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CHAPTER 12

Personal Finance

Life Insurance

Kapoor Dlabay Hughes

6e

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An Introduction to Life Insurance Life insurance is obtained by purchasing a policy, with

the insurance company promising to pay a lump sum at the time of the policy holder’s death, or sometimes while they are still alive.

The purpose of life insurance is to protect someone who depends on you from financial loss related to your death. Other reasons are. 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 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 your life expectancy and 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?

Do you have a partner who works? What are your objectives for life insurance?

How much money do you want to leave your dependents should you die today?

When you retire what income do you need? How much will you be able to pay for your

insurance program?12-4

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Estimating Your Life Insurance Requirements

The Easy Method. Typically, you will need 70% of your salary for

seven years while family adjusts. The DINK (dual income, no kids) Method. The “Nonworking” Spouse Method.

Multiply the number of years until the youngest child reaches 18 by $10,000.

The “Family Need” Method. More thorough than the first three because it

also considers employer provided insurance, Social Security benefits, and income and assets.

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Two Types ofLife Insurance Companies

Stock life insurance companiesare owned by the shareholders. 95% are of this type. Sell non-participating policies. Amount of premium stays the

same.

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Two Types ofLife Insurance Companies

Mutual life insurance companies. Owned by the policyholders. 5% of policies are from this type of

company. With participating policies the premiums are

higher than non-participating policies. However part of the premium is refunded to the policyholders annually. This is called a policy refund.

(continued)

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Types of Life Insurance Policies

Term life insurance. Protection for a specified period of time. If you don’t pay premiums, coverage stops. A renewability option means that at the end of

the term you can renew the policy without having a physical.

Conversion option allows you to change your policy from term to whole life without a physical.

With decreasing term insurance your premium stays the same, but the amount of coverage decreases as you age.

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Types of Life Insurance Policies

Whole life insurance also called straight life. 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.

(continued)

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Whole Life Policy Options Limited payment policy.

Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65).

Your policy then becomes “paid up” and you remain insured for life.

Variable life policy. A minimum death benefit guaranteed, but

the death benefit can rise above it depending on yield of the dollars invested in a separate fund.

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Whole Life Policy Options Adjustable.

You can change your policy as your needs change. For example, you can change your premium payments or the period of coverage.

Universal life. Lets you pay premiums in almost any amount. Combines term insurance and investment

elements.

(continued)

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Types of Policies Issued

10% 8%

Term22%

Whole Life45%

Other

Variable Universal

Universal

11%

Variable2%

Decreasing2.0%

12-121997 Insurance Facts book

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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 is paid off if you die.

Mortgage, car, furniture. Also protects lenders. Expensive protection. 12-13

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Life Insurance Contract Provisions Naming your beneficiary, and contingent

beneficiaries. 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 pay it during the grace period.

Misstatement of age provision.12-14

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Life Insurance Contract Provisions Policy loan provision to borrow against cash value. A rider to a policy modifies it coverage by adding

or excluding conditions or altering benefits. Nonforfeiture clause prevents the forfeiture of

accrued benefits if you choose to drop the policy. Waiver of premium disability benefit. Accidental death benefit - double indemnity. Guaranteed insurability option. Cost of living protection. Accelerated benefits.

(continued)

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Buying Life Insurance Look at your present and future sources of

income, savings, group life insurance, and Social Security benefits.

Determine from whom to buy your policy. Examine both private and public sources. Look up the company’s rating. Talk to friends or colleagues.

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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? 12-17

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Buying Life Insurance (continued)

Compare policy costs which are affected by... How selective they are in whom they insure. Their cost of doing business. Return on their investments. Mortality rate among policyholders. Policy features and competition from other firms

Use interest-adjusted index to compare policies. Takes into account the time value of money. Helps you make cost comparisons among insurance

companies.

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Obtaining and Examining a Policy The first step is to apply. The second step is to provide medical history. Usually no physical for a group policy. Read every word of the contract. After you buy it you have ten days to change your

mind. Give your beneficiaries

and lawyer a photocopy.

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Choosing Settlement Options Options are the choices for how you want the

money paid out. Lump-sum payment is most common. Limited installment plan.

In equal installments for a specific number of years after your death.

Life income option. Payments to the beneficiary for life.

Proceeds left with the company. Pays interest to the beneficiary.

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Should You Switch Policies?

Switch 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

An annuity is a financial contract written by an insurance company that provides you with a regular income.

People buy annuities to supplement retirement income and to shelter income from taxes.

Those who expect to live longer than average benefit most from annuities.

Annuities are tax-deferred investment plans. You pay taxes on the interest when you draw the money out. 12-22