Download Understanding Life Insurance: Types, Companies, and Policies and more Slides Management Fundamentals in PDF only on Docsity! 10 Financial Planning With Life Insurance • Primary Purpose of Life Insurance: – Protect someone who depends on you from financial loss related to your death – Reduces financial burdens of survivors • Life insurance: – Obtained by purchasing a policy – The insurance company promises to pay a lump sum (death benefit) to a named beneficiary at the time of the policy holder’s death (or sometimes while they are still alive) 10-1 Docsity.com Objective 1 Define Life Insurance and Determine Your Life Insurance Needs Other reasons to buy life insurance: – 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 (e.g., fund trusts with life insurance) – Pay estate and gift taxes (e.g., business owners) 10-2 Docsity.com 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 will continue – Cover funeral + ½ debts • The “Nonworking” Spouse Method – # years until the youngest child reaches 18 X $10,000 • The “Family Need” Method – More thorough than the first three methods – Considers employer provided insurance, Social Security benefits, income and assets 10-5 Docsity.com 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 10-6 Docsity.com 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 • Consider the financial stability of the insurance company 10-7 Docsity.com Whole Life Insurance Straight-Life or Whole-Life Insurance – 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 or draw out at retirement – Look carefully at the rate of return your money earns Types: • Limited Payment Policy – You pay premiums for a stipulated period – Policy then “paid up” and you remain insured for life • Variable Life Policy- Fixed premiums; investment accounts • Adjustable Life Policy- Can change coverage with needs • Universal Life- Can change premium, time period, benefit 10-10 Docsity.com
Comparison of Premium Dollars for
Life Insurance
Cash-Value Policy
Premium to pay for
insurance protection, Premium to provide for the building of cash value
sales commissions, plus related company expenses
and company expenses
Term Policy
Premium to pay for
insurance protection, Dollars not spent on life insurance and
sales commissions, available to spend, save, or invest
and company expenses
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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 (usually overpriced) • Endowment Life Insurance- pays policyholder a lump sum if still living at end of the endowment period 10-12 Docsity.com Choosing Settlement Options Settlement Options = choices of how the insurance money is paid out – Lump-Sum Payment = most common method – 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 10-15 Docsity.com 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 10-16 Docsity.com 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 – Online premium quote services 10-17 Docsity.com 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 10-20 Docsity.com 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? • Don’t cancel old policy until new policy is in hand 10-21 Docsity.com 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 (tax-deferred) • Those who expect to live longer than average benefit most from annuities • Fully fund IRAs and 401(k)s/403(b)s BEFORE considering an annuity (lower costs and tax advantages) 10-22 Docsity.com