10 Financial Planning With Life Insurance

1. 10Financial 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 holder’s death (or sometimes while they are still alive) 10-1

2. 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) 10-2

3. 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 10-3

4. 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! 10-4

5. Estimating Your Life Insurance Requirements • The Easy Method • 70%of your salary for seven years while your family adjusts • Assumes typical family • The DINKMethod • 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 10-5

6. Objective 2Distinguish Between the Types of Life Insurance Companies and Analyze Various Types of Life Insurance Policies These Companies Issue 10-6

7. 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 10-7

8. 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 10-8

9. 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 10-9

10. 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 coveragewith needs • Universal Life- Can change premium, time period, benefit 10-10

11. Comparison of Premium Dollars for Life Insurance

12. 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 10-12

13. Key Provisions in a Life Insurance Policy • Naming your beneficiary and contingent beneficiaries (those who will receive benefits upon the insured’s death) • Incontestability clause after the policy has been in force for a specified period, the company can’t 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 10-13

14. 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 10-14

15. 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 10-15

16. 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 10-16

17. Buying Life Insurance Determine from whom to buy your policy • Examine both private and public sources • Research the company’s rating by major rating companies: • A. M. Best • Standard and Poor’s • Duff & Phelps • Moody’s • Weiss Research • Talk to friends or colleagues • Online premium quote services 10-17

18. 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? 10-18

19. Buying Life Insurance • Compare policy costs based on: • Company’s cost of doing business • Return on company’s 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 10-19

20. 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 10-20

21. 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? • Don’t cancel old policy until new policy is in hand 10-21

22. 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) 10-22

23. 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 10-23

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