CHAPTER 12
Life Insurance
Personal Finance 6e
Kapoor
Dlabay
Hughes
12-1
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
An Introduction to Life Insurance
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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.
 To make charitable bequests upon your death.
 To save money for retirement or children’s
education.
 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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The Principle of Life Insurance
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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.
12-3
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Determining Your Life Insurance
Needs - Ask Yourself...
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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 you retire what income do you need?
 How much will you be able to pay for your
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insurance program?
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Estimating Your
Life Insurance Requirements
 The Easy Method.
 Typically, you will need 70% of your salary for
seven years while 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 12-5
assets.
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Two Types of
Life Insurance Companies
Stock life insurance companies
are owned by the shareholders.
 95% are of this type.
 Sell non-participating policies.
 Amount of premium stays the
same.
12-6
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Two Types of
Life Insurance Companies
(continued)
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
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a policy refund.
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Types of Life Insurance Policies
 Term life insurance.
 Protection for a specified period of time.
 If you don’t pay 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 change your
policy from term to whole life without a physical.
 With decreasing term insurance your premium
stays the same, but the amount of coverage
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decreases as you age.
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Types of Life Insurance Policies
(continued)
 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
12-9
money earns.
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Whole Life Policy Options
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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 guaranteed, but
the death benefit can rise above it
depending on yield of the dollars invested
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in a separate fund.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Whole Life Policy Options
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(continued)
Adjustable.
 You can change your policy as your needs
change. For example, you can change
your premium payments or the period of
coverage.
Universal life.
 Lets you pay premiums in almost any
amount.
 Combines term insurance and investment
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elements.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Types of Policies Issued
Term
22%
Whole Life
45%
Decreasing
2.0%
Variable
2%
Universal
11%
Other
1997 Insurance Facts book
Irwin/McGraw-Hill
10%
Variable Universal
8%
12-12
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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 is paid off if you die.
 Mortgage, car, furniture.
 Also protects lenders.
 Expensive protection.
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12-13
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Life Insurance Contract Provisions
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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.
Suicide clause during first two years.
Automatic premium loans.
 Uses the accumulated cash value to pay the
premium if you do not pay it during the grace
period.
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Misstatement of age provision.
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Life Insurance Contract Provisions
(continued)
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Policy loan provision to borrow against cash value.
A rider to a policy modifies it coverage by adding
or excluding conditions or altering benefits.
Nonforfeiture clause prevents the forfeiture of
accrued benefits if you choose to drop the policy.
Waiver of premium disability benefit.
Accidental death benefit - double indemnity.
Guaranteed insurability option.
Cost of living protection.
Accelerated benefits.
12-15
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Buying Life Insurance

Look at your present and future sources of
income, savings, group life insurance, and
Social Security benefits.
 Determine from whom to buy your policy.
 Examine both private and public sources.
 Look up the company’s rating.
 Talk to friends or colleagues.
12-16
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Choosing Your Insurance Agent
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Ask friends, parents and neighbors for
recommendations.
Find out if the agent belongs to professional
groups or is a 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?
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Are they available when needed?
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Buying Life Insurance
(continued)
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Compare policy costs which are affected by...
 How selective they are in whom they insure.
 Their cost of doing business.
 Return on their investments.
 Mortality rate among policyholders.
 Policy features and competition from other firms
 Use interest-adjusted index to compare policies.
 Takes into account the time value of money.
 Helps you make cost comparisons among
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insurance companies.
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Obtaining and Examining a Policy
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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.
12-19
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Choosing Settlement Options
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Options are the choices for how you want the
money paid out.
Lump-sum payment is most common.
Limited installment plan.
 In equal installments for a specific number of
years after your death.
Life income option.
 Payments to the beneficiary for life.
Proceeds left with the company.
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 Pays interest to the beneficiary.
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© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
Should You Switch Policies?
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Switch if benefits exceed
costs of getting another
physical, and paying policy
set up costs.
 Are you still insurable?
 Can you get all the provisions
you want?
12-21
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Financial Planning with Annuities
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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.
12-22
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