Chapter 12: Life Insurance Planning

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Chapter 12 Life Insurance Planning
2
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 ones life and identify the
  procedures used to calculate life insurance
  needs.

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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.

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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 childrens
  education
• To leave as part of your estate
• To pay off a mortgage or other debts at the time
  of death

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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

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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?

7
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

8
Determining Life Insurance Needs
CALCULATING DOLLAR LOSS

• Multiple-of-Earnings Approach

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Types of Life Insurance Policies

• Term life insurance
• protection for a specified period of time
• if you dont pay premiums, coverage stops
• renewability option
• at the end of the term you can renew the policy
  without having a physical

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Types of Life Insurance Policies

• Term life insurance (continued)
• conversion option
• can 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

12-8
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Types of Life Insurance Policies
(continued)

• 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

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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

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Whole Life Policy Options
(continued)

• 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

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Decreasing Term Insurance
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Comparison of Term vs. Cash Value
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Types of Policies Issued in 1994
12-12
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1997 Insurance Fact Book
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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

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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

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Life Insurance Contract Provisions
(continued)

• 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

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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

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Buying Your Life Insurance
(continued)

• 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 companys rating

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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?

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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

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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

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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?

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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