Chapter 12 Life Insurance

Obtaining a policy

1. apply 2. provide medical history 3. usually no physical for group 4.read every word of contract 5. after buying you have 10 days to change your mind 6. give beneficiaries and lawyer a photocopy

2. the DINK (dual income, no kids) method

1/2 debts and funeral expenses

Do you need life insurance?

-do you have people you need to protect financially -do you have a partner who works?

From whom to buy? Sources

-examine both private and public sources -look up company's rating -talk to friends or colleagues

Universal life

-gives more direct control -can pay premiums at any time in almost any amount. And amount can be changed easily -The increase in the cash value of the policy reflects the interest earned on short-term investments

Determining your life insurance objectives

-how much money do you want to leave your dependents should you die today? -When do you want to retire, and what income do you think you'll need? -How much insurance will you be able to pay for your insurance program?

LO 12-4 Select important provisions in life insurance contracts

-naming beneficiary(-ies) -length of grace period for late payments -reinstatement of lapsed policy if it has not been turned in for cash -nonforfeiture: keep accrued benefits if you drop the policy -incontestability clause: after policy has been in force for 2 years, the company cannot dispute its validity for any reason -suicide clause during first two years

Other reasons are

-pay off a home mortgage or other debts at the time of death -to leave as part of your estate -to save money for retirement or for income or education for children -to cover medical expenses and funeral costs

Whole life insurance (straight line)

-pay premium as long as you live -amt. of premium depends on age when you start policy -Provides death benefits and accumulates a cash value -you can borrow against the cash value or draw it out at retirement -look carefully at the rate of return your money earns

Term life insurance

-protection for a specified period of time -if you stop paying premiums, coverage stops -Renewability: you can renew without having a physical at the end of the term -multiyear level term: most popular term insurance -conversion option: can exchange term policy for whole life without a physical -Decreasing therm insurance: premium stays the same but amt. coverage decreases as you age -return of premium: Policy refunds every penny of the premiums if one outlives the defined term

Mutual life insurance companies

-24% are this type -owned by the policyholders -with participating policies the premiums are higher than non-participating policies - Part of the premium is refunded to the policyholders annually. (Policy dividend)

Stock life insurance companies are owned by the shareholders

-76% are this type -sell non-participating policies -If you want to pay the same premium each year, choose a non-participating policy with its guaranteed premiums

Credit life insurance

-Debts such as car loan is paid off if you die -also protects lenders -expensive protection

Compare policy costs which are affected by?

-How selective they are -cost of business -return of their investments -mortality rate among policyholders -policy features and competition

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

Switching policies

-Switch if benefits exceed costs of getting another physical, and paying policy set-up costs -tho older you are, the higher the premium will be -Are you still insurable? -Can you get all the provisions you want?

Group life insurance

-Term insurance -often by employer -no physical required

Choosing your insurance agent

-can friends and parents make reccomendations? -Does agent have professional designations? -are they getting you what you need or pushing something else? -do they ask about your financial plan? -do you feel pressured?

death (survivor benefits)

-covers immediate expenses resulting from the death of the insured -protects dependents against a loss of income

Types of life insurance policies Temporary insurance

-renewable term

use interest-adjusted index to compare policies

-takes time value of money into account -helps make cost comparisons

Automatic premium loans

-uses accumulated cash value to pay the premium if you do not pay it during the grace period

RIDERS: a rider to a policy modifies the coverage by adding or excluding conditions or altering benefits

-waiver of premium disability benefit -accidental death benefit - double indemnity -guaranteed insurability option -cost of living protection -accelerated benefits, paid to those who are deathly ill before they die -second-to-die opeion

LO 12-5

Create a plan to buy life insurance

LO 12-1

Define life insurance and describe its purpose and principle

LO 12-2

Determine your life insurance needs

LO 12-6

Evaluate the payout options for life insurance

Common settlement options Lump-sum payment

Face amount paid in one installment

The principle of life insurance

Mortality tables provide odd on your dying based on your sex and age

3. The nonworking spouse method

Multiply the number of years until the youngest turns 18 by $10,000

Annuity: Financial contract written by an insurance company that provides you with a regular income

Payments may begin at once (immediate annuity) or at some future date (deferred annuity)

Purpose of life insurance

Protect someone who depends on you from financial loss related to your death

What is Life insurance?

Purchase policy; insurance company promises to pay a lump sum at the time of the policy holder's death, or sometimes while they are still alive

Rating insurance companies

Research ratings on the web

Adjustable life policy

Whole life insurance policy, but you can change as needs change.

Estimating your life insurance needs 1. The easy method

You will need 70% of your salary for seven years while your family adjusts

How long will you live?

Your premium is based on your life expectancy and the projections for the payouts for persons who die

LO 12-3

distinguish between the two types of life insurance companies and analyze various types of life insurance policies these companies issue

Limited installment payment

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

Variable life policy

minimum death benefit guaranteed, but the death benefit can be greater than the minimum depending on earnings of the dollars invested in a separate stock or bond fund

4. The family need method

more thorough because it also considers employer provided insurance, social security benefits, and income and assets

Life income option

payments to the beneficiary for life

Proceeds left with the company

pays interest to the beneficiary

Income from Life insurance policies

people buy annuities to supplement retirement income and to shelter income from taxes. Annuities are tax-deferred investment plans

Endowment Life Insurance

provides coverage from the beginning of the contract to maturity and guarantees payment of a specified sum to the insured

Permanent insurance

whole life