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  • 1. C HAPTER 12 12-1 Personal Finance Life Insurance Kapoor Dlabay Hughes 6e
  • 2. An Introduction to Life Insurance
    • Life insurance is obtained by purchasing a policy, with the insurance company promising to pay a lump sum at the time of the policy holder’s death, or sometimes while they are still alive.
    • The purpose of life insurance is to protect someone who depends on you from financial loss related to your death. Other reasons are.
      • To make charitable bequests upon your death.
      • To save money for retirement or children’s education.
      • To leave as part of your estate.
      • To pay off a mortgage or debts at the time of death.
  • 3. The Principle of Life Insurance
    • Mortality tables provide odds on your dying, based on your age and sex.
    • Your premium is based on your life expectancy and the projections for the payouts for persons who die.
  • 4. Determining Your Life Insurance Needs - Ask Yourself...
    • Do you need life insurance?
      • Do you have people you need to protect financially?
      • Do you have a partner who works?
    • What are your objectives for life insurance?
      • How much money do you want to leave your dependents should you die today?
      • When you retire what income do you need?
      • How much will you be able to pay for your insurance program?
  • 5. Estimating Your Life Insurance Requirements
    • The Easy Method.
      • Typically, you will need 70% of your salary for seven years while family adjusts.
    • The DINK (dual income, no kids) Method.
    • The “Nonworking” Spouse Method.
      • Multiply the number of years until the youngest child reaches 18 by $10,000.
    • The “Family Need” Method.
      • More thorough than the first three because it also considers employer provided insurance, Social Security benefits, and income and assets.
  • 6. Two Types of Life Insurance Companies
    • Stock life insurance companies are owned by the shareholders.
      • 95% are of this type.
      • Sell non-participating policies.
      • Amount of premium stays the same.
  • 7. Two Types of Life Insurance Companies
    • Mutual life insurance companies.
      • Owned by the policyholders.
      • 5% of policies are from this type of company.
      • With participating policies the premiums are higher than non-participating policies. However part of the premium is refunded to the policyholders annually. This is called a policy refund.
    (continued) 12-7
  • 8. Types of Life Insurance Policies
    • Term life insurance.
      • Protection for a specified period of time.
      • If you don’t pay premiums, coverage stops.
      • A renewability option means that at the end of the term you can renew the policy without having a physical.
      • Conversion option allows you to change your policy from term to whole life without a physical.
      • With decreasing term insurance your premium stays the same, but the amount of coverage decreases as you age.
  • 9. Types of Life Insurance Policies
    • Whole life insurance also called straight life.
      • 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) 12-9
  • 10. Whole Life Policy Options
    • Limited payment policy.
      • Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65).
      • Your policy then becomes “paid up” and you remain insured for life.
    • Variable life policy.
      • A minimum death benefit guaranteed, but the death benefit can rise above it depending on yield of the dollars invested in a separate fund.
  • 11. Whole Life Policy Options
    • Adjustable.
      • You can change your policy as your needs change. For example, you can change your premium payments or the period of coverage.
    • Universal life.
      • Lets you pay premiums in almost any amount.
      • Combines term insurance and investment elements.
    (continued) 12-11
  • 12. Types of Policies Issued 10% 8% Term 22% Whole Life 45% Other Variable Universal Universal 11% Variable 2% Decreasing 2.0% 12-12 1997 Insurance Facts book
  • 13. Other Types of Life Insurance Policies
    • Group life insurance.
      • Term insurance.
      • Often provided by an employer.
      • No physical is required.
    • Credit life insurance.
      • Debt is paid off if you die.
        • Mortgage, car, furniture.
      • Also protects lenders.
      • Expensive protection.
  • 14. Life Insurance Contract Provisions
    • Naming your beneficiary, and contingent beneficiaries.
    • Length of grace period for late payments.
    • Reinstatement of a lapsed policy if it has not been turned in for cash.
    • Suicide clause during first two years.
    • Automatic premium loans.
      • Uses the accumulated cash value to pay the premium if you do not pay it during the grace period.
    • Misstatement of age provision.
  • 15. Life Insurance Contract Provisions
    • Policy loan provision to borrow against cash value.
    • A rider to a policy modifies it coverage by adding or excluding conditions or altering benefits.
    • Nonforfeiture clause prevents the forfeiture of accrued benefits if you choose to drop the policy.
    • Waiver of premium disability benefit.
    • Accidental death benefit - double indemnity.
    • Guaranteed insurability option.
    • Cost of living protection.
    • Accelerated benefits.
    (continued) 12-15
  • 16. Buying Life Insurance
    • Look at your present and future sources of income, savings, group life insurance, and Social Security benefits.
    • Determine from whom to buy your policy.
      • Examine both private and public sources.
      • Look up the company’s rating.
      • Talk to friends or colleagues.
  • 17. 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?
  • 18. Buying Life Insurance (continued)
    • Compare policy costs which are affected by...
      • How selective they are in whom they insure.
      • Their cost of doing business.
      • Return on their investments.
      • Mortality rate among policyholders.
      • Policy features and competition from other firms
    • Use interest-adjusted index to compare policies.
      • Takes into account the time value of money.
      • Helps you make cost comparisons among insurance companies.
  • 19. Obtaining and Examining a Policy
    • The first step is to apply.
    • The second step is to provide medical history.
    • Usually no physical for a group policy.
    • Read every word of the contract.
    • After you buy it you have ten days to change your mind.
    • Give your beneficiaries and lawyer a photocopy.
  • 20. Choosing Settlement Options
    • Options are the choices for how you want the money paid out.
    • Lump-sum payment is most common.
    • Limited installment plan.
      • In equal installments for a specific number of years after your death.
    • Life income option.
      • Payments to the beneficiary for life.
    • Proceeds left with the company.
      • Pays interest to the beneficiary.
  • 21. Should You Switch Policies?
    • Switch 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?
  • 22. Financial Planning with Annuities
    • An annuity is a financial contract written by an insurance company that provides you with a regular income.
    • People buy annuities to supplement retirement income and to shelter income from taxes.
    • Those who expect to live longer than average benefit most from annuities.
    • Annuities are tax-deferred investment plans. You pay taxes on the interest when you draw the money out.