10 Financial Planning With Life Insurance

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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 holders death (or sometimes
  while they are still alive)

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Objective 1Define 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)

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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

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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!

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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

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Objective 2Distinguish Between the Types of Life
Insurance Companies and Analyze Various Types of
Life Insurance Policies These Companies Issue
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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

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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

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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

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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

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Comparison of Premium Dollars for Life Insurance
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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

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Key Provisions in a Life Insurance Policy

• Naming your beneficiary and contingent
  beneficiaries (those who will receive benefits
  upon the insureds death)
• Incontestability clause ? after the policy has
  been in force for a specified period, the company
  cant 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

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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

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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

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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

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Buying Life Insurance

• Determine from whom to buy your policy
• Examine both private and public sources
• Research the companys rating by major rating
  companies
• A. M. Best
• Standard and Poors
• Duff Phelps
• Moodys
• Weiss Research
• Talk to friends or colleagues
• Online premium quote services

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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?

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Buying Life Insurance

• Compare policy costs based on
• Companys cost of doing business
• Return on companys 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

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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

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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?
• Dont cancel old policy until new policy is in
  hand

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Objective 4Recognize 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)

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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

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Wrap Up

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