Chapter 10 - Financial Planning with Life Insurance

6 common life insurance riders

(1) Waiver of premium disability benefit (most common) (2) accidental death benefit (second most common) (3) guaranteed insurability option (third most important) (4) cost of living protection (5) accelerated benefits (6) second-to-die

Settlement Options

(1) lump-sum payment (2) limited installment payment (3) life income option (4) Proceeds left with the company (5) Switching policies

Life insurance benefits may be used to:

(1) pay off a home mortgage or other debts (2) provide lump-sum payments though an endowment for children when they reach a specified age (3) provide an education or income for children (4) make charitable donations after death (5) provide a retirement income (6) accumulate savings (7) establish a regular income for survivors (8) set up an estate plan (9) pay estate and gift taxes

4 general methods for determining the amount of life insurance you may need:

(1) the easy method (2) the DINK (Dual income, No kids) method (3) the "nonworking" spouse method (4) the "family need" method

Policy Loan Provision

- A permanent life insurance may be borrowed against - If insured dies, the loan amount and any interest due must be repaid from the death benefit proceeds.

Credit Life Insurance

-A special type of coverage written to pay off the balance of a loan (auto loans or mortgages) in the event of the death of the debtor. -Decreasing term insurance is a better option

Endowment Life Insurance

-Life insurance that provides coverage for a specific period of time and pays an agreed-upon sum of money to the policyholder if he or she is still living at the end of the endowment period. -If the policyholder dies before that time, the beneficiary receives the money

The "family need" method

-More thorough than the first three -Considers employer provided insurance, Social Security benefits, income, and assets

limited payment policy

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

Life Income Option

-Payments are made to the beneficiary for as long as she or he lives. -The amount of each payment is based primarily on the sex and attained age of the beneficiary at the time of the insured's death. -It is probably the best option if you wish to provide sufficient income for your spouse for the rest of his or her life

Immediate Annuities

-People approaching retirement age can purchase immediate annuities. -These annuities provide income payments at once. When you are 65,, you may no longer need all of your life insurance coverage - especially if you have grown children. -You may decide to convert the cash value of your insurance policy into a lump-sum payment for an immediate annuity

Accelerated Benefits

-Riders attached to life insurance policies which allow death benefits to be used to cover nursing or convalescent home expenses. -Also known as living benefits

lump-sum payment

-The company pays this face amount of the policy in one installment to the beneficiary or to the estate of the insured. -This form of settlement is the most widely used option. -However, it may be a wrong option if you wish to financially protect your spouse for the rest of his/her life or until your children finish their education

Proceeds left with the company

-The life insurance proceeds are left with the insurance at a specified rate of interest. -The company acts as a trustee and pays the interest to the beneficiary. -The guarantee minimum interest rate paid on the proceeds varies among companies

switching policy

-Thinking twice if your agent suggests that you replace the whole life or universal life insurance you already own. -before you give up this protection, make sure you are still insurable (check medical and any other qualification requirements)

Adjustable Life Policy

-Whole life insurance policy, but you can change your policy as your needs change. -You can change your premium payments to increase or decrease coverage. -You are able to borrow or withdraw your cash value.

Living Benefits

-benefits that allow the policyholder to receive a portion of death benefits prior to death -Also known as accelerated benefits

administrative fees

-insurance company may deduct fees to cover record-keeping and other administrative expenses. -the fee may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) or as a percentage of your account value (usually 0.15 percent per year).

single premium deferred annuity

-purchased with a lump sum, but income is deferred until some future date -popular because of the greater potential for tax-free growth

temporary insurance

-term, renewable term, convertible term, or decreasing term insurance -group life and credit life are generally temporary forms of insurance

permanent insurance

-whole life, straight life, ordinary life, cash value life insurance -limited payment, variable, adjustable, or universal permanent insurance

The easy method

70% of your salary for seven years while your family adjusts Assumes typical family formula: current income x 7 years x .07 = life insurance needs

Annunity

A contract that provides a regular income for as long as the person lives

temporary life insurance

A life insurance policy that remains in effect for a specified period of time; sometimes called term insurance

Grace Period

A time period (usually 28 to 31 days to elapse) during which the time you pay the premium without penalty. After that time, the policy lapses if you have not paid the premium

conversion term

Allows you to change from term to permanent coverage. This will have a higher premium

Variable Annuity

An annuity and mutual fund combined in one product. Monthly income varies with the performance of the equity portfolio.

whole life insurance

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, a cash-value life policy, or an ordinary life policy.

cash-value life policy

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, whole life policy, or an ordinary life policy.

Fund expenses

Annual indirect costs imposed by funds handling underlying investments

surrender charges

Charge if you withdraw money within a certain period, usually within 6 to 8 years. Generally, the surrender charge declines gradually over a period of 7 to 10 years.

