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Chapter 12: Life Insurance Planning. Identify the purpose of life insurance and the reasons for buying it. Recognize that the need for life insurance varies over the course of one’s life and identify the procedures used to calculate life insurance needs. Objectives.

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Identify the purpose of life insurance and the reasons for buying it.

Recognize that the need for life insurance varies over the course of one’s life and identify the procedures used to calculate life insurance needs.

Distinguish among the various types of term and cash-value life insurance policies.

Describe and explain the purpose of the major provisions of life insurance policies.

Discuss important points to consider when choosing and buying life insurance.

what is the purpose of life insurance
What is the Purpose ofLife Insurance?
  • To protect people who depend on you from financial loss related to your death
    • 78% of all American households have it
  • To make charitable bequests upon your death
  • To save money for retirement or children’s education
  • To leave as part of your estate
  • To pay off a mortgage or other debts at the time of death
the principle of life insurance
The Principle of Life Insurance
  • Mortality tables provide odds on your dying, based on your age and sex
  • Your premium is based on the projections for the payouts for persons who die
determining your life insurance needs ask yourself
Determining Your Life Insurance Needs - Ask Yourself...
  • Do you need life insurance?
    • do you have people you need to protect financially?
    • does your partner work?
  • What are your objectives for life insurance?
    • to accumulate money for retirement?
    • to provide funds when you die?
    • how much can you afford?
estimating the amount of life insurance you need
Estimating the Amount ofLife Insurance You Need
  • The Easy Method
    • typically, you will need to have enough insurance to cover 70% of your income for seven years
  • The DINK (dual income, no kids) Method
  • The “Nonworking” Spouse Method
  • The “Family Need” Method looks at
    • employer provided insurance
    • Social Security benefits
    • income and assets
determining life insurance needs
Determining Life Insurance Needs


  • Multiple-of-Earnings Approach
types of life insurance policies
Types of Life Insurance Policies
  • Term life insurance
    • protection for a specified period of time
    • if you don’t pay premiums, coverage stops
    • renewability option
      • at the end of the term you can renew the policy without having a physical
types of life insurance policies1
Types of Life Insurance Policies
  • Term life insurance (continued)
    • conversion option
      • can change your policy from term to a whole life policy without a physical
    • decreasing term insurance
      • your premium stays the same, but the amount of coverage decreases as you age


types of life insurance policies2
Types of Life Insurance Policies


  • Whole life insurance
    • you pay a premium as long as you live
    • amount of premium depends on your age when you start the policy
    • provides death benefits and accumulates a cash value
    • you can borrow against the cash value or draw it out at retirement
    • look carefully at the rate of return your money earns
whole life policy options
Whole Life Policy Options
  • Nonforfeiture clause
    • if you stop paying premiums you can use the cash value in a variety of ways.
  • Limited payment policy
    • pay higher premiums during your earning years only, keeping lifetime coverage
  • Variable life policy
    • minimum death benefit guaranteed, but can be more depending on how your premium dollars are invested
whole life policy options1
Whole Life Policy Options


  • Adjustable
    • you can change your premium amount and thus your coverage
  • Universal life
    • lets you pay premiums in almost any amount
    • combines term insurance and investment elements
types of policies issued in 1994



Whole Life








Variable Universal



Types of Policies Issued in 1994*



*1997 Insurance Fact Book

other types of life insurance policies
Other Types of Life Insurance Policies
  • Group life insurance
    • often through an employer
    • no physical required
    • usually term insurance
  • Credit life insurance
    • debt is paid off if you die
      • mortgage, car, furniture
    • also protects lenders
    • expensive protection
life insurance contract provisions
Life Insurance Contract Provisions
  • Naming your beneficiary (one or more)
  • Length of grace period for late payments
  • Reinstatement of a lapsed policy if it has not been turned in for cash
  • Suicide clause during first two years
  • Automatic premium loans
    • uses the accumulated cash valueto pay the premium if you do not
life insurance contract provisions1
Life Insurance Contract Provisions


  • Misstatement of age provision
  • Policy loan provision
    • can borrow against your cash value
  • Rider to add or alter benefits
    • cost of living protection
  • Waiver of premium disability benefit
  • Accidental death benefit
    • pays twice the policy face amount
  • Guaranteed insurability option
  • Accelerated benefits
buying your life insurance
Buying Your Life Insurance
  • Look at your income, savings, group life insurance, and Social Security benefits
  • Compare policy costs which are affected by
    • cost of doing business
    • return on its investments
    • mortality rate among policyholders
    • features of the policy
    • competition from other companies
buying your life insurance1
Buying Your Life Insurance


  • Use the interest-adjusted index to compare policies
    • takes into account the time value of money
    • helps you make cost comparisons among insurance companies
  • Determine from whom to buy your policy
    • examine both private and public sources
    • look up the company’s rating
choosing your insurance agent
Choosing Your Insurance Agent
  • Ask friends, parents and neighbors for recommendations
  • Find out if the agent belongs to professional groups or is a CLU
  • Is the person willing to take the time to answer your questions and find a policy that is right for you?
  • Do they ask about your financial plan?
  • Do you feel pressured?
  • Are they available when needed?
obtaining and examining a policy
Obtaining and Examining a Policy
  • Apply and provide medical history
  • Read all of the contract
  • After you buy it you have ten days to change your mind
  • Give your beneficiaries and lawyer a copy
choosing settlement options
Choosing Settlement Options
  • Options are the choices for how you want the money paid out
  • One lump-sum is most common
  • Limited installment plan
    • in equal installments for a specific number of years after your death
  • Income for life
    • payments to the beneficiary for life
  • Proceeds left with the company
    • pays interest to the beneficiary
should you switch policies
Should You Switch Policies?
  • If benefits exceed costs of getting another physical and paying policy set up costs.
  • Are you still insurable?
  • Can you get all the provisions you want?
financial planning with annuities
Financial Planning with Annuities
  • What is an annuity?
    • a contract where you pay money in, and at a certain date get regular payments back during your lifetime
  • Why do people buy annuities?
    • to supplement retirement income and to shelter income from taxes
  • How are annuities taxed?
    • income deducted and interest earned is not taxed until you draw the money out