Chapter 12 Life Insurance

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. Explain the major provisions of life insurance policies. Apply a step-by-step strategy for implementing a life insurance plan.

“Death is certain. Its timing is not.” Uncertainty = RISK Same risk as a car accident? House fire? We want to reduce our risk, so we protect ourselves by buying insurance But… how is LIFE insurance different than other forms of insurance?

What is life Insurance and how does it work? How Life Insurance Works: You purchase a policy, and the insurance company promises to pay a specified amount The Purpose of Life Insurance: To protect the people who depend on you from financial obligations upon your death Who Benefits: Your named beneficiary at the time of your death

Who needs life insurance? If you're wondering whether or not you should buy life insurance, ask yourself this question: "Would my death leave anyone in a financial bind?" Reasons for purchasing life insurance: Final expenses Income replacement Debt-repayment College expenses Government benefits, existing insurance policies, and other assets may reduce the level of need.

Everyone’s Life Insurance Needs are Different ** Everyone’s Life Insurance Needs are Different! ** Is life insurance right for me NOW? Ask Yourself... Do I have people I need to protect financially? Do I have a partner who works? Does my family have a lot of debt? How much money do I want to leave to my spouse and/or dependents?

Maybe not NOW, BUT… Will My Life Insurance Needs Change Over Time? Young people usually have no need for life insurance If married, have children, have debt: life insurance needs As you age, kids become financially independent, your assets grow: life insurance needs Goal is to be self-insured by age 60 Review your needs after major life changes

Types of Policies Term Life Insurance [Pure Protection] Provides protection for a specific amount of money (face amount) You choose the term (1, 5, 10, 15, 20, 30 yrs) Temporary! When the term ends, coverage ends When policy expires, you may or may not choose to take out another policy Your cost (the premiums) are fixed for the entire term Why do policies with longer terms have higher premiums?

Cash-Value Life Insurance Protection for a specific amount of money, for life Fixed premiums are divided between: 1) insurance protection (like term insurance) 2) investment component (savings) The invested portion (cash value) grows tax-deferred The investment is managed by the insurance company Variable Life: investment is managed by policy holder You can borrow from the cash value Death benefit is the called the face amount of the policy

What Will It Cost? Fair Prices for Term Life Insurance

The Top 3 Financial Mistakes in Life Insurance Planning People slip up in when they do the following: Let their life insurance agent convince them how much and what type to buy. Buy their life insurance during their childbearing years through cash-value life insurance. Ignore their changing need for life insurance as their life progresses.