2Chapter 12 Learning Objectives Define Life insurance and describe its purpose and principleDetermine your life insurance needsDistinguish between the two types of life insurance companies and analyze various types of life insurance policies these companies issueSelect important provisions in life insurance contractsCreate a plan to buy life insuranceRecognize how annuities provide financial security
3Life Insurance: An Introduction Objective 1: Define life insurance and describe its purpose and principleWHAT IS LIFE INSURANCE?Life insurance - Purchase policy; insurance company promises to pay a lump sum at the time of the policy holder’s death, or sometimes while they are still alive
4Life Insurance: An Introduction (continued) THE PURPOSE OF LIFE INSURANCEPurpose of life insurance: Protect someone who depends on you from financial loss related to your death. Other reasons arePay off a home mortgage or other debts at the time of deathEstablish a regular income for survivorsTo save money for retirement or for income or education for childrenUncovered medical expenses and funeral costs
5Life Insurance: An Introduction (continued) THE PRINCIPLE OF LIFE INSURANCEMortality tables provide odds on your dying, based on your age and sexHOW LONG WILL YOU LIVE?Your premium is based on your life expectancy and the projections for the payouts for persons who die
6Determining Your Life Insurance Needs Objective 2: Determine your life insurance needsDO YOU NEED LIFE INSURANCE?Do you have people you need to protect financiallyDo you have a partner who works?DETERMING YOUR LIFE INSURANCE OBJECTIVESHow much money do you want to leave your dependents should you die today?When do you want to retire, and what income do you think you’ll need?How much will you be able to pay for your insurance program?
7Determining Your Life Insurance Needs (continued) ESTIMATING YOUR LIFE INSURANCE NEEDSThe Easy MethodYou will need 70% of your salary for seven years while your family adjustsThe DINK (dual income, no kids) MethodThe “Nonworking” Spouse MethodMultiply the number of years until the youngest child reaches 18 by $10,000The “Family Need” MethodMore thorough than the first three because it also considers employer provided insurance, Social Security benefits, and income and assets
8Types of Life Insurance Companies and Policies Objective 3: Distinguish between the two types of life insurance companies and analyze various types of life insurance policies these companies issueStock life insurance companies are owned by the shareholders77% are of this type.Sell non-participating policiesIf you want to pay the same premium each year, choose a non-participating policy with its guaranteed premiums
9Types of Life Insurance Companies and Policies (continued) Mutual life insurance companies23% are of this typeOwned by the policyholdersWith participating policies the premiums are higher than non-participating policiesPart of the premium is refunded to the policyholders annually. This is called the policy dividend
10Types of Life Insurance Companies and Policies (continued) TYPES OF LIFE INSURANCE POLICIESTerm life insuranceProtection for a specified period of timeIf you stop paying premiums, coverage stopsRenewability: You can renew the policy without having a physical at the end of the term
11Types of Life Insurance Policies (continued) Multiyear level term: Most popular form of term insuranceConversion option: Can exchange term policy for whole life policy without having a physicalDecreasing term insurance: Premium stays the same, but the amount of coverage decreases as you age – mortgage insuranceReturn on Premium: Policy refunds every penny of the premiums if one outlives the defined term
12Types of Life Insurance Policies (continued) Whole life insurance - Also called straight lifeYou pay a premium as long as you liveAmount of premium depends on your age when you start the policyProvides death benefits and accumulates a cash valueYou can borrow against the cash value or draw it out at retirementLook carefully at the rate of return your money earns
13Types of Life Insurance Policies (continued) Limited payment policyPay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65)Your policy then becomes “paid up” and you remain insured for lifeVariable life policyMinimum death benefit guaranteed, but the death benefit can be greater than the minimum depending on earnings of the dollars invested in a separate stock or bond fund
