Personal Finance Garman/Forgue Ninth Edition Chapter 12: Life Insurance Planning PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Understand the reasons why you might need life insurance and calculate the appropriate amount of coverage. Distinguish among the types of life insurance. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Explain the major provisions of life insurance policies. Apply a step-by-step strategy for implementing a life insurance plan. Copyright ©Houghton Mifflin Company. All rights reserved.

Introduction Risk of dying too soon Risk of living too long Copyright ©Houghton Mifflin Company. All rights reserved.

How Much Life Insurance Do You Need? 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. Beneficiary: The person named in the policy to receive the funds. Copyright ©Houghton Mifflin Company. All rights reserved.

What Needs Must Be Met? Final expenses: One-time expenses occurring just prior to or after a death. Income-replacement needs Readjustment-period needs Copyright ©Houghton Mifflin Company. All rights reserved.

What Needs Must Be Met? Debt-repayment needs College expense needs Other special needs Copyright ©Houghton Mifflin Company. All rights reserved.

What Needs Must Be Met? Government benefits can reduce the level of need. Social Security survivor’s benefits Social Security blackout period Existing insurance and assets reduce the level of need. Copyright ©Houghton Mifflin Company. All rights reserved.

What Dollar Amount Do You Need? The Multiple-of-Earnings Approach: easy but flawed. The Needs-Based Approach: a better method Copyright ©Houghton Mifflin Company. All rights reserved.

Two Basic Types of Life Insurance Term Life Insurance (or Pure Protection) Face amount Cash-Value Life Insurance Cash-Value: Represents the value of the investment element in the life insurance policy. Copyright ©Houghton Mifflin Company. All rights reserved.

Term Life Insurance Guaranteed Renewable Term Insurance Protects you against the possibility of becoming uninsurable. Level-Premium Term Insurance Reenter Provision Copyright ©Houghton Mifflin Company. All rights reserved.

Term Life Insurance Decreasing Term Insurance Convertible Term Insurance Group Term Life Insurance Credit Term Life Insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Value Life Insurance Some forms of cash-value life insurance pay a fixed return: Cash-Value Life Permanent Insurance Whole (or Straight) Life Insurance Limited-Pay Whole Life Insurance Adjustable Life Insurance Modified Life Insurance Endowment Life Insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Value Life Insurance Some forms of cash-value life insurance pay a variable return: Universal life insurance Variable life insurance Variable-Universal (or Flexible-Premium) life insurance Don’t be fooled by vanishing-premium or return-of-premium policies. Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding Your Life Insurance Policy Owner (or Policyholder) Insured Contingent Beneficiary Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions Unique 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. Survivorship Joint Life Policy: Pays when the last person covered dies. Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions Unique to Life Insurance The Incontestability Clause The Suicide Clause Cash Dividends Insurance Dividends Participating Policies Nonparticipating Policies Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions Unique to Life Insurance Death Benefit: Amount that will be paid to beneficiary when the insured dies. Grace Period Lapsed policy Multiple Indemnity Multiple Indemnity Clause Copyright ©Houghton Mifflin Company. All rights reserved.

Settlement Options Lump sum Interest income Income of a specific amount Income for a specific period Income for life Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Features Unique to Cash-Value Life Insurance The Policy Illustration Guaranteed Minimum Rate of Return Current Rate Nonforfeiture Values Cash-Surrender Value Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Features Unique to Cash-Value Life Insurance Policy loans Automatic Premium Loan Living Benefit Clause Viatical Companies Waiver of premium Guaranteed Insurability (or Guaranteed Purchase Option) Copyright ©Houghton Mifflin Company. All rights reserved.

Step-by-Step Strategy for Buying Life Insurance First ask whether or not, and for how much, your life should be insured. Then properly integrate your life insurance into your overall financial planning. Buy term and invest the rest. Layering term insurance policies Before my rewrite, #6 was completely different than on p 326. Copyright ©Houghton Mifflin Company. All rights reserved.

Where and How to Buy Your Life Insurance You can easily buy life insurance online. Premium Quote Service: Offers computer-generated comparisons among 20 to 80 different companies. Or you can use a local insurance agent. Before my rewrite, #6 was completely different than on p 326. Copyright ©Houghton Mifflin Company. All rights reserved.

Where and How to Buy Your Life Insurance Compare costs among policies Net Cost Method Interest-Adjusted Cost Index Method Interest-Adjusted Net Payment Index Method Before my rewrite, #6 was completely different than on p 326. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps in Life Insurance Planning People slip up in when they do the following: 1. Let their life insurance agent convince them how much and what type to buy. 2. Buy their life insurance during their childbearing years through cash-value life insurance. 3. Ignore their changing need for life insurance as their life progresses. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Life Insurance Planning Calculate your life insurance needs every three years or when major life events occur, such as the birth of a child. Avoid being talked into buying types and amounts of life insurance that you do not need. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Life Insurance Planning Shop for term life insurance on the internet to obtain the lowest possible rates. Employ the principle of “buy term life insurance and invest the rest” with guaranteed renewable or level-premium term life insurance. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Life Insurance Planning Contribute the money saved by purchasing term rather than cash-value insurance into your retirement plan. If you decide that you need a cash-value life insurance policy, get one with a guaranteed insurability option. Copyright ©Houghton Mifflin Company. All rights reserved.