Stock Companies

Generally sell nonparticipating policies (also called nonpar policies). Participating policy has a somewhat higher premium than a nonparticipating policy.

straight term policy

It is a policy that guarantees that you pay the same premium throughout the service of the term. Also called a multiyear level term

Variable Life Policy

Minimum death benefit guaranteed. Benefit can be greater depending on the earnings of the dollars invested in the separate fund. Premium payments are fixed.

The "nonworking" spouse method

Multiply the number of years until the youngest child reaches 18 by $10,000 formula: youngest child's age x $10,000 = total insurance needs assumes typical family

Mutual Companies

Owned by the policy owners and issue participating policies (also called par policies). Participating policy has a somewhat higher premium than a nonparticipating policy.

Limited installment payment

Paid in equal installments for a specific number of years after your death

Types of Insurance Companies

Stock- non-participating-does not pay dividends, owned by shareholders Mutual- participating-pays dividends, owned by policyholders

Decreasing Term

Term life insurance in which the face amount of the policy decreases over time in scheduled steps. Most often used to cover a debt obligation (mortgage).

multiyear level term

The most popular. It is a policy that guarantees that you pay the same premium throughout the service of the term. Also called a straight term

Return of Premium Term

This policy provides for a full refund of premiums if the insured is still living at the end of the term. These policies charge a higher premium than regular term insurance, but you get all your money back

Double Indemnity

a benefit under which the company pays twice the face value of the policy if the insured's death results from an accident; also called accidental death benefit

Rider

a document attached to a policy that modifies its coverage

Policy Reinstatement

a lapsed policy can be put back in force, or reinstated, if it has not been turned in for cash

interest-adjusted index

a method of evaluating the cost of life insurance by taking into account the time value of money

beneficiary

a person designated to receive something, such as life insurance proceeds, from the insured

nonforfeiture clause

a provision that allows the insured not to forfeit all accrued benefits

Policy Dividends

a return of part of the premiums paid and are generally not taxable income or guaranteed.

Second-to-die option

a rider paid when the second spouse dies, intended to cover estate taxes; also called survivorship life

Cost of living protection

a rider to help prevent inflation from eroding purchasing power of insurance protection, not necessary

accidental death benefit

a rider to life insurance sometimes called double indemnity

waiver of premium disability benefit

a rider where a company pays premiums in event of disability, extra money and worth it

Universal Life Insurance

a whole life policy that combines term insurance and investment elements

Guaranteed Insurability Option

allows the insured to purchase specific amounts of additional insurance at specific times without proving insurability

Index Annuities

are fixed annuities that invest on an aggressive basis for higher returns. has a guaranteed minimum interest rate and is tie to Standard and Poor's 500. normally, insurance companies reserve the initial returns for themselves an pay the excess to the annuitant

Mortality and expense risk charge

charge is equal to a certain percentage of the account value. Usually 1.25% of account value

Renewable Term

coverage of term insurance ends at the conclusion of the term, but you can continue it for another term - five years, for example - if you have a renewable option. However, the premium will increase because you will be older. It also usually has an age limit; you cannot renew after you reach a certain age

The DINK (dual income, no kids) Method

figure amounts for to determine total insurance needs: (1) funeral expenses (2) one-half of mortgage (3) one-half of auto loan (4) one-half of credit card balance (5) one-half of personal debt (6) Other debts = total insurance needs assumes typical family

Suicide Clause

if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid

Survivorship Life

insures two or more lives for a premium that is based on a joint age; pays on the last death; also called second-to-die

participating policies

life insurance policies that pay dividends; also called a par policy

par policy

life insurance policies that pay dividends; also called a participating policy

Term Insurance

life insurance protection for a specified period of time; sometimes called temporary life insurance

nonparticipating policy

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

nonpar policy

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

Misstatement of Age

o Allows the insurer to go back and make changes to the benefits so that they match the correct age o Benefits will be adjusted accordingly

Straight Life Policy

premium is based on your age at inception and remains fixed over the policy life (also called whole life insurance)

Deferred Annuities

provide income payments at some specified future date, can be funded with periodic payments over time.

Group Life Insurance

provides lower rates for the employer or employee and includes all employees, including new employees, regardless of health or physical condition

Fixed Annuity

states that the annuitant (the person who is to receive the annuity) will receive a fixed amount of income over a certain period or for life

Incontestability Clause

states that the insurer can't cancel the policy if it's been in force for a specified period, usually 2 years. After that time, the policy is considered valid during the lifetime of the insured. This is true even if the policy was gained through fraud.

cash value

the amount received after giving up a life insurance policy

Ordinary Life Policy

whole life insurance where the premiums remain the same each year as long as the policyholder lives; also called a straight life policy, whole life policy, or a cash-value life policy.