2 Life Insurance Chapter Learning Objectives LO10.1 Define life insurance and determine your life insurance needs.LO10.2 Distinguish between the types of life insurance companies and analyze various types of life insurance policies these companies issue.LO10.3 Select important provisions in life insurance contracts and create a plan to buy life insurance.LO10.4 Recognize how annuities provide financial security.
3 Learning Objective LO10.1 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 deathLife insurance:Obtained by purchasing a policyThe 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)
4 Purpose of Life Insurance Other reasons:Pay off a mortgage or debtsLump-sum endowments for childrenProvide an education or income for childrenMake charitable donationsProvide retirement incomeAccumulate savingsEstablish a regular income for survivorsSet up an estate planPay estate and gift taxes
5 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
6 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?
7 Estimating Your Life Insurance Requirements The Easy Method70% of your salary for seven years while your family adjustsAssumes typical familyThe DINK MethodDual income, no kidsAssumes spouse earnings => insuredCover funeral + ½ debts
8 Estimating Your Life Insurance Requirements The “Nonworking” Spouse Method# years until the youngest child reaches 18 X $10,000The “Family Need” MethodMore thorough than the first threeConsiders employer provided insurance, Social Security benefits, income and assets
9 2 Types of Life Insurance Companies Learning Objective LO10.2 Types of Life Insurance Companies and Policies2 Types of Life Insurance CompaniesType of CompanyOwned byPolicy TypeStock life InsuranceShareholdersNonparticipatingMutual life insurancePolicyholdersParticipating
10 Stock Life Insurance Companies Owned by the shareholders95% are of this typeSell non-participating (non-par) policiesIf you want to pay the same premium each year choose a non-participating policy with guaranteed premiums
11 Mutual Life Insurance Companies Owned by the policyholders5% of policies are from this type of companyParticipating policy premiums are higher than non-participating policiesPart of the non-participating premium is refunded to the policyholders annually in the form of a policy dividend
12 Types of Life Insurance Policies Term life insuranceWhole Life insuranceGroup Life insuranceCredit life insuranceEndowment Life insurance
13 Term Life Insurance “Term Life” Many types: Protection for a specified period of timeIf you stop paying premiums, coverage stopsMany types:Renewable term – Price on renewMultiyear level term – straight term, Price fixedConversion term – convertible to other types of life insuranceDecreasing term – Coverage over timeReturn-of-premium term – you get your money back (if you live)
14 Whole Life Insurance “Straight Life” Pay the premium as long as you liveAmount of premium depends on age when you start the policyProvides death benefitsAccumulates a cash valueYou can borrow against the cash value or draw it out at retirementLook carefully at the rate of return your money earns
15 Whole Life Policy Options Limited Payment PolicyYou pay premiums for a stipulated periodUsually 20 or 30 years, orUntil you reach a specified age (65)Policy then “paid up” and you remain insured for lifeVariable Life PolicyMinimum death benefit guaranteedBenefit can be greater depending on earnings of the dollars invested in the separate fund
16 Whole Life Policy Options Adjustable Life PolicyCan change premium payments or period of coverage as your needs change.Universal LifeTerm life policy with a cash valueCan borrow against cash valuePremium amount may be changed at any time without changing coveragePart of premium goes to investment accountIncrease in cash value reflects interest earned on short-term investments
17 Other Types of Life Insurance Policies Group life insuranceTerm insuranceOften provided by an employerNo physical requiredCredit life insuranceDebt paid off if you dieMortgage, car, furnitureAlso protects lendersExpensive protectionEndowment Life InsurancePays you if you live, otherwise pays beneficiary
19 Key Provisions in a Life Insurance Policy Naming your beneficiary and contingent beneficiariesIncontestability clause after the policy has been in force for a specified period, the company can’t dispute its validity for any reasonLength of grace period for late paymentsReinstatement of a lapsed policy if it has not been turned in for cash
20 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 policyMisstatement of age provisionPolicy loan provision to borrow against cash valueSuicide clause during first two yearsPolicy rider modifies the coverage by adding or excluding conditions or altering benefits
21 Key Provisions in a Life Insurance Policy Life Insurance Policy RidersWaiver of premium disability benefitAccidental death benefit - double indemnityGuaranteed insurability optionCost-of-living protectionAccelerated benefits, also called living benefits, pay to those who are terminally ill before they dieSecond-to-die option, also called survivorship life, insures two lives
22 Buying Life Insurance Consider: Present and future sources of income Other savings and income protectionGroup life insurancePension benefitsSocial Security benefitsFinancial strength of the insurance company
23 Buying Life Insurance Determine from whom to buy your policy Examine both private and public sourcesResearch the company’s rating by major rating companies:A. M. BestStandard and Poor’sDuff & PhelpsMoody’sWeiss ResearchTalk to friends or colleagues
24 Choosing Your Insurance Agent Ask friends, parents, and neighbors for recommendationsIs the agent available when needed?Does the agent advise you to have a financial plan?Do you feel pressured?Does the agent keep current with changes in the insurance field?Does the agent belong to professional groups or is a Chartered Life Underwriter (CLU) who require continuing education?Is the agent willing to take the time to answer your questions and find a policy that is right for you?
