Financial Planning with Life Insurance Chapter 12 Personal Finance Finance 235

Life insurance 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.) Personal Finance

Life insurance 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) Personal Finance

Life insurance 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 Personal Finance

Life insurance companies 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) Personal Finance

insurance companies 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 Personal Finance

insurance companies 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 Personal Finance

Selecting provisions 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) Personal Finance

Buying life insurance 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 Personal Finance

Financial planning with annuities 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! Personal Finance

Homework Questions: What is an Annuity? What are the Principal Types of Annuities? Why do People Buy Annuities? Be Your Own Personal Financial Planner* 1 – Calculating your insurance need (w/s 47) 6 – Set up a layered Term Insurance Program (w/s 48) * These are simulated situations. Personal Finance