Garman/Forgue
Personal Finance
Ninth Edition
Chapter 12:
Life Insurance
Planning
PPT slide program prepared by
Amy Forgue and Ray Forgue.
Learning Objectives
1. Understand the reasons why you
might need life insurance and
calculate the appropriate amount of
coverage.
2. Distinguish among the types of life
insurance.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 2
Learning Objectives
3. Explain the major provisions of life
insurance policies.
4. Apply a step-by-step strategy for
implementing a life insurance plan.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 3
Introduction
• Risk of dying too soon
• Risk of living too long
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 4
How Much Life Insurance Do You
Need?
• The primary reason for buying life
insurance is to allow the family
members of the deceased to continue
with their lives free from the financial
burdens that death can bring.
• Beneficiary: The person named in the
policy to receive the funds.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 5
What Needs Must Be Met?
• Final expenses: One-time expenses
occurring just prior to or after a death.
• Income-replacement needs
• Readjustment-period needs
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 6
What Needs Must Be Met?
• Debt-repayment needs
• College expense needs
• Other special needs
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 7
What Needs Must Be Met?
• Government benefits can reduce the
level of need.
– Social Security survivor’s benefits
– Social Security blackout period
• Existing insurance and assets reduce
the level of need.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 8
What Dollar Amount Do You Need?
• The Multiple-of-Earnings Approach:
easy but flawed.
• The Needs-Based Approach: a better
method
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 9
Two Basic Types of Life Insurance
• Term Life Insurance (or Pure
Protection)
– Face amount
• Cash-Value Life Insurance
– Cash-Value: Represents the value of the
investment element in the life insurance
policy.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 10
Term Life Insurance
•
Guaranteed Renewable Term
Insurance
– Protects you against the possibility of
becoming uninsurable.
•
Level-Premium Term Insurance
– Level-Premium Term Insurance
– Reenter Provision
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 11
Term Life Insurance
• Decreasing Term Insurance
• Convertible Term Insurance
• Group Term Life Insurance
• Credit Term Life Insurance
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 12
Cash-Value Life Insurance
• Some forms of cash-value life insurance
pay a fixed return:
– Cash-Value Life
– Permanent Insurance
– Whole (or Straight) Life Insurance
– Limited-Pay Whole Life Insurance
– Adjustable Life Insurance
– Modified Life Insurance
– Endowment Life Insurance
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 13
Cash-Value Life Insurance
• Some forms of cash-value life insurance
pay a variable return:
– Universal life insurance
– Variable life insurance
– Variable-Universal (or Flexible-Premium)
life insurance
• Don’t be fooled by vanishing-premium
or return-of-premium policies.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 14
Understanding Your Life Insurance
Policy
• Life Insurance Policy
• Owner (or Policyholder)
• Insured
• Contingent Beneficiary
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 15
Policy Terms and Provisions Unique to
Life Insurance
•
Life Insurance Application: The
policyholder’s offer to purchase a
policy.
•
Lives Covered
– First-to-Die Policies: Cover more than
one person but pay only when the first
insured dies.
– Survivorship Joint Life Policy: Pays
when the last person covered dies.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 16
Policy Terms and Provisions Unique to
Life Insurance
• The Incontestability Clause
• The Suicide Clause
• Cash Dividends
– Insurance Dividends
– Participating Policies
– Nonparticipating Policies
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 17
Policy Terms and Provisions Unique to
Life Insurance
• Death Benefit: Amount that will be paid
to beneficiary when the insured dies.
• Grace Period
– Lapsed policy
• Multiple Indemnity
– Multiple Indemnity Clause
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 18
Settlement Options
• Lump sum
• Interest income
• Income of a specific amount
• Income for a specific period
• Income for life
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 19
Policy Features Unique to Cash-Value
Life Insurance
•
The Policy Illustration
– Guaranteed Minimum Rate of Return
– Current Rate
•
Nonforfeiture Values
– Cash-Surrender Value
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 20
Policy Features Unique to Cash-Value
Life Insurance
• Policy loans
– Automatic Premium Loan
– Living Benefit Clause
– Viatical Companies
• Waiver of premium
• Guaranteed Insurability (or Guaranteed
Purchase Option)
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 21
Step-by-Step Strategy for Buying Life
Insurance
1. First ask whether or not, and for how
much, your life should be insured.
2. Then properly integrate your life
insurance into your overall financial
planning.
3. Buy term and invest the rest.
•
Layering term insurance policies
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 22
Where and How to Buy Your Life
Insurance
•
You can easily buy life insurance
online.
– Premium Quote Service: Offers
computer-generated comparisons among
20 to 80 different companies.
•
Or you can use a local insurance
agent.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 23
Where and How to Buy Your Life
Insurance
•
Compare costs among policies
– Net Cost Method
– Interest-Adjusted Cost Index Method
– Interest-Adjusted Net Payment Index
Method
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 24
The Top 3 Financial Missteps in Life
Insurance Planning
People slip up in when they do the following:
1. Let their life insurance agent convince
them how much and what type to buy.
2. Buy their life insurance during their
childbearing years through cash-value life
insurance.
3. Ignore their changing need for life
insurance as their life progresses.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 25
Good Money Habits in Life Insurance
Planning
•
Calculate your life insurance needs every
three years or when major life events
occur, such as the birth of a child.
•
Avoid being talked into buying types and
amounts of life insurance that you do not
need.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 26
Good Money Habits in Life Insurance
Planning
•
Shop for term life insurance on the
internet to obtain the lowest possible
rates.
•
Employ the principle of “buy term life
insurance and invest the rest” with
guaranteed renewable or level-premium
term life insurance.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 27
Good Money Habits in Life Insurance
Planning
• Contribute the money saved by
purchasing term rather than cash-value
insurance into your retirement plan.
• If you decide that you need a cashvalue life insurance policy, get one with
a guaranteed insurability option.
Copyright ©Houghton Mifflin Company. All rights reserved.
12 - 28