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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.

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Presentation Transcript
life insurance
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 insurance1
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 insurance2
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
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
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 companies1
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
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
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
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
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