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Kapoor Dlabay Hughes
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„ 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.
Š To make charitable bequests upon your death.
Š To save money for retirement or for income or education for children.
Š
Š
To leave as part of your estate.
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To pay off a mortgage or debts at the time of death.
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„
Do you need life insurance?
Š Do you have people you need to protect financially?
Š Do you have a partner who works?
„ What are your objectives for life insurance?
Š How much money do you want to leave your dependents should you die today?
Š When do you want to retire, and what income do you think you’ll need?
Š How much will you be able to pay for your
12-4 insurance program?
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
„
The Easy Method.
Š 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.
Š Multiply the number of years until the youngest
„ child reaches 18 by $10,000.
The “Family Need” Method.
Š More thorough than the first three because it also considers employer provided insurance,
Social Security benefits, and income and assets.
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12-5
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„ 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.
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n
Stock life insurance companies are owned by the shareholders.
Š 95% are of this type.
Š Sell non-participating policies.
Š If you want to pay the same premium each year, choose a non-participating policy with its guaranteed premiums.
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(continued) o
Mutual life insurance companies.
Š Owned by the policyholders.
Š 5% of policies are from this type of company.
Š 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.
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„ Limited payment policy.
Š Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65).
„
Š Your policy then becomes “paid up” and you remain insured for life.
Variable life policy.
Š A minimum death benefit is guaranteed, but the death benefit can be greater than the minimum depending on earnings of the
12-10 dollars invested in the separate fund.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
„ Term life insurance.
Š Protection for a specified period of time.
Š If you stop paying premiums, coverage stops.
Š A renewability option means that at the end of the term you can renew the policy without having a physical.
Š Conversion option allows you to exchange your term policy to a whole life policy without having a physical.
Š With decreasing term insurance your premium stays the same, but the amount of coverage
12-8 decreases as you age.
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(continued)
„ Adjustable life policy.
Š 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.
Š Lets you pay premiums at any time in almost any amount. The amount of insurance can be changed more easily than a traditional policy.
Š The increase in the cash value of the policy reflects the interest earned on short-term investments.
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(continued)
„ Whole life insurance is also called straight life.
Š You pay a premium as long as you live.
Š Amount of premium depends on your age when you start the policy.
Š Provides death benefits and accumulates a cash value.
Š You can borrow against the cash value or draw it out at retirement.
Š Look carefully at the rate of return your money earns.
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„ Group life insurance.
Š Term insurance.
Š Often provided by an employer.
Š No physical is required.
„ Credit life insurance.
Š Debt is paid off if you die.
y Mortgage, car, furniture.
Š Also protects lenders.
Š Expensive protection.
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„ 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.
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„ 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.
Š Examine both private and public sources.
Š Look up the company’s rating, in A. M. Best.
Š Talk to friends or colleagues.
Š Research ratings on the web, www.standardandpoor.com.
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(continued)
„ Automatic premium loans.
Š 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.
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„ Ask friends, parents, and neighbors for recommendations.
„ Find out if the agent belongs to professional groups or is a Chartered Life Underwriter (CLU).
„ Is the person willing to take the time to answer your questions and find a policy that is right for you?
„ Do they ask about your financial plan?
„ Do you feel pressured?
„ Are they available when needed?
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(continued)
„ 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.
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12-15
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(continued)
„ Compare policy costs which are affected by...
Š How selective they are in whom they insure.
Š Their cost of doing business.
Š Return on their investments.
Š Mortality rate among policyholders.
„
Š Policy features and competition from other firms
Use interest-adjusted index to compare policies.
Š Takes into account the time value of money.
Š Helps you make cost comparisons among insurance companies.
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Š See sites such as www.quotesmith.com.
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„ The first step is to apply.
„ The second step is to provide medical history.
„ Usually no physical for a group policy.
„ Read every word of the contract.
„ After you buy it, you have ten days to change your mind.
„ Give your beneficiaries and lawyer a photocopy.
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„ An annuity is a financial contract written by an insurance company that provides you with a regular income.
„ People buy annuities to supplement retirement income and to shelter income from taxes.
„ Those who expect to live longer than average benefit most from annuities.
„ Annuities are tax-deferred investment plans.
You pay taxes on the interest when you draw the money out.
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„ Options are the choices available for how you can have the life insurance money paid out.
„ Lump-sum payment is most common.
„ Limited installment plan.
Š In equal installments for a specific number of years after your death.
„ Life income option.
Š Payments to the beneficiary for life.
„ Proceeds left with the company.
Š Pays interest to the beneficiary.
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„ Switch if benefits exceed costs of getting another physical, and paying policy set-up costs.
„ The older you are the higher the premium will be.
„ Are you still insurable?
„ Can you get all the provisions you want?
Irwin/McGraw-Hill
12-21
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