1. Copyright ©2004 Pearson Education, Inc. All rights reserved. Chapter 12 Life Insurance

2. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-2 Chapter Objectives Describe the types of life insurance that are available Identify the factors that influence the amount of insurance needed Review the factors that affect life insurance premiums Examine the decision of whether to purchase life insurance

3. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-3 Chapter Objectives Explain the possible settlement options that are available for beneficiary payments

4. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-4 Background on Life Insurance Life insurance: insurance that provides a payment to a specified beneficiary when the policyholder dies Role of life insurance –Maintain financial support for dependents –Leave money for heirs Role of life insurance companies –Provide coverage in exchange for premiums

5. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-5 Types of Life Insurance Term insurance: life insurance that is provided over a specified time period and does not build a cash value –Premium dependent on your health, age, gender, and length of term of the insurance –Usually renewable, but premiums will increase

6. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-6 Types of Life Insurance Decreasing-term insurance: a form of term insurance in which the benefits that will be paid to the beneficiary are reduced over time and the premium remains constant Mortgage life insurance: life insurance that pays off a mortgage in the event of the policyholder’s death

7. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-7 Types of Life Insurance Term insurance options –Renewability option: allows you to renew your policy for another term once an existing policy expires –Conversion option: allow you to convert your term insurance policy into a different type of policy that will be in effect the rest of your life

8. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-8 Life Insurance Premiums Exhibit 12.1: Example of Quoted Term Life Insurance Premiums Offered over the Internet

9. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-9 Financial Planning Online: Buying Term Life Insurance Go to: http://moneycentral.msn.com/http://moneycentral.msn.com/ Click on: “Insurance” under the Planning heading, then click on “Life.” This Web site provides step-by-step instructions on shopping for term life insurance.

10. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-10 Types of Life Insurance Whole life insurance: life insurance that continues to provide insurance as long as premiums are paid; not only provides benefits to the beneficiary but also has a cash value –Nonforfeiture clause: allows you to receive the savings you accumulated if you terminated your whole life policy early

11. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-11 Determining the Amount of Life Insurance Needed –Annual living expenses –Special future expenses like college education –Debt –Job marketability of spouse –Value of existing savings

12. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-12 Types of Life Insurance –Comparison to term insurance Whole life has higher premiums Whole life accumulates savings Whole life premiums remain constant

13. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-13 Financial Planning Online: Should You Buy Whole Life or Term Insurance? Go to: http://www.financenter.com/products/ sellingtools/calculators http://www.financenter.com/products/ sellingtools/calculators Click on: “Life Insurance,” then “Which is better: term or whole life?” This Web site provides an opinion on which type of insurance you should buy.

14. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-14 Financial Planning Online: Return on Your Whole Life Insurance Policy Go to: http://financenter.com/products/sellingto ols/calculators http://financenter.com/products/sellingto ols/calculators Click on: “Life Insurance,” then “What is my return on a whole life policy?” This Web site provides an estimate of the return you would earn

15. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-15 Types of Life Insurance Universal life insurance: life insurance that provides insurance over a specified term and accumulates savings for the policy holder over this time Variable life insurance: life insurance that provides insurance over a specified term and allows policyholders to invest residual funds, after the term portion is paid, in various types of investments

16. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-16 Determining the Amount of Life Insurance Needed Income method: a method that determines how much life insurance is needed based on the policyholder’s annual income –For example, 10 times your annual income, so, using this method, a person with an annual income of $40,000 would need $400,000 of life insurance coverage –Easy, but doesn’t consider individual circumstances

17. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-17 Determining the Amount of Life Insurance Needed Income method: a method that determines how much life insurance is needed based on the policyholder’s annual income –Does not consider your household situation Budget method: a method that determines how much life insurance is needed based on the household’s future expected expenses

18. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-18 Life Insurance Premiums Factors that affect your insurance premiums –Amount of insurance –Cash value — term insurance is less expensive –Personal characteristics Age, health, gender

19. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-19 Life Insurance Premiums Using the Internet to price term insurance can be very efficient and may be less expensive Focus on Ethics: Applying for life insurance –A life insurance policy is a legal contract, so you must be truthful with all information you provide

20. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-20 Financial Planning Online: How Much Life Insurance Do You Need? Go to: http://moneycentral.msn.com/investor/ calcs/n_life/main.asp http://moneycentral.msn.com/investor/ calcs/n_life/main.asp This Web site provides a recommendation for the amount of life insurance you should have based on your financial situation.

21. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-21 Settlement Options on a Life Insurance Policy Settlement options: the alternative ways a beneficiary can receive life insurance benefits in the event that the insured person dies Lump-sum settlement: a single payment of all the benefits owed to a beneficiary under a life insurance policy

22. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-22 Settlement Options on a Life Insurance Policy Installment payments settlement: the payment of the benefits owed to a beneficiary under a life insurance policy as a stream of equal payments over a specified number of years

23. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-23 Settlement Options on a Life Insurance Policy Interest payments settlement: a method of paying the benefits owed under a life insurance policy in which the company retains the amount owed for a specified number of years and pays interest to the beneficiary

24. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-24 How Life Insurance Fits within Your Financial Plan Key decisions about life insurance for your financial plan are: –Do you need life insurance? –How much life insurance should you plan for in the future?

25. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-25 Integrating Key Concepts

26. Copyright ©2004 Pearson Education, Inc.All rights reserved.12-26 Integrating Key Concepts Part 1: Financial Planning Tools Part 2: Liquidity Management Part 3: Financing Part 4: Protecting Your Assets and Income –In Chapter 10 we learned about auto and homeowner’s insurance –In Chapter 11 we learned about health and disability insurance –In Chapter 12 we learned about life insurance Part 5: Investing Part 6: Retirement and Estate Planning