Chapter 12-Personal Finance Life Insurance

Common Settlement Options

Lump-sum Payment • Pays face amount in one installment - Proceeds Left with the Company • Pays interest to the beneficiary - Limited Installment Payment • Pays equal installments for a specific number of years after your death - Life Income Option • Payments to the beneficiary for life (annuity)

Variable Life Policy

Minimum death benefit guaranteed but cash value is not guaranteed - The death benefit can be greater than the minimum depending on earnings of the dollars invested in a separate stock, money market, or bond fund 12-1

Types of Life Insurance Policies

Temporary Insurance (term, renewable term, convertible term, or decreasing term insurance) - Permanent Insurance (called whole life, straight life, ordinary life, or cash value life insurance)

Riders to Life Insurance

a policy modifies the coverage by adding or excluding conditions or altering benefits - Waiver of Premium Disability Benefit - Accidental Death Benefit — double indemnity - Cost-of-Living Protection - Accelerated Benefits • Also called living benefits; pay to those who are terminally ill before they die

Stock life insurance companies

are owned by shareholders - 73% are of this type - Sell nonparticipating policies - If you want to pay the same premium each year, choose a nonparticipating policy with its guaranteed premiums

Switching Policies

- Are you still insurable? - Before you switch, make sure you are still insurable(check medical and other requirements) - The older you are, the higher the premium will be - Can you get all the provisions in the new policy that existed in the old policy?

Payments from Life Insurance Policies

- Naming Your Beneficiary • Contingent Beneficiary - Misstatement of Age Provision • Pays based on actual age - Policy Loan Provision to borrow against cash value • Up to the cash value of the policy - Second-to-die Option • Also called survivorship life, insures two lives

Term Life Insurance

- Protection for a specified period of time - If you stop paying premiums, coverage stops - Renewability Option: renew the policy at the end of the term without a medical reevaluation

Life Expectancy

-Individuals are living longer due to improved medical care, healthier lifestyles, and education obtained; Women outlive men

The principle of life insurance

-Mortality tables show the number of deaths among various age groups and gender during any year

Obtaining and Examining a Policy

1. Application 2. Provide medical history 3. Usually no physical for a group policy 4. Read every word of the contract 5. After you buy it, you have a 10 day "free-look" period to change your mind 6. Give your beneficiaries and lawyer a photocopy

Mutual Life insurance companies

27% are of this type - Owned by policyholders - Sell participating policies - Higher premium than nonparticipating policies but part of the premium is refunded to the policyholder annually; Refund is called the policy dividend

Life Insurance

A person purchases a policy by paying a premium and the insurance company promises to pay a sum of money at the time of the policyholder's death to the designated beneficiary. If an endowment, then the amount is paid to policyholder while living

Whole Life Insurance

Also called straight life or cash-value life or ordinary life - You pay specified premium as long as you live - Premium depends on your age when you start the policy - Provides death benefits and a savings account (accumulates a cash value) - Makes sense if you intend to keep the policy for the long term or must be forced to save - First consider other savings and investment options before investing in whole life insurance

DO YOU NEED LIFE INSURANCE?

Do you have people you need to protect financially (spouse, children, parents) - Influenced by your stage in the life cycle and the type of household you live in • Households with small children have greatest need for life insurance

Universal Life

Gives you more direct control - Can pay premiums at any time in almost any amount. Amount of insurance can be changed more easily than a traditional policy - The increase in the cash value of the policy reflects the interest earned on short-term investments - Combines term insurance and investment elements

Income from Life Insurance Policies

Insured of a whole life policy may borrow against cash value or surrender policy and receive cash value - People who purchase variable life insurance policies may supplement retirement income by withdrawing some of the investment portion as an annuity

Term life insurance

Multiyear Level Term: popular because you pay the same premium for life of policy - Conversion Option: can exchange term policy for whole life policy without a medical examination - Decreasing Term Insurance: premium stays the same, but the coverage decreases as you age or debt is repaid (if paired with mortgage) - Return of Premium: policy refunds every penny of the premiums paid if one outlives the policy term

Limited Payment Policy

Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (such as 60 or 65) - Your policy then becomes "paid up" and you remain insured for life; face amount paid at death

Important Provisions in a Life Insurance Contract

Payments to Life Insurance Policies - Policy Reinstatement • Reinstatement of a lapsed policy if it has not been turned in for cash; time limit 1 to 2 years - The Grace Period • Allows 28 to 31 day late payment without penalty - Automatic Premium Loan • Cash value is used to pay premium if not paid within grace period - Guaranteed Insurability Option

Purpose of Life Insurance

Protect someone who depends on you from financial loss related to your death • Proceeds may also be used to: - Pay off a home mortgage or other debts at the time of death - Provide lump-sum payments to children when they reach a specified age (endowment) - Provide a retirement income, or provide an education or income for children - Cover medical expenses and funeral costs - Accumulate savings or establish income for survivors

Use interest-adjusted index to compare policies

Takes into account the time value of money • Helps you make cost comparisons among insurance companies • The lower the index, the lower the policy cost

Estimating your life insurance requirements

The Multiple of Income Method • Needs range between 5 and 8 times your annual income - The Easy Method • Typical family needs 70% of your salary for seven years before they adjust to life without your income - The DINK (dual income, no kids) Method • Funeral expenses plus half of debts - The "Nonworking" Spouse Method • Multiply the number of years until the youngest child reaches 18 by $10,000 Online Calculators and Apps

Adjustable Life Insurance Policy

Whole life insurance policy, but you can change your coverage by changing the premium payments or the period of coverage

Five factors affect the price of a policy:

The company's cost of doing business • Return on the company's investments • Mortality rate the company expects among policyholders • Policy features • Competition among companies with comparable policies

Death (or Survivor) Benefits

To cover the immediate expenses resulting from the death of the insured - To protect dependents against a loss of income resulting from premature death of primary wage earner