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© 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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