1. Financial Planning with Life Insurance Chapter 12
Personal Finance
Finance 235

2. Life insurance What is Life Insurance and when should we get it?
A means for protecting the financial security of those that depend on us for their safety and economic well being.
The best time to get it is when you are young and healthy.
You should have some by the time you marry or partner.
You are foolish not to have it when you start a family and acquire property (cars, home, investments, etc.)
Personal Finance

3. Life insurance Major Purposes of Life Insurance
Pay off mortgage or other debts at time of death
Provide lump sum payments or endowments to beneficiaries
Provide education or income to children
Make charitable donations
Provide retirement income (whole life / endowment policies)
Estate Planning (paying estate or gift taxes)
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4. Life insurance How Much Life Insurance Do You Need?
The answer depends on your personal life situation
A young single person – not much
An older person with family responsibilities – depends
Number of dependents
Magnitude of financial liabilities (mortgages, loans, etc.)
Magnitude of income
Social Security survivor benefit
Example #1: Family (spouse, children, household expenses)
7 times 70% of yearly income
More if dependents are under 7 years of age.
Example #2: Dual Incomes no Kids (DINKs)
Enough to cover debts
Provide a financial cushion
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5. Life insurance companies
Types of Insurance Companies
Stock: Owned by the stockholders – sell nonparticipating polices
Mutual: Owned by the policy holders – sell participating policies
Participating Policies (Mutual):
Mutual LICs return a portion of its investment profits as dividend
Premiums are invested in investment quality bonds and other high degree of safety investments (function of legal list requirements)
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6. insurance companies Type of Policies (1) Term
Coverage for a specified number of years.
After that period, policy may continue but typically with higher premiums.
Categories
Renewable
Level
Conversion (to whole life)
Decreasing
Return of Premium
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7. insurance companies Type of Policies (2)
Whole Life (cash value / straight life / ordinary)
Permanent premium paid for lifetime of insured
Accrues cash values
Cash values can be used as collateral for loans
Limited Life (paid up after 20 or 30 years)
Variable Life (value a function of stock market investment performance)
Universal Life (ability to change premiums based on cash values)
Group Polices
Associated with employment or affinity groups
Credit Life – pay off a debt if you die before debt is paid
Endowment Life – pays a sum at maturity to policy holder
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8. Selecting provisions What are the Key Provisions in a Policy?
Naming the Beneficiary (ies)
Incontestability – policy cannot be cancelled after a certain period of time
Grace Period (limit to late payment) – lapsed policy
Reinstatement
Policy loan provision (borrow against cash values)
Suicide clause (within 1 year – no benefits)
Typical Riders
Accidental death (2x)
Waiver of premium if permanently disabled (age limit)
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9. Buying life insurance Decision Criteria AM Best rating
Costs and Features
Availability of local agents
Recommendations of Friends
Articles in Kiplinger, WSJ, Money
Choosing Settlement Options
Lump-sum
Installments
Life income
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10. Financial planning with annuities
What is an Annuity?
An particular type of insurance plan structured to provide you with a fixed payment each [month] for a set period of years.
What are the Principal Types of Annuities?
Immediate
Deferred
Variable [rate]
Indexed [to a mix of stocks and bonds]
Why do People Buy Annuities?
Main reason is to remove market risk.
There are also certain tax advantages.
Thoroughly Investigate before you Buy!
Personal Finance

11. Homework Questions: What is an Annuity?
What are the Principal Types of Annuities?
Why do People Buy Annuities?
Be Your Own Personal Financial Planner*
1 – Calculating your insurance need (w/s 47)
6 – Set up a layered Term Insurance Program (w/s 48)
* These are simulated situations.
Personal Finance