1. Life Insurance Planning
Chapter Twelve
Life Insurance Planning

2. Introduction
Life Insurance – insurance that protects against financial losses resulting from death.
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3. 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
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4. 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.
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5. 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.
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6. 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.
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7. 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.
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8. Term Life Insurance
Face Amount – the dollar value of protection as listed in the policy and used to calculate the premium.
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9. Guaranteed Renewable Term Insurance
Guaranteed Renewable Term Insurance – protects you against the possibility of becoming uninsurable.
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10. Level-Premium Term Insurance
Level-Premium (or Guaranteed Level-Premium) Term Insurance – a term policy with a long time period.
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11. Decreasing Term Insurance
Decreasing Term Insurance – the face amount of coverage declines annually, while the premiums remain constant.
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12. 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.
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13. Group Term Life Insurance
Group Term Life Insurance – issued to people as members of a group rather than as individuals.
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14. Credit Term Life Insurance
Credit Term Life Insurance – will pay the remaining balance of a loan if the insured dies before repaying the debt.
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15. Cash-Value Life Insurance
Permanent Insurance – does not need to be renewed and coverage is maintained for the entire life of the insured.
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16. Figure 12.1: Comparison of Premium Dollars for Life Insurance
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17. Figure 12.2: The Essence of Cash-Value Life Insurance
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18. 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.”
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19. 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.
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20. 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.
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21. 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.
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22. 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.
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23. 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.
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24. 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.
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25. 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.
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26. 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.
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27. 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.
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28. 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.
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29. 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.
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30. 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.
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31. 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.
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32. 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.
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33. 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.
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34. 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.
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35. 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.
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36. Settlement Options The five Settlement options: lump sum
interest income
income for a specific period
income for life and
income of a specific amount.
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37. 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.
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38. 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.
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39. 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.
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40. 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.
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41. 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.
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42. 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.
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43. 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.
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44. 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.
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