Life Insurance Planning Chapter Twelve Life Insurance Planning

Introduction Life Insurance – insurance that protects against financial losses resulting from death. Copyright ©Houghton Mifflin Company. All rights reserved.

Why Do People Need Life Insurance? Income-Replacement Needs – major financial loss resulting from premature death is lost income and employee benefits Final Expenses – one-time expenses occurring just prior to or after a death. Readjustment-Period Needs – period that may last for a few years; allows remaining spouse or family member to take time off from work Copyright ©Houghton Mifflin Company. All rights reserved.

Why Do People Need Life Insurance? (continued) Debt-Repayment Needs – a plan to pay off all debts, other than the mortgage, to simplify the financial burden on the survivors. College-Expense Needs – earmarked dollar amount of life insurance proceeds for future college expenses. Other Special Needs – wealthier families might need extra life insurance to pay federal estate and state inheritance taxes or a family with a disabled child might have special needs if that child is later likely to require medical or custodial care. Copyright ©Houghton Mifflin Company. All rights reserved.

Government Benefits Can Reduce the Level of Need Social Security Survivor’s Benefits – paid to a surviving spouse and children. Social Security Blackout Period – ends when the surviving spouse reaches 60. Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Your Need for Life Insurance The Multiple-of-Earnings Approach is an Inaccurate Method multiplies one’s income by some factor to derive a rough estimate of the level of need. The Needs Approach is a Better Method considers all of the factors that might potentially affect the level of need. Copyright ©Houghton Mifflin Company. All rights reserved.

The Two Basic Types of Life Insurance Term Life Insurance – pays benefits only if the insured person dies within the time period (term) covered by the policy. Cash-Value Life Insurance – pays benefits at death and includes a savings/investment element that can provide benefits to the policyholder prior to the death of the insured person. Copyright ©Houghton Mifflin Company. All rights reserved.

Term Life Insurance Face Amount – the dollar value of protection as listed in the policy and used to calculate the premium. Copyright ©Houghton Mifflin Company. All rights reserved.

Guaranteed Renewable Term Insurance Guaranteed Renewable Term Insurance – protects you against the possibility of becoming uninsurable. Copyright ©Houghton Mifflin Company. All rights reserved.

Level-Premium Term Insurance Level-Premium (or Guaranteed Level-Premium) Term Insurance – a term policy with a long time period. Copyright ©Houghton Mifflin Company. All rights reserved.

Decreasing Term Insurance Decreasing Term Insurance – the face amount of coverage declines annually, while the premiums remain constant. Copyright ©Houghton Mifflin Company. All rights reserved.

Convertible Term Insurance Convertible Term Insurance – offers the policyholder the option of exchanging a term policy for a cash-value policy without evidence of insurability. Copyright ©Houghton Mifflin Company. All rights reserved.

Group Term Life Insurance Group Term Life Insurance – issued to people as members of a group rather than as individuals. Copyright ©Houghton Mifflin Company. All rights reserved.

Credit Term Life Insurance Credit Term Life Insurance – will pay the remaining balance of a loan if the insured dies before repaying the debt. Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Value Life Insurance Permanent Insurance – does not need to be renewed and coverage is maintained for the entire life of the insured. Copyright ©Houghton Mifflin Company. All rights reserved.

Figure 12.1: Comparison of Premium Dollars for Life Insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Figure 12.2: The Essence of Cash-Value Life Insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Whole Life Insurance Whole Life Insurance – a form of cash-value life insurance that provides lifetime life insurance protection and expects you to pay premiums for life. Straight Life and Ordinary Life – labels sometimes used interchangeably with “whole life.” Copyright ©Houghton Mifflin Company. All rights reserved.

Limited-Pay Whole Life Insurance Limited-Pay Whole Life Insurance – whole life insurance that allows premium payments to cease before you reach the age of 100. 20-Pay Life Policies – allow premium payments to cease after 20 years. Paid-at-65 Policies – require payment of premiums only until the insured turns 65. Copyright ©Houghton Mifflin Company. All rights reserved.

Limited-Pay Whole Life Insurance (continued) Single-Premium Life Insurance – the premium is paid once in the form of a lump sum. Paid-Up – the policy owner can stop paying premiums. Vanishing Premium Life Insurance – designed to allow policyholders to cease making premium payments after just a few years. Copyright ©Houghton Mifflin Company. All rights reserved.

Adjustable Life Insurance Adjustable Life Insurance – allows you to modify any one of the three components of cash-value life insurance, with corresponding changes occurring in the other two. Copyright ©Houghton Mifflin Company. All rights reserved.

Modified Life Insurance Modified Life Insurance – whole life insurance for which the insurance company charges reduced premiums in the early years and higher premiums thereafter. Copyright ©Houghton Mifflin Company. All rights reserved.

Endowment Life Insurance Endowment Life Insurance – pays the face amount of the policy either upon the death of the insured or at some previously agreed-upon date, whichever occurs first. Copyright ©Houghton Mifflin Company. All rights reserved.

Interest-Sensitive Life Insurance Is a Form of Cash-Value Life Insurance Interest-Sensitive Life Insurance – employs rates of return that vary according to changing interest rates and investment returns. Copyright ©Houghton Mifflin Company. All rights reserved.

