Chapter 10 Personal Finance- Life Insurance

How much do insurance experts estimate extra costs will be up to a year to replace the services of a homemaker in a family with small children?

$10,000 a year

whole life insurance

A permanent policy for which you pay a specified premium each year for the rest of your life. In return, the insurance company pays your beneficiary a stated sum when you die.

Conversion Term

A type of life insurance policy that allows one to change from term to permanent coverage (this will have a higher premium).

Adjustable Life Policy

An adjustable life policy allows one to charge their coverage as your needs shift and change.

Endowment Life Insurance

Endowment life insurance provides coverage for a specific period of time and then proceeds to pay a certain sum of money to the policyholder f they are still living at the end of the endowment period. If the policyholder were to die before the period of time, the beneficiary receives the money.

What are some examples of what life insurance benefits could be used for?

Ex: To pay off a home mortgage or other debts at the time of death, to provide an education or income for children, to make charitable donations after death, or to provide a retirement income.

Group Life Insurance

Group Life Insurance is a variation of term insurance. It covers a large number of people under a single policy and is usually offered through employers who pay a part of or all of the costs for their employees.

What are the disadvantages of Whole Life insurance?

It can be costly if you back out early and there is usually no cash value for at least three to five years. It also may not meet short-term needs.

Easy Method

It is 70% of your salary for seven years while your family adjusts. It is based upon the insurance agents "rule of thumb" that a family will need approximately 70% of ones salary for seven years before they adjust to the financial consequences of ones death.

Universal Life Insurance

It is basically a term policy with a cash value or a combination of whole life insurance and term life insurance. It allows ones to change their premium without changing their coverage.

What do insurance companies use to determine insurance premiums?

Life Expectancy Tables

Credit Life Insurance

Life insurance that is used to pay off certain debts (ex: auto loans or mortgages) in the event that one dies before they are paid in full. Usually these types of policies are not the most ideal for the protection that they offer (decreasing term insurance is better).

limited payment policy

Limited payment policies will charge premiums for only certain lengths of time (20-30 years or until the insured reached a certain age). At the close of this time the policy will become "paid up" and the policyholder will remain insured for life.

What are the subtypes of whole, straight, and ordinary Life Insurance?

Limited payment, Variable life, Adjustable life, and Universal Life.

DINK method

Method of calculation: Duel income, no kids. Half of debts + funeral expenses. This method assumes one have very simple insurance needs and all one needs to go is ensure that ones spouse will not be unduly burdened by debts if one were to die.

Term Insurance

Term Insurance provides protection against loss of life for only a specified term or period of time. A term insurance policy usually pays a benefit only if you die during the period it covers (1, 5, 10, or 20 years).

Renewable Term

The coverage of term insurance will end at the conclusion of the term but one can continue if there is a renewable option. The premium will increase because one will be older and usually has an age limit.

What are the four general methods for determining the amount of insurance you may need?

The easy method, the "DINK" method, the "nonworking" spouse method, and the "family need" method.

Decreasing Term

This is a type of term insurance that is also available in a structure that will pay less to the beneficiary as time passes. It is a type of life insurance that features a level premium and a death benefit that decreases each year over the duration of the policy.

Why do people buy life insurance?

To protect the people who depend on them from financial losses caused by their death. These people can include a spouse, children, an aging parent, or a business partner or corporation.

Variable Life Policy

When you have a variable life policy your premiums are fixed. Like the cash-value policy, a portion of your premium is put in a separate account and this money is invested in a stock, bond, or money market fund. Death benefit is guaranteed but the cash value of the benefit can significantly vary.

nonparticipating policy

life insurance that does not provide policy dividends; also called a nonpar policy.

participating policy

life insurance that provides policy dividends; also called a par policy

What are the two basic types of life insurance?

temporary and permanent

cash value

the amount received after giving up a life insurance policy