1. 10 Financial Planning With Life Insurance
Primary Purpose of Life Insurance:
Protect someone who depends on you from financial loss related to your death
Reduces financial burdens of survivors
Life insurance:
Obtained by purchasing a policy
The insurance company promises to pay a lump sum (death benefit) to a named beneficiary at the time of the policy holder’s death (or sometimes while they are still alive)
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2. Objective 1 Define Life Insurance and Determine Your Life Insurance Needs
Other reasons to buy life insurance:
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 (e.g., fund trusts with life insurance)
Pay estate and gift taxes (e.g., business owners)
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3. The Principle of Life Insurance
Mortality Tables-provide odds on your dying, based on your age and sex.
Premium is based on life expectancy and projections for payouts for persons who die (called actuarial tables)
Older people pay more because they will die sooner
Face Amount- the dollar value of protection listed in the policy and amount used to calculate the premium (e.g., $100,000)
Group Term Insurance- issued to people as members of a group rather than as individuals
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4. Do You Need Life Insurance?
Do you have people you need to protect financially? Will your death cause them financial hardship?
Are you single and have a lot of debt?
Do you have parents, relatives, or a charity that you want to support?
Avoid being persuaded to buy unnecessary life insurance!
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5. Estimating Your Life Insurance Requirements
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 will continue
Cover funeral + ½ debts
The “Nonworking” Spouse Method
# years until the youngest child reaches 18 X $10,000
The “Family Need” Method
More thorough than the first three methods
Considers employer provided insurance, Social Security benefits, income and assets
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6. 2 Types of Life Insurance Companies
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
Owned by
Stock life Insurance
Shareholders
Mutual life insurance
Policyholders
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7. 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
Consider the financial stability of the insurance company
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8. 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 participating premium is refunded to the policyholders annually in the form of a policy dividend
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9. Term Life Insurance Term Life Many types:
Protection for a specified period of time
At the end of term (or if you stop paying premiums), coverage stops
Many types:
Renewable Term- can renew; higher premium charged
Multiyear Level Term- same premium for set period
Conversion Term- allows change to permanent policy
Decreasing Term- face value decreases over time
Return-of-Premium Term- can get premium back
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10. Whole Life Insurance Straight-Life or Whole-Life Insurance
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 or draw out at retirement
Look carefully at the rate of return your money earns
Types:
Limited Payment Policy
You pay premiums for a stipulated period
Policy then “paid up” and you remain insured for life
Variable Life Policy- Fixed premiums; investment accounts
Adjustable Life Policy- Can change coverage with needs
Universal Life- Can change premium, time period, benefit
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11. Comparison of Premium Dollars for Life Insurance

12. 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 (usually overpriced)
Endowment Life Insurance- pays policyholder a lump sum if still living at end of the endowment period
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13. Key Provisions in a Life Insurance Policy
Naming your beneficiary and contingent beneficiaries (those who will receive benefits upon the insured’s death)
Incontestability clause  after the policy has been in force for a specified period, the company can’t dispute its validity for any reason (usually 2 years)
Length of grace period for late payments
Reinstatement of a lapsed policy if it has not been turned in for cash (must qualify again and pay overdue premiums)
Non-forfeiture clause allows you to keep accrued benefits in a whole life policy if you drop the policy
Misstatement of age provision (benefits paid on real age)
Policy loan provision to borrow against cash value
Suicide clause during first two years (only get back premiums)
Policy rider modifies the coverage by adding or excluding conditions or altering benefits
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14. Key Provisions in a Life Insurance Policy
Life Insurance Policy Riders
Waiver of premium disability benefit
Accidental death benefit – “double indemnity”
Guaranteed insurability option (can buy additional insurance at specified intervals without a medical exam)
Cost of living protection (helps maintain purchasing power)
Accelerated benefits, also called living benefits (make payments to those who are terminally ill before they die)
Second-to-die option, also called survivorship life (insures two lives, typically a married couple); benefit paid upon death of second spouse
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15. Choosing Settlement Options
Settlement Options = choices of how the insurance money is paid out
Lump-Sum Payment = most common method
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
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16. 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 the insurance company
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17. 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
Moody’s
Weiss Research
Talk to friends or colleagues
Online premium quote services
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18. Choosing an Insurance Agent
Ask friends, parents, and neighbors for recommendations.
Does the agent belong to professional groups or is a Chartered Life Underwriter (CLU)?
Is the agent willing to take the time to answer 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?
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19. 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
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20. 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
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21. 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?
Don’t cancel old policy until new policy is in hand
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22. 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 (tax-deferred)
Those who expect to live longer than average benefit most from annuities
Fully fund IRAs and 401(k)s/403(b)s BEFORE considering an annuity (lower costs and tax advantages)
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23. Why Buy Annuities? Provides retirement income for life
Compounded interest grows tax-free (until money withdrawn)
No maximum annual contribution (like IRAs)
Beneficiary guaranteed no less than amount paid in
Immediate annuity or deferred annuity
Two Types
Fixed Annuity
Annuitant receives fixed amount for life
Variable Annuity
Amount received depends on investment performance
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24. Wrap Up Chapter Quiz Case Study Project Discussion
Form groups
Select cases
Homework: Concept Checks 10-1, 10-2 (True/False Questions)