"If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance." - Suze Orman (Author and financial advisor)

Learning Objectives: Understand what life insurance is. Understand who needs life insurance. Know and understand the different types of life insurance.

What is life insurance? Life insurance: Pays a sum of money upon the death of an insured person to the beneficiary. It is designed to protect those who depend on the insured person financially against the loss of income that would result if the insured were to pass away. The goal of life insurance is to provide financial security for your family after you pass away. How life insurance works video:

Who needs life insurance? Who likely doesn’t need life insurance: Someone who has no dependents. If you are single and have no dependents it is likely not worth the expense unless you want to provide for your parents or other relative and/or have a lot of debt. Who needs life insurance: If you have someone who financially depends on you it is likely you will need some kind of life insurance. Example: if your children, spouse, or parents depend on you for financial support life insurance may be important. Life insurance tends to be particularly important if you have children under the age of 18. The younger they are the more important and the more of it you should have.

What to ask yourself: Questions to ask yourself when considering life insurance: Do I need life insurance? How much life insurance do I need? How long will I need it? What type of policy should I get? Who should I get the policy from? (Remember to shop around)

Question Cluster 1

How much life insurance is right for you Your need for life insurance is dependent upon your circumstances including your: Income Expenses Savings Goals

Estimating your needs: The DINK (Dual Income No Kids) method: The dink method is used when you have no dependents and your spouse makes as much or more than you. In this method you are ensuring that your spouse will not be overcome by debt if you were to pass away. In this method you figure half of all your debts should be paid by the insurance in case of you death. For example: Funeral expense: $6,000 ½ of mortgage:$75,000 ½ of auto loans: $5,000 ½ of credit card balance: $500 ½ of personal debt: $750 ½ other debts: $0 Total insurance needs: $87,250 You may consider adding additional coverage if your spouse suffers from health conditions or in employed in an occupation with a risky future.

Estimating your needs:  7/70 method: o Based on the idea that a typical family will need 70% of your salary for 7 years before they financially adjust to your death. o To use this method you simply multiply your gross income by 7 and then by 70%.  For example: If you have a gross income of $50,000  $50,000 x 7 = 350,000 x.70 = $245,000  Therefore someone who has a gross income of $50,000 a year will need roughly $245,000 worth of life insurance for a typical family. o However you may need more or less life insurance if your family has:  More or less than three children  A higher than average amount of debt  Family members who have health conditions  If your spouse has poor employment potential

Estimating your needs: These are two of the most basic methods of determining how much life insurance you may need although there are a variety of other ways of doing so. An easy way of finding other ways is to simply google. Assignment: Use calculator to calculate your needs.

Question Cluster 2

Types of Life Insurance: Life insurance can be temporary or permanent: Types of temporary life insurance also known as term: Term insurance- Only provides protection for a specific period of time. Is often the best value for customers as they initially provide more insurance protection per dollar spent than permanent policies. Premiums are much lower than that of whole life policies Maximum term period is generally 30 years Do not build cash values The premiums generally increase as the policy holder gets older

Types of Insurance: Renewable term- The renewable option in term insurance allows you to renew your insurance for another term with an increase in the premium. Generally has an age limit that prevents you from renewing after you hit a certain age. Multiyear (straight term) level term- Guarantees you will pay the same premium for your whole policy. The longer the term the more expensive the premium. If renewed the premiums do not increase. Convertible term- Permits you to change your term life policy to permanent coverage. Has higher premium than general term.

Types of Insurance: Decreasing term- Has a consistent premium but a smaller death benefit with the more time that passes. May be a good option if you have children or a mortgage. Example: Likewise the total amount owed on a mortgage will decrease with time, therefore less insurance is needed with more time. Return-of-premium term- Policy returns all the premiums if you survive to the end of the policy. Premiums are higher than regular term policies.

Types of Insurance: Types of permanent life insurance as known as whole life insurance:  Whole life-  You pay a specified premium each year for the remainder of your life.  Have a higher premium at first but the rate remains the same for the rest of your life while term life premiums increase the older you get.  The premium amount depends on the age which you purchase the insurance.  Can act as an investment.  Carry a cash value component that grows tax deferred at a low interest rate until it is withdrawn.

Types of Insurance: Limited payment-  Charge premiums for only a certain length of time. At the end of this time the policy is paid up and the policyholder is insured for life.  The premiums are higher as they have to be paid within a shorter period of time. Variable life-  Premium payments are fixed.  Has two components the general and separate account.  The general account is not for the policy itself and instead acts as the reserve account for the insurance provider.  Money in the separate account is placed into various investment funds such as stocks or bonds.  The value of the death benefit and cash fluctuate due to the investment nature of this policy.

Types of Insurance: Adjustable life- Let’s you change your coverage as needed. Example: you can either change the period of coverage or premium payments in order to increase or decrease the amount of the death benefit. Universal life- Also known as adjustable life or flexible premium. Allows you to change your premium without changing your coverage, as you are allowed to withdraw or borrow from your cash value portion of the policy.

Types of Insurance: Because there are a variety of differences in how policies are designed and priced, it is important to carefully consider both the advantages and disadvantages of temporary and permanent life insurance and what works best for your specific needs. For example: In the case that you only need to replace your income temporarily, such as until your dependents are old enough to care for themselves, many life insurance purchasers choose to buy temporary insurance and invest their savings from not purchasing permeant coverage into another investment, such as their retirement plan, or brokerage account.

Question Cluster 3

Purchasing coverage: The reputation and financial strength of the company: Evaluating an insurance company before you buy is extremely important as it is not unusual for a person’s relationship with their insurance company to last for 20 to 30 years. You want to make sure that the company is financially strong before investing in it. Choosing an agent: The agent you choose is an important aspect of buying life insurance as they guide you using their knowledge to purchase the proper amount and type of insurance for your specific circumstances and financial boundaries. One of the best ways of finding a good agent is by simply asking around for recommendations.

Additional things to consider:  Compare policy costs: o There are a variety of things that affect the price of life insurance policies, and every policy has different features. Therefore it is extremely important to shop around as prices vary between different companies. Examining the policy: When you receive a life insurance policy it is important to read every word of the contract and if there are parts you don’t understand ask your agent what they mean. After purchasing new life insurance you have 10 days which you can change your mind in which case the company will return your premium.

Additional things to consider: Selecting the best payout option for your families situation: Popular types of payouts: Lump-Sum Payments: Most used option Company pays the face amount in one single lump sum Limited Installment Payment: Gives payments in equal periodic payments for a specific period of time after death Life Income Option: Payments are made to the beneficiary for the remainder of their lifetime

Additional things to consider: Changing policies: Be careful if your insurance agent suggests you replace a permanent insurance with something else. Make sure that you are still insurable before giving up this contract. Reading Assignment: Insurance/Comparing-Life-Insurance-Policies Insurance/Comparing-Life-Insurance-Policies

Question Cluster 4

Module Test