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Life Insurance (ch 12)

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PowerPoint PresentationAn Introduction to Life InsuranceThe Principle of Life InsuranceDetermining Your Life Insurance Needs - Ask Yourself...Estimating Your Life Insurance RequirementsTwo Types of Life Insurance CompaniesSlide 7Types of Life Insurance PoliciesSlide 9Whole Life Policy OptionsSlide 11Other Types of Life Insurance PoliciesLife Insurance Contract ProvisionsSlide 14Slide 15Buying Life InsuranceChoosing Your Insurance AgentSlide 18Obtaining and Examining a PolicyChoosing Settlement OptionsShould You Switch Policies?Financial Planning with AnnuitiesLife Insurance ActivityChapter 12Life InsuranceLife InsuranceMcGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.An Introduction to Life Insurance•Life insurance - Purchase policy; insurance company promises to pay a lump sum at the time of the policy holder’s death, or sometimes while they are still alive.•Purpose of life insurance: Protect someone who depends on you from financial loss related to your death. Other reasons are.To leave as part of your estate.To save money for retirement or for income or education for children.To pay off a mortgage or debts at the time of death.12-2The 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.12-3Determining 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?12-4Estimating Your Life Insurance Requirements•The Easy Method.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.12-5Two Types ofLife Insurance CompaniesStock 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.12-6Two Types ofLife Insurance CompaniesMutual 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)12-7Types of Life Insurance Policies•Term life insurance.Protection for a specified period of time.If you stop paying premiums, coverage stops.Renewability: You can renew the policy without having a physical at the end of the term.Conversion option: Can exchange term policy for whole life policy without having a physical.Decreasing term insurance: Premium stays the same, but the amount of coverage decreases as you age – mortgage insurance.12-8Types of Life Insurance Policies•Whole life insurance - 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)12-9Whole 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.Minimum death benefit guaranteed, but the death benefit can be greater than the minimum depending on earnings of the dollars invested in a separate stock or bond fund.12-10Whole Life Policy Options•Adjustable life policy.Whole life insurance policy, but you can change your policy as your needs change. You can change your premium payments to increase or decrease coverage.•Universal life - gives you more direct control.Can pay premiums at any time in almost any amount. 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)12-11Other Types of Life Insurance Policies •Group life insurance.Term insurance. Often provided by an employer.No physical is required.•Credit life insurance.Debts such as car loan is paid off if you die.Also protects lenders.Expensive protection.12-12Life 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: Keep accrued benefits if you drop the policy.•Incontestability clause: After the policy has been in force for awhile (2 years), the company can’t dispute its validity for any reason.•Suicide clause during first two years.12-13Life 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 excluding conditions or altering benefits.(continued)12-14Life Insurance Contract Provisions•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, insures two lives.(continued)12-15Buying Life Insurance•Look at your present and future sources of income, other savings and income protection, group life insurance, pension benefits, and Social Security benefits.•Determine from whom to buy your policy.Examine both private and public


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