ul><li>Part 3: Financing </li></ul><ul><li>Part 4: Protecting Your Assets and Income </li></ul><ul><ul><li>In Chapter 10 we learned about auto and homeowner’s insurance </li></ul></ul><ul><ul><li>In Chapter 11 we learned about health and disability insurance </li></ul></ul><ul><ul><li>In Chapter 12 we learned about life insurance </li></ul></ul><ul><li>Part 5: Investing </li></ul><ul><li>Part 6: Retirement and Estate Planning </li></ul>

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