Personal Finance: Chapter 10- Financial Planning with Life Insurance

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Key provisions in a typical life insurance policy?

1. Naming your beneficiary 2. Incontestability clause 3. The grace period 4. Policy reinstatement 5. Nonforfeiture clause 6. Misstatment of age provision 7. Policy Loan provision 8. Suicide clause 9. Riders to life insurance policies 10. Guaranteed insurability option 11. Cost-of-living protection 12.Accelerated benefits 13. Second-to-die option

What to look for from whom you buy life insurance?

1. Understand and know what your life insurance need are 3. Buy your life insurance from a company lisenced in your state 3. Select an agent who is competent 4. Shop around and compare costs 5. Buy only the amount of life insurance you need & can afford 6. Ask for lower premiums 7. Read your policy 8. Inform your beneficiaries 9. Keep your policy in a safe place at home 10. Check coverage periodically

The Easy Method

70% of your salary for seven years while your family adjusts Assumes typical family Multiply your current gross income by 7 then multiply that number by .70

What is life insurance?

A contract between an insurance company and an individual to pay a stated sum of money upon your death to your beneficiary

Two main types of life insurance: whole

An insurance plan in which the policyholder pays a specified premium each year for as long as he or she lives, also called a straight life policy, cash-value, or an ordinary life policy -provide a death benefit and saving value

Financial Planning with Annuities (costs vs. benefits)

Annuities may be fixed proving a specific income for life, payments may begin at once "immediate annuity" or some future date "deferred annuity"

Immediate & Deferred annuities

Immediate Annuity - The immediate annuity does not have an accumulation period and is used to generate immediate income within a year of the issue date. Deferred Annuity - A deferred annuity will pay periodic benefits starting at some specified time in the future; benefits begin more than 1 year from the issue date.

Two main types of life insurance: Term (temporary)

Life insurance protection for a specified period of time; sometimes called temporary life insurance -best value bc can change as life changes ex. renewable, multiyear, conversion

Two types of life insurance companies: non‐participating

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

Two types of life insurance companies: participating policy

Life insurance that provides policy dividends, also called a par policy

Purposes (reasons for) life insurance?

-Pay off home mortgage or other debts at the time of death -provide lump-sum payments through an endowment for children when they reach a specified age

How to estimate how much life insurance you need? -Different methods

1. Easy Method 2. The Dink (Dual income, no kids) method 3. The "Nonworking" Spouse method 4.The "Family Need" Method

Why buy an annuity?

To give you retirement income for the rest of your life

Third kind of insurance that is not widely utilized

Universal life insurance- A whole life policy that combines term insurance and investment elements -more flexibility


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