14Types of Life Insurance Policies (continued) Adjustable life policyWhole life insurance policy, but you can change your policy as your needs change. You can change your premium payments to increase or decrease coverage.Universal lifeGives you more direct controlCan pay premiums at any time in almost any amount. Amount of insurance can be changed more easily than a traditional policyThe increase in the cash value of the policy reflects the interest earned on short-term investments
15Types of Life Insurance Policies (continued) OTHER TYPES OF LIFE INSURANCE POLICIESGroup life insuranceTerm insuranceOften provided by an employerNo physical is requiredEndowment life InsuranceProvides coverage from the beginning of the contract to maturity and guarantees payment of a specified sum to the insuredCredit life insuranceDebts such as car loan is paid off if you dieAlso protects lendersExpensive protection
16Important Provisions in a Life Insurance Contract Objective 4: Select important provisions in life insurance contractsNaming your beneficiary, and contingent beneficiariesLength of grace period for late paymentsReinstatement of a lapsed policy if it has not been turned in for cashNonforfeiture: Keep accrued benefits if you drop the policyIncontestability clause: After the policy has been in force for awhile (2 years), the company can’t dispute its validity for any reasonSuicide clause during first two years
17Important Provisions in a Life Insurance Contract (continued) Automatic premium loansUses the accumulated cash value to pay the premium if you do not pay it during the grace periodMisstatement of age provisionPolicy loan provision to borrow against cash valueA rider to a policy modifies the coverage by adding or excluding conditions or altering benefitsWaiver of premium disability benefitAccidental death benefit - double indemnityGuaranteed insurability option
18Important Provisions in a Life Insurance Contract (continued) Cost of living protectionAccelerated benefits, also called living benefits, pay to those who are terminally ill before they dieSecond-to-die option, also called survivorship, insures two lives
19Buying Life Insurance Objective 5: Create a plan to buy the insurance FROM WHOM TO BUY?SOURCESExamine both private and public sourcesRATING INSURANCE COMPANIESLook up the company’s rating, in A. M. Best or other rating agenciesTalk to friends or colleaguesResearch ratings on the web,
20Buying Life Insurance (continued) CHOOSING YOUR INSURANCE AGENT?Can friends or parents make recommendations?Does the agent have professional designations such as Chartered Life Underwriter (CLU)?Is the agent willing to find a policy that is right for you or does he push a certain type of policy?Do they ask about your financial plan?Do you feel pressured?
21Buying Life Insurance (continued) COMPARING POLICY COSTSCompare policy costs which are affected by:How selective they are in whom they insureTheir cost of doing businessReturn on their investmentsMortality rate among policyholdersPolicy features and competition from other firmsUse interest-adjusted index to compare policiesTakes into account the time value of moneyHelps you make cost comparisons among insurance companiesSee sites such as
22Buying Life Insurance (continued) OBTAINING A POLICYApplyProvide medical historyUsually no physical for a group policyRead every word of the contractAfter you buy it, you have ten days to change your mindGive your beneficiaries and lawyer a photocopy
23Buying Life Insurance (continued) CHOOSING SETTLEMENT OPTIONSLump-sum payment is most commonLimited installment paymentIn equal installments for a specific number of years after your deathLife income optionPayments to the beneficiary for lifeProceeds left with the companyPays interest to the beneficiary
24Buying Life Insurance (continued) SWITCHING POLICIESSwitch if benefits exceed costs of getting another physical, and paying policy set-up costsThe older you are the higher the premium will beAre you still insurable?Can you get all the provisions you want?
25Financial Planning with Annuities Objective 6: Recognize how annuities provide financial securityAnnuity: Financial contract written by an insurance company that provides you with a regular incomePeople buy annuities to supplement retirement income and to shelter income from taxesThose who expect to live longer than average benefit most from annuitiesAnnuities are tax-deferred investment plans. You pay taxes on the interest when you draw the money out
26Life Insurance Activity What type of life insurance policy do you think most agents would try to sell to you? Why?Primerica agents often try to sell term insurance to most clients. Clients are encouraged to drop whole life policies & invest cash values in mutual funds through Primerica. Comment on Primerica’s sales approach.