10-1. mcgraw-hill/irwin copyright © 2006 the mcgraw-hill companies, inc. all rights reserved. 10...
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10-1
McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
10 Life Insurance
10-3 Life Insurance
Chapter Objectives1. Define Life Insurance and determine your life
insurance needs 2. Distinguish between the types of life insurance
companies and analyze various types of life insurance policies these companies issue
3. Select Important provisions in life insurance contracts and create a plan to buy life insurance
4. Recognize how annuities provide financial security
10-4 Objective 1: Define life insurance and determine your life insurance needsLife 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.Purpose of Life Insurance
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 pay for burial expenses– To leave as part of your estate.– To pay off a mortgage or debts at the time of death.
10-5 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.
10-6Determining 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 do you want to retire, and what income do
you think you’ll need?– How much will you be able to pay for your
insurance program?
10-7 Estimating Your Life Insurance Requirements
The Easy Method.– Typically, you will need 70% of your salary for
seven years while your 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.
10-8 Obective 2: Distinguish between the types of life insurance companies and analyze various types of life insurance policies these companies issue
Two Types of Life Insurance CompaniesStock life insurance companies
are owned by the shareholders.– 95% are of this type.– Sell non-participating policies.– If you want to pay the same premium each
year, choose a non-participating policy with its guaranteed premiums.
10-9 Two Types of Life 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 the policy dividend.
(continued)
10-10 Types of Life Insurance Policies Term life insurance.
– Protection for a specified period of time.– If you stop paying 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 exchange your term policy to a whole life policy without having a physical.
– With decreasing term insurance your premium stays the same, but the amount of coverage decreases as you age.
10-11 Types of Life Insurance Policies
Whole life insurance is 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)
10-12 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 is guaranteed, but the
death benefit can be greater than the minimum depending on earnings of the dollars invested in the separate fund.
10-13 Whole Life Policy Options
Adjustable life policy.– A whole life insurance policy, but you can change
your policy as your needs change. For example, you can change your premium payments or the period of coverage.
Universal life - gives you more direct control.– Lets you pay premiums at any time in almost any
amount. The amount of insurance can be changed more easily than a traditional policy.
– The increase in the cash value of the policy reflects the interest earned on short-term investments.
(continued)
10-14 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.
10-15 Key Provisions in a Life Insurance Policy
Naming your beneficiary, and contingent beneficiaries.
Incontestability clause says that after the policy has been in force for a specified period, the company can’t dispute its validity for any reason.
Length of grace period for late payments. Reinstatement of a lapsed policy if it has not been
turned in for cash. Nonforfeiture allows you to keep accrued benefits
if you drop the policy. Misstatement of age provision.
10-16 Key Provisions in a Life Insurance Policy
Suicide clause during first two years. Policy loan provision to borrow against cash value. Automatic premium loans.
– Uses the accumulated cash value to pay the premium if you do not pay it during the grace period.
A rider to a policy modifies the coverage by adding or excluding conditions or altering benefits.
(continued)
10-17 Key Provisions in a Life Insurance Policy
Waiver of premium disability benefit. Accidental death benefit - double indemnity. Guaranteed insurability option. Cost of living protection. Accelerated benefits, also called living benefits,
pay to those who are terminally ill before they die. Second-to-die option, also called survivorship,
insures two lives.
(continued)
10-18 Buying Life Insurance
Look at your present and future sources of income, other savings and income protection, group life insurance, pension benefits, and Social Security benefits.
Determine from whom to buy your policy.– Examine both private and public sources.– Look up the company’s rating,
in A. M. Best.– Talk to friends or colleagues.– Research ratings on the web,
www.standardandpoor.com.
10-19 Choosing Your Insurance Agent
Ask friends, parents, and neighbors for recommendations.
Find out if the agent belongs to professional groups or is a Chartered Life Underwriter (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?
10-20 Buying Life Insurance
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.– See sites such as www.quotesmith.com.
(continued)
10-21 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.
10-22 Choosing Settlement Options
Options are the choices available for how you can have the life insurance 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.
10-23 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 will be.
Are you still insurable? Can you get all the provisions you
want?
10-24Objective 4: Recognize how annuities provide financial security
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.