Transcript Life Insurance Chapter Fourteen

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 of
Life 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 of
Life 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
Determining Life Insurance Needs
CALCULATING DOLLAR LOSS:
 Multiple-of-Earnings Approach
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 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
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
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
(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
Decreasing Term Insurance
Comparison of Term vs. Cash Value
Types of Policies Issued in 1994*
Term
22%
Whole Life
45%
Decreasing
2.0%
Variable
2%
Universal
11%
Other
10%
*1997 Insurance Fact Book
Variable Universal
8%
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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 value
to pay the premium if you do not
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
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
(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 company’s rating
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