1. Chapter 10 Financial Planning with Life Insurance McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Life Insurance Chapter Objectives
Define life insurance and determine your life insurance needs.
Distinguish between the types of life insurance companies and analyze various types of life insurance policies these companies issue.
Select important provisions in life insurance contracts and create a plan to buy life insurance.
Recognize how annuities provide financial security.
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3. Objective 1 Define Life Insurance and Determine Your Life Insurance Needs
Primary Purpose of Life Insurance:
Protect someone who depends on you from financial loss related to your death
Life insurance:
Obtained by purchasing a policy
The insurance company promises to pay a lump sum to a named beneficiary at the time of the policy holder’s death (or sometimes while they are still alive)
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4. Purpose of Life Insurance
Other reasons:
Pay off a mortgage or debts
Lump-sum endowments for children
Provide an education or income for children
Make charitable donations
Provide retirement income
Accumulate savings
Establish a regular income for survivors
Set up an estate plan
Pay estate and gift taxes
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5. The Principle of Life Insurance
Mortality tables provide odds on your dying, based on your age and sex.
Premium is based on your life expectancy and the projections for the payouts for persons who die
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6. Do You Need Life Insurance?
Do you have people you need to protect financially?
Are you single and have a lot of debt?
Do you have parents, relatives, or a charity that you want to support?
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7. Estimating Your Life Insurance Requirements
The Easy Method
70% of your salary for seven years while your family adjusts
Assumes typical family
The DINK Method
Dual income, no kids
Assumes spouse earnings => insured
Cover funeral + ½ debts
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8. Estimating Your Life Insurance Requirements
The “Nonworking” Spouse Method
# years until the youngest child reaches 18 X $10,000
The “Family Need” Method
More thorough than the first three
Considers employer provided insurance, Social Security benefits, income and assets
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9. 2 Types of Life Insurance Companies
Objective 2 Distinguish Between the Types of Life Insurance Companies and Analyze Various Types of Life Insurance Policies These Companies Issue
2 Types of Life Insurance Companies
Type of Company
Owned by
Stock life Insurance
Shareholders
Mutual life insurance
Policyholders
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10. Stock Life Insurance Companies
Owned by the shareholders
95% are of this type
Sell non-participating (non-par) policies
If you want to pay the same premium each year  choose a non-participating policy with guaranteed premiums
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11. Mutual Life Insurance Companies
Owned by the policyholders
5% of policies are from this type of company
Participating policy premiums are higher than non-participating policies
Part of the non-participating premium is refunded to the policyholders annually in the form of a policy dividend
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12. Types of Life Insurance Policies
Term life insurance
Whole Life insurance
Group Life insurance
Credit life insurance
Endowment Life insurance
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13. Term Life Insurance “Term Life” Many types:
Protection for a specified period of time
If you stop paying premiums, coverage stops
Many types:
Renewable term
Multiyear level term
Conversion term
Decreasing term
Return-of-premium term
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14. Whole Life Insurance “Straight Life”
Pay the premium as long as you live
Amount of premium depends on age when you start the policy
Provides death benefits
Accumulates a cash value
You can borrow against the cash value or draw it out at retirement
Look carefully at the rate of return your money earns
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15. Whole Life Policy Options
Limited Payment Policy
You pay premiums for a stipulated period
Usually 20 or 30 years, or
Until you reach a specified age (65)
Policy then “paid up” and you remain insured for life
Variable Life Policy
Minimum death benefit guaranteed
Benefit can be greater depending on earnings of the dollars invested in the separate fund
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16. Whole Life Policy Options
Adjustable Life Policy
Can change premium payments or period of coverage as your needs change.
Universal Life
Term life policy with a cash value
Can borrow against cash value
Premium amount may be changed at any time without changing coverage
Part of premium goes to investment account
Increase in cash value reflects interest earned on short-term investments
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17. Other Types of Life Insurance Policies
Group life insurance
Term insurance
Often provided by an employer
No physical is required
Credit life insurance
Debt paid off if you die
Mortgage, car, furniture
Also protects lenders
Expensive protection
Endowment Life Insurance
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18. Key Provisions in a Life Insurance Policy
Naming your beneficiary and contingent beneficiaries
Incontestability clause  after the policy has been in force for a specified period, the company can’t dispute its validity for any reason
Length of grace period for late payments
Reinstatement of a lapsed policy if it has not been turned in for cash
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19. Key Provisions in a Life Insurance Policy
Non-forfeiture clause allows you to keep accrued benefits in a whole life policy if you drop the policy
Misstatement of age provision
Policy loan provision to borrow against cash value
Suicide clause during first two years
Policy rider modifies the coverage by adding or excluding conditions or altering benefits
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20. Key Provisions in a Life Insurance Policy
Life Insurance Policy Riders
Waiver of premium disability benefit
Accidental death benefit - double indemnity
Guaranteed insurability option
Cost of living protection
Accelerated benefits, also called living benefits, pay to those who are terminally ill before they die
Second-to-die option, also called survivorship life, insures two lives
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21. Choosing Settlement Options
Settlement Options = choices of how the insurance money is paid out
Lump-sum payment = most common
Limited installment plan
In equal installments for a specific number of years after your death (10-year certain)
Life income option
Payments to the beneficiary for life
Proceeds left with the company
Pays interest to the beneficiary
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22. Buying Life Insurance Consider: Present and future sources of income
Other savings and income protection
Group life insurance
Pension benefits
Social Security benefits
Financial strength of the insurance company
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23. Buying Life Insurance Determine from whom to buy your policy
Examine both private and public sources
Research the company’s rating by major rating companies:
A. M. Best
Standard and Poor’s
Duff & Phelps
Moody’s
Weiss Research
Talk to friends or colleagues
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24. Choosing Your Insurance Agent
Ask friends, parents, and neighbors for recommendations.
Does the agent belong to professional groups or is a Chartered Life Underwriter (CLU)?
Is the agent willing to take the time to answer your questions and find a policy that is right for you?
Does the agent ask about your financial plan?
Do you feel pressured?
Is the agent available when needed?
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25. Buying Life Insurance Compare policy costs based on:
Company’s cost of doing business
Return on company’s investments
Mortality rate among policyholders
Policy features
Competition from other firms
Interest-adjusted index
Used to compare policy costs
Lower index = lower cost policy
See sites such as
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26. Obtaining and Examining a Policy
First step = apply
Second step = provide medical history
Usually no physical for a group policy
Read every word of the contract
10-day “free-look” period to change your mind
Give your beneficiaries and lawyer a photocopy
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27. 10 Golden Rules of Buying Life Insurance
From Page 338, Personal Finance in Practice Box
Source: American Council of Life Insurance
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28. Should You Switch Policies?
Switch if benefits exceed costs of getting another physical, and paying policy set-up costs
The older you are, the higher the premium
Are you still insurable?
Can you get all the provisions you want?
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29. Objective 4 Recognize How Annuities Provide Financial Security
Financial Planning with Annuities
An annuity = a financial contract written by an insurance company, providing a regular income
Can supplement retirement income and shelter income from taxes
Those who expect to live longer than average benefit most from annuities.
Fully fund IRAs, Keoghs and 401(k)’s BEFORE considering an annuity
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30. Why Buy Annuities? Provides retirement income for life
Compounded interest grows tax free until money withdrawn
No maximum annual contribution (like IRAs)
Beneficiary guaranteed no less than amount paid in
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31. Types of Annuities Fixed annuity Variable annuity
Annuitant receives fixed amount for life
Variable annuity
Amount received depends on investment performance
Can be included in IRAs and Keogh plans
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