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FINANCIAL PLANNING WITH LIFE INSURANCE CHAPTER 12 Personal Finance Finance 235.

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Presentation on theme: "FINANCIAL PLANNING WITH LIFE INSURANCE CHAPTER 12 Personal Finance Finance 235."— Presentation transcript:

1 FINANCIAL PLANNING WITH LIFE INSURANCE CHAPTER 12 Personal Finance Finance 235

2 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.) LIFE INSURANCE Personal Finance 2

3 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) LIFE INSURANCE Personal Finance 3

4 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 LIFE INSURANCE Personal Finance 4

5 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) 5 Personal Finance LIFE INSURANCE COMPANIES

6 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 6 Personal Finance INSURANCE COMPANIES

7 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 7 Personal Finance INSURANCE COMPANIES

8 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) 8 Personal Finance SELECTING PROVISIONS

9 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 9 Personal Finance BUYING LIFE INSURANCE

10 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! 10 Personal Finance FINANCIAL PLANNING WITH ANNUITIES

11 A.Questions: 1.What is an Annuity? 2.What are the Principal Types of Annuities? 3.Why do People Buy Annuities? B.Be Your Own Personal Financial Planner* 1.1 – Calculating your insurance need (w/s 47) 2.6 – Set up a layered Term Insurance Program (w/s 48) * These are simulated situations. 11 Personal Finance HOMEWORK


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