1. Chapter 12: Life Insurance Planning

2. 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.

3. 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.

4. What is the Purpose of Life 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

5. 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

6. 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?

7. Estimating the Amount of Life 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

8. Determining Life Insurance Needs
CALCULATING DOLLAR LOSS:
Multiple-of-Earnings Approach

9. 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

10. Types of Life Insurance Policies
Term life insurance (continued)
conversion option
can 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

11. Types of Life Insurance Policies
(continued)
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

12. 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

13. Whole Life Policy Options
(continued)
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

14. Decreasing Term Insurance

15. Comparison of Term vs. Cash Value

16. Types of Policies Issued in 1994*8%
Term
22%
Whole Life
45%
Other
Variable Universal
Universal
11%
Variable 2%
Decreasing
2.0%
12-12
10%
*1997 Insurance Fact Book

17. 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

18. 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 value to pay the premium if you do not

19. Life Insurance Contract Provisions
(continued)
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

20. 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

21. Buying Your Life Insurance
(continued)
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

22. 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?

23. 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

24. 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

25. 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?

26. 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