This document discusses life insurance, including its primary purposes of protecting dependents from financial loss due to death and reducing survivors' financial burdens. It defines life insurance as a policy purchased from an insurance company that pays a lump sum death benefit to beneficiaries upon the policy holder's death. The document provides information on determining life insurance needs, the types of life insurance companies and policies, key policy provisions, and factors to consider when buying a policy. It also discusses annuities and how they can provide financial security and supplement retirement income.

1. 10 Financial Planning With
Life Insurance
• Primary Purpose of Life Insurance:
– Protect someone who depends on you from
financial loss related to your death
– Reduces financial burdens of survivors
• Life insurance:
– Obtained by purchasing a policy
– The insurance company promises to pay a lump
sum (death benefit) to a named beneficiary at the
time of the policy holder’s death (or sometimes
while they are still alive)
10-1

2. Objective 1
Define Life Insurance and
Determine Your Life Insurance
Needs
Other reasons to buy life insurance:
– Pay off a mortgage or debts
– Lump-sum endowments for children
– Provide an education or income for children
– Make charitable donations
– Provide retirement income
– Accumulate savings
– Establish a regular income for survivors
– Set up an estate plan (e.g., fund trusts with life insurance)
– Pay estate and gift taxes (e.g., business owners) 10-2

3. The Principle of Life
Insurance
• Mortality Tables-provide odds on your
dying, based on your age and sex.
• Premium is based on life expectancy
and projections for payouts for persons
who die (called actuarial tables)
– Older people pay more because they will die
sooner
• Face Amount- the dollar value of
protection listed in the policy and
amount used to calculate the premium
(e.g., $100,000)
• Group Term Insurance- issued to
people as members of a group rather
than as individuals
10-3

4. Do You Need Life Insurance?
• Do you have people you need to protect financially? Will
your death cause them financial hardship?
• Are you single and have a lot of debt?
• Do you have parents, relatives, or a charity that you want
to support?
Avoid being persuaded to buy unnecessary life insurance!
10-4

5. Estimating Your Life Insurance
Requirements
• The Easy Method
– 70% of your salary for seven years while your family adjusts
– Assumes typical family
• The DINK Method
– Dual income, no kids
– Assumes spouse earnings will continue
– Cover funeral + ½ debts
• The “Nonworking” Spouse Method
– # years until the youngest child reaches 18 X $10,000
• The “Family Need” Method
– More thorough than the first three methods
– Considers employer provided insurance, Social Security benefits,
income and assets
10-5

6. Objective 2
Distinguish Between the Types of
Life Insurance Companies and
Analyze Various Types of Life
Insurance Policies These
Companies Issue
2 Types of Life Insurance Companies
Type of Company Owned by
Stock life Insurance Shareholders
Mutual life insurance Policyholders
10-6

7. Stock Life Insurance
Companies
• Owned by the shareholders
• 95% are of this type
• Sell non-participating (non-par) policies
• If you want to pay the same premium
each year  choose a non-participating
policy with guaranteed premiums
• Consider the financial stability of the
insurance company
10-7

8. Mutual Life Insurance
Companies
• Owned by the policyholders
• 5% of policies are from this type
of company
• Participating policy premiums are higher
than non-participating policies
– Part of the participating premium is refunded
to the policyholders annually in the form of a
policy dividend
10-8

9. Term Life Insurance
Term Life
– Protection for a specified period of time
– At the end of term (or if you stop paying premiums),
coverage stops
• Many types:
– Renewable Term- can renew; higher premium charged
– Multiyear Level Term- same premium for set period
– Conversion Term- allows change to permanent policy
– Decreasing Term- face value decreases over time
– Return-of-Premium Term- can get premium back
10-9

10. Whole Life Insurance
Straight-Life or Whole-Life Insurance
– Pay the premium as long as you live
– Amount of premium depends on age when you start
the policy
– Provides death benefits
– Accumulates a cash value you can borrow against or
draw out at retirement
– Look carefully at the rate of return your money earns
Types:
• Limited Payment Policy
– You pay premiums for a stipulated period
– Policy then “paid up” and you remain insured for life
• Variable Life Policy- Fixed premiums; investment accounts
• Adjustable Life Policy- Can change coverage with needs
• Universal Life- Can change premium, time period, benefit
10-10

11. Comparison of Premium
Dollars for Life Insurance

12. Other Types of Life
Insurance Policies
• Group life insurance
– Term insurance
– Often provided by an employer
– No physical is required
• Credit life insurance
– Debt paid off if you die
• Mortgage, car, furniture
– Also protects lenders
– Expensive protection (usually overpriced)
• Endowment Life Insurance- pays
policyholder a lump sum if still living at end of the
endowment period
10-12

