CFS 4062: Chapter 12: Life Insurance Planning

Distinguish between cash-value life insurance with a fixed return and with a variable return.

-All of the cash-value policies described above earn a guaranteed minimum rate of return, often 2 to 4 percent and are known as fixed-rate policies. Some cash-value policies, however, may instead pay a higher rate depending on the success of the investments made by the insurance company. A drawback of policies with a variable return is the high expense loadings and fees they carry. -Variable-universal life insurance is a form of universal life insurance that gives the policyholder some choice in the investments made with the cash value accumulated by the policy

Distinguish between an incontestability clause and a suicide clause in a life insurance contract.

-An incontestability clause places a time limit, usually two years after issuance of the policy, on the right of the insurance company to deny a claim. This clause addresses the problems arising out of erroneous statements that may have been made by the insured on the application. -A suicide clause allows the life insurance company to deny coverage (premiums will be refunded) if the insured commits suicide within the first two years after the policy is issued. If the specified number of years has passed, the full death benefit will be paid.

Distinguish between an automatic premium loan and a waiver-of-premium option ina life insurance policy.

-Automatic premium loan provision that allows any premium not paid by the end of the grace period to be paid automatically with a policy loan if sufficient cash value or dividends have accumulated. -Waiver of premium is a clause in an insurance policy that waives the policyholder's obligation to pay any further premiums should he or she become seriously ill or disabled.

which company to use?

-Buy from a financially strong company. -You can get a great price buying life insurance online. ~Premium Quote Services offer computer-generated comparisons among 20 to 80 different companies -Or you can use a local insurance agent

types of term life insurance:

-Decreasing Term Insurance -Convertible Term Insurance -Group Term Life Insurance -Credit Term Life Insurance -Mortgage Term Life Insurance

Distinguish between the dying-too-soon problem and the living-too-long problem and the best ways to address each.

-Dying-too-soon means that the person may die before planning well for the finances of the family. The person may die without being able to provide properly for the financial well-being of the family and dependents. -Best way to address the dying-too-soon problem is by purchasing life insurance well in advance. This will be helpful in case of untimely death. The family will get some financial support from the life insurance policy. -Living-too-long means that the person has lived for a longer time period and he has outlived his savings. -Best way to address the problem of lining-too-long is investing in a tax-sheltered retirement savings plan. This will help to meet the financial requirements in case the person outlives his savings.

List five types of needs that can be addressed through life insurance.

-Final-expense needs- Final expenses are one-time expenditures occurring either prior or after a death. This includes the expenses for the funeral and burial of the deceased -Income-replacement needs- The income-replacement needs affect those who are financially dependent on you. The loss of your income will be a major financial loss for them. -Readjustment-period needs- After a death, families usually need a period of readjustment after the death of a loved one. For example the spouse of someone who died, might need to take time off from working. -Debt-repayment needs- One's debt isn't just erased when they die. There will still be credit card, mortgage, etc. payments that are outstanding and must be repaid. Planning for debt-repayment needs is important and purchasing additional life insurance to off all debt should be considered. -College-expense needs- Most families have a college savings plan for their children. These plans often depend on your current income which would no longer exist. The solution is to specify a dollar amount of life insurance proceeds for future college expenses.

life insurance within a financial plan:

-First ask whether, and for how much, your life should be insured. -Next, properly integrate your life insurance into your overall financial planning.

lives covered by life insurance policy:

-First-to-die policies: cover more than one person but pay only when the first insured dies -Survivorship joint life policies: pay when the last covered person covered dies

Give three signs of an unethical life insurance agent.

-Five times your salary should do the trick. To assess your insurance needs the agent uses the multiple earnings approach rather than use the needs approach. -Cash-value is a great investment. The agent discourages you from buying a term policy and instead pressures you to buy a cash-value policy. -I have a better policy for you. The agent encourages you to replace an existing cash-value policy with another (and this is illegal in some states).

Term Life Insurance (or Pure Protection):

-For a specific face amount -For a specific time period or "term" -Premium goes up with each renewal as you get older

Term life insurance:

-Guaranteed Renewable Term Insurance: Protects you against the possibility of becoming uninsurable -Level-Premium Term Insurance: Covers for 5, 10, or more years with the annual premiums set at the average over that time span

features of cash-value life insurance (1 of 2):

-Guaranteed minimum rate of return -Current rate -Nonforfeiture values -Cash-surrender value -Guaranteed insurability (or guaranteed purchase option) allows purchase of additional insurance without regard to health status

What two factors in the process of calculating life insurance needs are likely to be themost expensive to replace?

