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Financial Planning with Life Insurance Chapter 12

Financial Planning with Life Insurance Chapter 12. Personal Finance Finance 235. Life insurance. What is Life Insurance and when should we get it? A means for protecting the financial security of those that depend on us for their safety and economic well being.

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Financial Planning with Life Insurance Chapter 12

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  1. Financial Planning with Life InsuranceChapter 12 Personal Finance Finance 235

  2. Life insurance • What is Life Insurance and when should we get it? • A means for protecting the financial security of those that depend on us for their safety and economic well being. • The best time to get it is when you are young and healthy. • You should have some by the time you marry or partner. • You are foolish not to have it when you start a family and acquire property (cars, home, investments, etc.) Personal Finance

  3. Life insurance • Major Purposes of Life Insurance • Pay off mortgage or other debts at time of death • Provide lump sum payments or endowments to beneficiaries • Provide education or income to children • Make charitable donations • Provide retirement income (whole life / endowment policies) • Estate Planning (paying estate or gift taxes) Personal Finance

  4. Life insurance • How Much Life Insurance Do You Need? • The answer depends on your personal life situation • A young single person – not much • An older person with family responsibilities – depends • Number of dependents • Magnitude of financial liabilities (mortgages, loans, etc.) • Magnitude of income • Social Security survivor benefit • Example #1: Family (spouse, children, household expenses) • 7 times 70% of yearly income • More if dependents are under 7 years of age. • Example #2: Dual Incomes no Kids (DINKs) • Enough to cover debts • Provide a financial cushion Personal Finance

  5. Life insurance companies • Types of Insurance Companies • Stock: Owned by the stockholders – sell nonparticipating polices • Mutual: Owned by the policy holders – sell participating policies • Participating Policies (Mutual): • Mutual LICs return a portion of its investment profits as dividend • Premiums are invested in investment quality bonds and other high degree of safety investments (function of legal list requirements) Personal Finance

  6. insurance companies • Type of Policies (1) • Term • Coverage for a specified number of years. • After that period, policy may continue but typically with higher premiums. • Categories • Renewable • Level • Conversion (to whole life) • Decreasing • Return of Premium Personal Finance

  7. insurance companies • Type of Policies (2) • Whole Life (cash value / straight life / ordinary) • Permanent premium paid for lifetime of insured • Accrues cash values • Cash values can be used as collateral for loans • Limited Life (paid up after 20 or 30 years) • Variable Life (value a function of stock market investment performance) • Universal Life (ability to change premiums based on cash values) • Group Polices • Associated with employment or affinity groups • Credit Life – pay off a debt if you die before debt is paid • Endowment Life – pays a sum at maturity to policy holder Personal Finance

  8. Selecting provisions • What are the Key Provisions in a Policy? • Naming the Beneficiary (ies) • Incontestability – policy cannot be cancelled after a certain period of time • Grace Period (limit to late payment) – lapsed policy • Reinstatement • Policy loan provision (borrow against cash values) • Suicide clause (within 1 year – no benefits) • Typical Riders • Accidental death (2x) • Waiver of premium if permanently disabled (age limit) Personal Finance

  9. Buying life insurance • Decision Criteria • AM Best rating • Costs and Features • Availability of local agents • Recommendations of Friends • Articles in Kiplinger, WSJ, Money • Choosing Settlement Options • Lump-sum • Installments • Life income Personal Finance

  10. Financial planning with annuities • What is an Annuity? • An particular type of insurance plan structured to provide you with a fixed payment each [month] for a set period of years. • What are the Principal Types of Annuities? • Immediate • Deferred • Variable [rate] • Indexed [to a mix of stocks and bonds] • Why do People Buy Annuities? • Main reason is to remove market risk. • There are also certain tax advantages. • Thoroughly Investigate before you Buy! Personal Finance

  11. Homework • Questions: • What is an Annuity? • What are the Principal Types of Annuities? • Why do People Buy Annuities? • Be Your Own Personal Financial Planner* • 1 – Calculating your insurance need (w/s 47) • 6 – Set up a layered Term Insurance Program (w/s 48) * These are simulated situations. Personal Finance

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