Insuring Your Life

1
Chapter 8

• Insuring Your Life

2
Logic Behind Insurance

• Risk pooling -- individuals share their financial
  risks
• Reduces catastrophic losses from death
• Protects those left behind

3
Life Insurance -- Who Needs It?

• Single person, without dependents
• Double-income married couple, without dependents
• Married, but unemployed, individual without
  dependents
• Retired persons

4
How Much Life Insurance?

• Earnings multiple
• 5 to 10 times gross annual salary
• Multiple depends on life circumstances
• Dont forget the effects of inflation

5
How Much Life Insurance?

• Funds Needs Approach
• Add total funding needs
• Subtract current insurance coverage and other
  available assets
• Result amount of additional insurance needed

6
Major Types of Life Insurance

• Term insurance --based on your probability of
  dying
• Cash-value insurance -- Combines life insurance
  and savings plan

7
Term Insurance

• Specific time of coverage
• Pays only if you die
• Least expensive insurance
• Premiums based on probability of death

8
Term Insurance Types

• Straight term insurance
• Renewable term insurance
• Level-premium term insurance
• Decreasing term insurance
• Group life insurance
• Convertible term life insurance

9
Cash-Value Insurance

• Whole life --Permanent insurance
• Universal life --Death benefit and savings plan

10
Whole Life Insurance

• Permanent -- insurance that does not expire
• Savings feature (cash value) fixed return
  borrow against cash value
• Continuous payment (straight life) level
  premium (lower when purchased young)
• Limited payment pay until certain age then paid
  up
• Single payment one up-front payment

11
Universal Life

• More flexible than whole life insurance
• Term insurance combined with savings portions
  identified separately in premium
• Rate of return varies
• Premium paid from earnings transferred between
  savings and insurance portions.
• As cash value becomes very large, amount of
  insurance has to be increased for tax reasons

12
Term Versus Cash-Value
Premiums
Term Premiums
600
Cash-Value Premiums
300
100
Time
Older
Younger
13
Premium Comparison 100K
For 20-year term Policy stays at this
premium for life
14
The Right Insurance?

• Term insurance becomes very expensive BUT need
  declines with age.
• Cash-value insurance provides for a simple means
  of savings BUT you lose control of savings.

15
The Right Insurance?

• Cash-value insurance may eventually pay its own
  premiums BUT might not.
• Cash-value insurance savings grow tax-deferred
  BUT so do IRAs, 401(k)s.

16
Key Features of Life Insurance Types
17
Buying the Best Life Insurance Policy

• Insurance agents earn commissions
• Figure your needs first
• Difficult to compare across policies
• Select a high-quality insurance company based on
  company ratings

18
Contract Features

• Beneficiaries
• Settlement Options
• Policy Loans
• Grace Period
• Premium Payment Intervals

19
Questions?