-Income-Replacement needs -level of need.

Cash dividends are basically a refund of excess premium:

-Insurance dividends -Participating policies -Nonparticipating policies

Identify three of the five settlement options for the payment of the proceeds of a lifeinsurance policy to its beneficiary.

-Lump sum -Interest income -Income of a specific amount

Distinguish among the owner, the insured, the beneficiary, and the contingent beneficiary of a life insurance policy.

-Owner/policyholder retains all rights and privileges granted by the policy, including the right to amend the policy and the right to designate who receives the proceeds. -The insured is the individual whose life is insured -Along with the beneficiary, the owner will name a contingent beneficiary who will become the beneficiary if the original beneficiary dies before the insured.

some cash-value life insurance policies pay a fixed return:

-Permanent Insurance -Whole (or Straight) -Life Insurance -Limited-Pay Whole Life Insurance -Adjustable Life Insurance -Modified Life Insurance

Cash-Value Life Insurance:

-Permanent insurance -For a specific face amount -Level premium -Combines insurance with a savings element -The cash-value represents the value of the savings element in the life insurance policy

There are two primary risks related to longevity and finances:

-Risk of dying too soon -Risk of living too long

sales commissions:

-Sales commissions can amount to 90 percent of annual premium. -Watch for signs of an unethical life insurance agent.

government benefits can reduce the level of need:

-Social Security survivor's benefits -Social Security blackout period

Clauses affecting payments during policy's first years:

-The incontestability clause -The suicide clause

Explain why the multiple-of-earnings approach is less accurate than a needs-basedapproach to life insurance planning.

-The multiple-of-earnings approach to life insurance planning estimates the amount of life insurance needed by multiplying your income by some number. However, this method only addresses one of the types of needs, income-replacement needs. It is important to consider all six types of needs so that adequate life insurance can be provided. -The needs-based approach to life insurance planning uses all six types of needs and then subtracts assets that could be used to cover the expenses.

Identify periods in a typical person's life when the need for life insurance is low andone when it is high.

-The need for life insurance is low when no one is financially dependent on you. This occurs before marriage and after your children become financially independent. -The need for life insurance is high when multiple people are financially dependent on you. This often happens when one starts a family with children.

buy term (insurance) and invest the rest:

-The term insurance solves the dying too soon problem most efficiently -The investment program will be your retirement accounts -These will generate a much higher return than cash-value life insurance, thereby helping you solve the living too long problem

Some forms of cash-value life insurance pay a variable return:

-Universal life insurance -Variable life insurance -Variable-Universal (or Flexible-Premium) life insurance

insurance policy basic components:

-declarations -insuring agreements -exclusions -conditions -endorsements (or riders in life insurance)

Financial Needs Upon Death what needs must be met?

-final expenses -income-replacement needs -readjustment-period needs -debt-repayment needs -college expense needs -other special needs

named parties in the policy:

-insured -owner (or policyholder) -beneficiary -contingent beneficiary

what Dollar Amount do you need? (1 of 2) multiple-of-earnings approach:

-is easy but flawed it simply multiplies income by some factor, such as 7 -it only address lost income; ignores the other financial needs that occur when someone dies

Explain why the amount of "insurance" declines over time under a cash-value lifeinsurance policy.

Because coverage is maintained for the entire life of the insured as long as premiums are paid. The annual premiums for cash-value policies usually remain constant.

What is meant by integrating your life insurance into your financial plan over the life cycle?

Financial planning is a process where you determine the steps that you will take in the future based on your current situations. These steps are based on where you should invest, what time you should invest and how much you should invest. The plan that integrates your life insurance into your financial plan over the life cycle is built on two foundations: systematic, regular investments and term insurance. A base of life insurance can provide for funeral, burial, and other final expenses. The remainder of your life insurance should consist of multiple term insurance policies that you start buying when you begin to have dependents. These should be five-or ten-year, level-premium, guaranteed renewable policies in increments of $100,000. The policies should be layered so that later on in life you can drop individual policies as your life insurance needs declines. By the time you reach retirement, you can drop all your policies as your retirement investment plan hopefully can provide for your survivor's needs.

