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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 ofLife 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 ofLife 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
Multiple-of-Earnings Approach
Determining Life Insurance NeedsCALCULATING DOLLAR LOSS:
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 optioncan 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
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
(continued)
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
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
(continued)
Decreasing Term Insurance
Comparison of Term vs. Cash Value
Types of Policies Issued in 1994*
10%*1997 Insurance Fact Book
8%
Term22%
Whole Life45%
Other Variable Universal
Universal11%
Variable2%
Decreasing2.0%
12-12
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 valueto pay the premium if you do not
Life Insurance Contract Provisions 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
(continued)
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
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
(continued)
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