© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-Hill12-1CHAPTER 12Personal FinanceLife InsuranceKapoor Dlabay Hughes7e© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillAn Introduction to Life Insurance Life insurance is obtained by purchasing a policy, with the insurance company promising to pay a lump sum at the time of the policy holder’s death, or sometimes while they are still alive. The purpose of life insurance is to protect someone who depends on you from financial loss related to your death. Other reasons are. To make charitable bequests upon your death. To save money for retirement or for income or education for children. To leave as part of your estate. To pay off a mortgage or debts at the time of death.12-2© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillThe Principle of Life Insurance Mortality tables provide odds on your dying, based on your age and sex. Your premium is based on your life expectancy and the projections for the payouts for persons who die.12-3© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillDetermining Your Life Insurance Needs - Ask Yourself... Do you need life insurance? Do you have people you need to protect financially? Do you have a partner who works? What are your objectives for life insurance? How much money do you want to leave your dependents should you die today? When do you want to retire, and what income do you think you’ll need? How much will you be able to pay for your insurance program?12-4© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillEstimating Your Life Insurance Requirements The Easy Method. Typically, you will need 70% of your salary for seven years while your family adjusts. The DINK (dual income, no kids) Method. The “Nonworking” Spouse Method. Multiply the number of years until the youngest child reaches 18 by $10,000. The “Family Need” Method. More thorough than the first three because it also considers employer provided insurance, Social Security benefits, and income and assets.12-5© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillTwo Types ofLife Insurance CompaniesnStock life insurance companiesare owned by the shareholders. 95% are of this type. Sell non-participating policies. If you want to pay the same premium each year, choose a non-participating policy with its guaranteed premiums.12-6© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillTwo Types ofLife Insurance CompaniesoMutual life insurance companies. Owned by the policyholders. 5% of policies are from this type of company. With participating policies the premiums are higher than non-participating policies. However, part of the premium is refunded to the policyholders annually. This is called the policy dividend.(continued)12-7© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillTypes of Life Insurance Policies Term life insurance. Protection for a specified period of time. If you stop paying premiums, coverage stops. A renewability option means that at the end of the term you can renew the policy without having a physical. Conversion option allows you to exchange your term policy to a whole life policy without having a physical. With decreasing term insurance your premium stays the same, but the amount of coverage decreases as you age.12-8© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillTypes of Life Insurance Policies Whole life insurance is also called straight life. You pay a premium as long as you live. Amount of premium depends on your age when you start the policy. Provides death benefits and 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.(continued)12-9© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillWhole Life Policy Options Limited payment policy. Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65). Your policy then becomes “paid up” and you remain insured for life. Variable life policy. A minimum death benefit is guaranteed, but the death benefit can be greater than the minimum depending on earnings of the dollars invested in the separate fund.12-10© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillWhole Life Policy Options Adjustable life policy. A whole life insurance policy, but you can change your policy as your needs change. For example, you can change your premium payments or the period of coverage. Universal life - gives you more direct control. Lets you pay premiums at any time in almost any amount. The amount of insurance can be changed more easily than a traditional policy. The increase in the cash value of the policy reflects the interest earned on short-term investments.(continued)12-11© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillOther Types of Life Insurance Policies Group life insurance. Term insurance. Often provided by an employer. No physical is required. Credit life insurance. Debt is paid off if you die.y Mortgage, car, furniture. Also protects lenders. Expensive protection.12-12© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillLife Insurance Contract Provisions Naming your beneficiary, and contingent beneficiaries. Length of grace period for late payments. Reinstatement of a lapsed policy if it has not been turned in for cash. Nonforfeiture allows you to keep accrued benefits if you drop the policy. Incontestability clause says that after the policy has been in force for a specified period, the company can’t dispute its validity for any reason. Suicide clause during first two years.12-13© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.Irwin/McGraw-HillLife Insurance Contract Provisions Automatic premium loans. Uses the accumulated cash value to pay the premium if you do not pay it during the grace period. Misstatement of age provision. Policy loan provision to borrow against cash value. A rider to a policy modifies the coverage by adding or
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