13. Key Provisions in a Life
Insurance Policy
• Naming your beneficiary and contingent beneficiaries (those
who will receive benefits upon the insured’s death)
• Incontestability clause  after the policy has been in force for
a specified period, the company can’t dispute its validity for any
reason (usually 2 years)
• Length of grace period for late payments
• Reinstatement of a lapsed policy if it has not been turned in for
cash (must qualify again and pay overdue premiums)
• Non-forfeiture clause allows you to keep accrued benefits in a
whole life policy if you drop the policy
• Misstatement of age provision (benefits paid on real age)
• Policy loan provision to borrow against cash value
• Suicide clause during first two years (only get back premiums)
• Policy rider modifies the coverage by adding or excluding
conditions or altering benefits
10-13

14. Key Provisions in a Life
Insurance Policy
Life Insurance Policy Riders
• Waiver of premium disability benefit
• Accidental death benefit – “double indemnity”
• Guaranteed insurability option (can buy additional insurance at
specified intervals without a medical exam)
• Cost of living protection (helps maintain purchasing power)
• Accelerated benefits, also called living benefits (make
payments to those who are terminally ill before they die)
• Second-to-die option, also called survivorship life (insures two
lives, typically a married couple); benefit paid upon death of
second spouse
10-14

15. Choosing Settlement Options
Settlement Options = choices of how the
insurance money is paid out
– Lump-Sum Payment = most common method
– Limited Installment Plan
• In equal installments for a specific number of years
after your death (10-year certain)
– Life Income Option
• Payments to the beneficiary for life
– Proceeds Left with the Company
• Pays interest to the beneficiary
10-15

16. Buying Life Insurance
Consider:
– Present and future sources of income
– Other savings and income protection
– Group life insurance
– Pension benefits
– Social Security benefits
– Financial strength of the
insurance company
10-16

17. Buying Life Insurance
Determine from whom to buy your policy
– Examine both private and public sources
– Research the company’s rating by major
rating companies:
• A. M. Best
• Standard and Poor’s
• Duff & Phelps
• Moody’s
• Weiss Research
– Talk to friends or colleagues
– Online premium quote services
10-17

18. Choosing an Insurance Agent
• Ask friends, parents, and neighbors
for recommendations.
• Does the agent belong to
professional groups or is a
Chartered Life Underwriter (CLU)?
• Is the agent willing to take the time
to answer questions and find a
policy that is right for you?
• Does the agent ask about your
financial plan?
• Do you feel pressured?
• Is the agent available when
needed?
10-18

19. Buying Life Insurance
• Compare policy costs based on:
– Company’s cost of doing business
– Return on company’s investments
– Mortality rate among policyholders
– Policy features
– Competition from other firms
• Interest-adjusted index
– Used to compare policy costs
– Lower index = lower cost policy
– See sites such as www.quotesmith.com
10-19

20. Obtaining and Examining a
Policy
• First step = apply
• Second step = provide medical history
– Usually no physical for a group policy
• Read every word of the contract
• 10-day “free-look” period to change
your mind
• Give your beneficiaries
and lawyer a photocopy
10-20

21. Should You Switch Policies?
• Switch if benefits exceed
costs of getting another
physical and paying policy
set-up costs
• The older you are, the higher
the premium
• Are you still insurable?
• Can you get all the provisions
you want?
• Don’t cancel old policy until
new policy is in hand 10-21

22. Objective 4
Recognize How Annuities Provide
Financial Security
Financial Planning with Annuities
• An annuity = a financial contract written by an
insurance company, providing a regular income
• Can supplement retirement income and shelter
income from taxes (tax-deferred)
• Those who expect to live longer than average
benefit most from annuities
• Fully fund IRAs and 401(k)s/403(b)s BEFORE
considering an annuity (lower costs and tax advantages)
10-22

23. Why Buy Annuities?
• Provides retirement income for life
• Compounded interest grows tax-free (until money withdrawn)
• No maximum annual contribution (like IRAs)
• Beneficiary guaranteed no less than amount paid in
• Immediate annuity or deferred annuity
Two Types
• Fixed Annuity
– Annuitant receives fixed amount for life
• Variable Annuity
– Amount received depends on investment performance
10-23

24. Wrap Up
• Chapter Quiz
• Case Study Project Discussion
– Form groups
– Select cases
• Homework: Concept Checks 10-1, 10-2
(True/False Questions)