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 death To save money for retirement or children’s

education To leave as part of your estate To 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 Need The 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) Method The “Nonworking” Spouse Method The “Family Need” Method looks at

employer provided insurance Social Security benefits income and assets

Multiple-of-Earnings Approach

Determining Life Insurance NeedsCALCULATING DOLLAR LOSS:

Types of Life Insurance Policies

Term life insurance protection 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 Options Nonforfeiture clause

if you stop paying premiums you can use the cash value in a variety of ways.

Limited payment policy pay higher premiums during your earning

years only, keeping lifetime coverage Variable life policy

minimum death benefit guaranteed, but can be more depending on how your premium dollars are invested

Whole Life Policy Options

Adjustable you can change your premium amount

and thus your coverage Universal 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

Universal11%

Variable2%

Decreasing2.0%

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Other Types of Life Insurance Policies

Group life insurance often through an employer no physical required usually term insurance

Credit life insurance debt is paid off if you die

mortgage, car, furniture also protects lenders expensive protection

Life Insurance Contract Provisions

Naming your beneficiary (one or more) 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 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 by cost of doing business return on its investments mortality rate among policyholders features of the policy competition from other companies

Buying Your Life Insurance

Use the interest-adjusted index to compare policies takes into account the time value of money helps you make cost comparisons among

insurance companies Determine 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 common Limited 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