25 Buying Life Insurance Compare policy costs based on: Company’s cost of doing businessReturn on company’s investmentsMortality rate among policyholdersPolicy featuresCompetition from other firmsInterest-adjusted indexUsed to compare policy costsLower index = lower cost policySee sites such as and
26 Obtaining and Examining a Policy First step = applySecond step = provide medical historyUsually no physical for a group policyRead every word of the contract10-day “free-look” period to change your mindGive your beneficiaries and lawyer a photocopy
27 Choosing Settlement Options Settlement Options = choices of how the insurance money is paid outLump-sum payment = most commonLimited installment planIn equal installments for a specific number of years after your death (10-year certain)Life income optionPayments to the beneficiary for lifeProceeds left with the companyPays interest to the beneficiary
28 10 Golden Rules of Buying Life Insurance From Page 338, Personal Finance in Practice BoxSource: American Council of Life Insurance
29 Should You Switch Policies? Switch if benefits exceed costs of getting another physical, and paying policy set-up costsThe older you are, the higher the premiumAre you still insurable?Can you get all the provisions you want?
30 Learning Objective LO10.4 Financial Planning with Annuities An annuity = a financial contract written by an insurance company, providing a regular incomeCan supplement retirement income and shelter income from taxesThose who expect to live longer than average benefit most from annuitiesFully fund IRAs, Keoghs and 401(k)’s BEFORE considering an annuity
31 Why Buy Annuities? Provides retirement income for life Compounded interest grows tax free until money withdrawnNo maximum annual contribution (like IRAs)Beneficiary guaranteed no less than amount paid in
32 Types of Annuities Immediate annuity Deferred annuity Fixed annuity Income payments begin at onceDeferred annuityPayments begin at some point in the futureFixed annuityAnnuitant receives fixed amount for lifeVariable annuityAmount received depends on investment performanceCan be included in IRAs and Keogh plans
33 Costs of Annuities Surrender charges Mortality and expense risk charge Charged if you withdraw money within a certain periodMortality and expense risk chargeUsually 1.25% of account value per yearAdministrative feesFlat fee $25-$30 per yearPercentage – usually 0.15% per yearFund expenses
34 Tax Considerations of Annuities Tax Reform Act of 1986Preserves tax advantage of annuities and insuranceNo maximum contributionBeneficiary guaranteed no less than contributed
35 Chapter Summary Learning Objective LO10.1 Life insurance protects the people who depend on you from financial losses caused by your death.Estimation methods:DINK method“Nonworking” spouse method“Family need” method
36 Chapter Summary Learning Objective LO10.2 Two types of insurance companies:Stock insurance companiesMutual insurance companiesTypes of policies:NonparticipatingParticipatingTwo basic types of insurance:Term lifeWhole lifeMany variations and combinations
37 Chapter Summary Learning Objective LO10.3 Most life insurance policies have standard features.An insurance company can change the conditions of a policy by adding a rider to it.Before buying life insurance, consider all your present and future sources of income, then compare the costs and choose appropriate settlement options.
38 Chapter Summary Learning Objective LO10.4 An annuity pays while you live, whereas life insurance pays when you die.With a fixed annuity, you receive a fixed amount of income over a certain period or for life.With a variable annuity, the monthly payments vary because they are based on the income received from stocks or other investments.