Universal Life Insurance Universal Life Insurance – provides both the pure protection of term insurance and the cash-value buildup of whole life insurance, along with variability in the face amount, rate of cash-value accumulation, premiums, and rate of return. Copyright ©Houghton Mifflin Company. All rights reserved.

Variable Life Insurance Variable Life Insurance – allows you to choose the investments made with your cash-value accumulations and to share in any gains or losses. Copyright ©Houghton Mifflin Company. All rights reserved.

Variable-Universal Life Insurance Variable-Universal Life Insurance – a form of universal life insurance that gives the policyholder some choice in the investments made with the cash value accumulated by the policy. Also known as Flexible-Premium Variable Life Insurance. Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding Your Life Insurance Policy Life Insurance Policy – the written contract between the insurer and the policyholder that contains all of the information relevant to the agreement. Owner (or Policyholder) – retains all rights and privileges granted by the policy. Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding Your Life Insurance Policy (continued) Insured – the person whose life is insured. Beneficiary – the person or organization named in the policy that will receive the life insurance or other benefit payment in the event of the insured’s death. Contingent Beneficiary – becomes the beneficiary if the original beneficiary dies before the insured. Copyright ©Houghton Mifflin Company. All rights reserved.

Insurance Policies Are Organized into Five Sections Declarations – provide the basic descriptive information about the insured person or property, the premium to be paid, the time period of the coverage, and the policy limits. Insuring Agreements – the broadly defined coverages provided under the policy. Exclusions – narrow the focus and eliminate specific coverages broadly stated in the insuring agreements. Copyright ©Houghton Mifflin Company. All rights reserved.

Insurance Policies Are Organized into Five Sections (continued) Conditions – Obligations imposed on both the insured and the insurer. Endorsements (or Riders) – amendments and additions to the basic insurance policy that can both expand and limit coverage to accommodate specific needs. Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions For to Life Insurance Life Insurance Application – the policyholder’s offer to purchase a policy. Lives Covered First-to-Die Policies – cover more than one person but pay only when the first insured dies. Incontestability Clause – places a time limit on the right of the insurance company to deny a claim. Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions For to Life Insurance (continued) The Suicide Clause – allows the life insurance company to deny coverage if the insured commits suicide within the first few years after the policy is issued. Cash Dividends Insurance Dividends – a return of a portion of the premium paid for a life insurance policy. Participating Policies – policies that pay dividends. Nonparticipating Policies – policies that do not pay dividends. Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions For to Life Insurance (continued) Death Benefit – the amount that will be paid upon the death of the insured person. Grace Period Lapsed Policy – one that has been terminated because of nonpayment of premiums. Grace Period – a period of time during which an overdue premium may be paid without a lapse of the policy. Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions For to Life Insurance (continued) Multiple Indemnity Clause – provides for a doubling or tripling of the face amount if death results from certain specified causes. Copyright ©Houghton Mifflin Company. All rights reserved.

Settlement Options The five Settlement options: lump sum interest income income for a specific period income for life and income of a specific amount. Copyright ©Houghton Mifflin Company. All rights reserved.

The Policy Illustration Policy Illustration – charts the projected growth in the cash value for given rates of return. Guaranteed Minimum Rate of Return – the minimum rate that, by contract, the company is legally obligated to pay. Current Rate – the rate of return recently paid by the policyholders. Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Loans Policy Loans – owner of a cash-value policy may borrow all or a portion of the accumulated cash value. Interest rates charged for the loan will range from 2 to 8 percent, depending on the terms of the policy. Add any text here from p 345? Copyright ©Houghton Mifflin Company. All rights reserved.

Automatic Premium Loan Automatic Premium Loan – 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. Living Benefit Clause – allows the payment of all or a portion of the death benefit prior to death if the insured contracts a terminal illness. Copyright ©Houghton Mifflin Company. All rights reserved.

Waiver of Premium Waiver of Premium – sets certain conditions under which an insurance policy would be kept in full force by the company without the payment of premiums. Copyright ©Houghton Mifflin Company. All rights reserved.

Guaranteed Insurability Guaranteed Insurability – permits (for an extra cost) the cash-value policyholder to buy additional stated amounts of life insurance at stated times in the future without evidence of insurability. Copyright ©Houghton Mifflin Company. All rights reserved.

Step-by-Step Strategies for Buying Life Insurance First Ask Whether Your Life Should be Insured at All Choose the Right Type of Life Insurance for You Properly Integrate Your Life Insurance into Your Overall Financial Planning Risk of Dying too Soon – the risk that you will die before you have accumulated enough financial wealth to provide for you dependents adequately. Risk of Living too Long – the risk that you will live so long that you will outlive your wealth. Copyright ©Houghton Mifflin Company. All rights reserved.

Step-by-Step Strategies for Buying Life Insurance (continued) Adjust Your Life Insurance and Investment Plan Over Your Life Cycle Choose a Financially Strong Company Underwriting Profits – result when the premiums collected exceed the expenses of providing coverage plus the losses paid by the company. Title can be centered once art is re-located. Copyright ©Houghton Mifflin Company. All rights reserved.

Step-by-Step Strategies for Buying Life Insurance (continued) Choose an Agent Insurance Agent – a representative of an insurance company authorized to sell, modify, service, and terminate insurance contracts. Compare Costs Among Policies Premium Quote Service – concentrate on marketing term life insurance at the lowest possible rates. Copyright ©Houghton Mifflin Company. All rights reserved.