Nobody plans to fail....

Chapter 10
Financial Planning
with Life Insurance
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Life Insurance
Chapter Objectives
1. 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
4. Recognize how annuities provide financial
Objective 1
Define Life Insurance and Determine
Your Life Insurance Needs
• Primary Purpose of Life Insurance:
– Protect someone who depends on you from
financial loss related to your death
• Life insurance:
– Obtained by purchasing a policy
– The insurance company promises to pay
a lump sum to a named beneficiary at the
time of the policy holder’s death (or
sometimes while they are still alive)
Purpose of Life Insurance
Other reasons:
– 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
– Pay estate and gift taxes
The Principle of Life Insurance
• Mortality tables provide
odds on your dying, based
on your age and sex.
• Premium is based on your
life expectancy and the
projections for the payouts
for persons who die
Do You Need Life Insurance?
• Do you have people you need
to protect financially?
• Are you single and have a lot of debt?
• Do you have parents, relatives, or a
charity that you want to support?
Estimating Your Life Insurance
• The Easy Method
– 70% of your salary for seven years while
your family adjusts
– Assumes typical family
• The DINK Method
– Dual income, no kids
– Assumes spouse earnings => insured
– Cover funeral + ½ debts
Estimating Your Life Insurance
• The “Nonworking” Spouse Method
– # years until the youngest child reaches 18
X $10,000
• The “Family Need” Method
– More thorough than the first three
– Considers employer provided insurance,
Social Security benefits, income and assets
Objective 2
Distinguish Between the Types of Life
Insurance Companies and Analyze
Various Types of Life Insurance Policies
These Companies Issue
2 Types of Life Insurance Companies
Type of Company
Stock life Insurance
Mutual life insurance
Owned by
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
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 non-participating premium is
refunded to the policyholders annually in the
form of a policy dividend
Types of Life Insurance Policies
• Term life insurance
• Whole Life insurance
• Group Life insurance
• Credit life insurance
• Endowment Life insurance
Term Life Insurance
• “Term Life”
– Protection for a specified period of time
– If you stop paying premiums, coverage
• Many types:
– Renewable term
– Multiyear level term
– Conversion term
– Decreasing term
– Return-of-premium term
Whole Life Insurance
• “Straight Life”
– 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 the cash value or draw
it out at retirement
– Look carefully at the rate of return your
money earns
Whole Life Policy Options
• Limited Payment Policy
– You pay premiums for a stipulated period
• Usually 20 or 30 years, or
• Until you reach a specified age (65)
– Policy then “paid up” and you remain
insured for life
• Variable Life Policy
– Minimum death benefit guaranteed
– Benefit can be greater depending on
earnings of the dollars invested in the
separate fund
Whole Life Policy Options
• Adjustable Life Policy
– Can change premium payments or period of
coverage as your needs change.
• Universal Life
– Term life policy with a cash value
• Can borrow against cash value
– Premium amount may be changed at any
time without changing coverage
– Part of premium goes to investment account
– Increase in cash value reflects interest
earned on short-term investments
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
• Endowment Life Insurance
Key Provisions in a Life
Insurance Policy
• Naming your beneficiary and contingent
• Incontestability clause  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
Key Provisions in a Life
Insurance Policy
• Non-forfeiture clause allows you to keep
accrued benefits in a whole life policy if
you drop the policy
• Misstatement of age provision
• Policy loan provision to borrow against
cash value
• Suicide clause during first two years
• Policy rider modifies the coverage by
adding or excluding conditions or altering
Key Provisions in a Life
Insurance Policy
Life Insurance Policy Riders
• 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 life,
insures two lives
Choosing Settlement Options
• Settlement Options = choices of how
the insurance money is paid out
– Lump-sum payment = most common
– 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
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
insurance company
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
Weiss Research
– Talk to friends or colleagues
Choosing Your Insurance Agent
• Ask friends, parents, and neighbors for
• Does the agent belong to professional groups
or is a Chartered Life Underwriter (CLU)?
• Is the agent willing to take the time to answer
your 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?
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
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 Golden Rules of Buying Life
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?
Objective 4
Recognize 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
• Those who expect to live longer than average
benefit most from annuities.
• Fully fund IRAs, Keoghs and 401(k)’s BEFORE
considering an annuity
Why Buy Annuities?
• Provides retirement income for life
• Compounded interest grows tax free
until money withdrawn
• No maximum annual contribution (like
• Beneficiary guaranteed no less than
amount paid in
Types of Annuities
• Fixed annuity
– Annuitant receives fixed amount for life
• Variable annuity
– Amount received depends on investment
• Can be included in IRAs and Keogh plans

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