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Chapter12:

LifeInsurancePlanning
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.
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.
WhatisthePurposeof
LifeInsurance?
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
ThePrincipleofLifeInsurance

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
DeterminingYourLifeInsurance
NeedsAskYourself...
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?
EstimatingtheAmountof
LifeInsuranceYouNeed
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
DeterminingLifeInsuranceNeeds
CALCULATING DOLLAR LOSS:

Multiple-of-Earnings Approach
TypesofLifeInsurancePolicies

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
TypesofLifeInsurancePolicies

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
TypesofLifeInsurancePolicies
(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
WholeLifePolicyOptions
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
WholeLifePolicyOptions (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
DecreasingTermInsurance
ComparisonofTermvs.CashValue
TypesofPoliciesIssuedin1994*
Term
22%
Whole Life
45%
Decreasing
2.0%
Variable
2%

Universal
11%
Other Variable Universal
8% 12-12
10%
*1997 Insurance Fact Book
OtherTypesofLifeInsurancePolicies
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
LifeInsuranceContractProvisions
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 value
to pay the premium if you do not
LifeInsuranceContractProvisions
(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
BuyingYourLifeInsurance
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
BuyingYourLifeInsurance (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
ChoosingYourInsuranceAgent
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?
ObtainingandExaminingaPolicy
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
ChoosingSettlementOptions
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
ShouldYouSwitchPolicies?

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?
FinancialPlanningwithAnnuities
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