List the benefits of buying term and investing the rest.

If you invest the money difference between the cost of premiums for a term life insurance policy and the cost of premiums for a more expensive cash-value policy, you will always come out ahead financially.

What are nonforfeiture values and why are they important?

Nonforfeiture values are important for the policyholders because they are amounts stipulated in a life insurance policy that protect the cash value, if any, in the event that the policyholder chooses not to pay or fails to pay required premiums.

features of cash-value life insurance (2 of 2):

Policy loans: allow owners to borrow all or a portion of the accumulated cash value. -Automatic premium loan allows premiums to be paid out of accumulated cash values if the premiums are unpaid Accelerated death benefits: allow partial payment of a benefit prior to death in the event of terminal illness waiver of premium options: allows waiver of premium payment if the owner becomes disabled

Explain why the premiums for term insurance are always so much lower than those ofcash-value life insurance.

Premiums on policies written for ten or more years usually remain constant for a five-year interval, and then might increase to a new constant rate for another five-year or ten-year interval.

Distinguish between term life insurance and cash-value life insurance.

Term life insurance is described as "pure protection" against early death; pays benefits only if the insured dies within the time period (term) that the policy covers while cash-flow life insurance pays benefits at death and includes a savings/investment element that can provide a level of benefits to the policyholder prior to the death of the insured person.

Explain how guaranteed renewability for term life insurance and guaranteed insurabilityfor cash-value insurance protects insured people who develop serious health conditions.

The guaranteed insurability option permits the cash-value policyholder to buy additional stated amounts of cash-value life insurance at stated times in the future without taking a health exam. This option differs from the guaranteed renewability option for term insurance in that it enables the owner to increase the face amount of the policy or to buy an additional policy. The policy might permit the utilization of these options when the insured turns 30, 35, 40 or when he or she marries or has children. The added cost of this option is nominal or valuable.

Give some examples of fair prices for life insurance and one example of why some people must pay higher premiums than others.

The price people pay for life insurance depends on how old they are, their health status, occupational status, and the type of life-style they have. Life insurance companies offer them their lowest prices to the "preferred" applicants whose health status and lifestyle (a good example would be nonsmokers) suggest longevity. The "standard" and "impaired" applicants would pay more than those who are "preferred". Because of who companies differ in assigning these labels to applicants, comparison shopping is the best treatment. It is easy to pay too much for term life insurance, especially if you do not comparison-shop beforehand. For example, some companies allow an occasional (or monthly) cigar smoker to qualify for non-smoker rates. Men pay more than women because they typically die five years earlier. Smokers pay much higher premiums, usually triple the price than nonsmokers because, as a group, smokers die ten years earlier than nonsmokers.

Describe the benefit of buying guaranteed renewable term insurance.

This is a term policy with a long time period. Under such a policy, the premiums remain constant throughout the entire life of the policy, perhaps 5, 10, or 20 years. Premiums charged in early years are higher than necessary to balance out the lower-than-necessary premiums in later years covered by the policy.

grace period:

allows overdue premiums to be paid without a lapse in policy

life insurance can close......

any remaining gap in needs

multiple indemnity:

clause allows higher death benefit if death is caused by certain specified conditions

your life insurance plan should be focused on the.....

dying too soon risk

reinstatement:

is sometimes available on a lapsed policy

death benefit:

is the amount that will be paid to beneficiary when the insured dies face amount +unpaid dividends +premium paid in advance -outstanding cash-value loans. death benefit

life insurance application:

is the applicant's offer to purchase a policy; the application becomes part of the policy when issued

life insurance policy:

is the written contract between the insurer and the policyholder

what is the primary reason for buying life insurance?

is to allow the family members of the deceased to continue with their lives free from the financial burdens that death can bring.

final expenses:

one-time expenses occurring just prior to or after a death

settlement options (or payout options):

specify how the death benefit will be paid. -lump sum -Interest income -Income of a specific amount -Income for a specific period -Income for life

lapsed policy:

terminated for nonpayment of premium (Although policies do have a grace period for this) Also, sometimes you can be reinstated.

what Dollar Amount do you need? (2 of 2) needs-based approach:

the best method, as it includes all of the needs that must be met, not just replacement of income -Needs are high for a parent with young children -Young, single professionals may need little life insurance

existing insurance and assets reduce....

the level of need

beneficiary:

the person named in the policy to receive the funds. change with life events.