Transcript Chapter 12
FINANCIAL PLANNING WITH LIFE INSURANCE CHAPTER 12 Personal Finance Finance 235 LIFE INSURANCE • What is Life Insurance and when should we get it? – A means for protecting the financial security of those that depend on us for their safety and economic well being. – The best time to get it is when you are young and healthy. – You should have some by the time you marry or partner. – You are foolish not to have it when you start a family and acquire property (cars, home, investments, etc.) Personal Finance 2 LIFE INSURANCE • Major Purposes of Life Insurance – Pay off mortgage or other debts at time of death – Provide lump sum payments or endowments to beneficiaries – Provide education or income to children – Make charitable donations – Provide retirement income (whole life / endowment policies) – Estate Planning (paying estate or gift taxes) Personal Finance 3 LIFE INSURANCE • How Much Life Insurance Do You Need? – The answer depends on your personal life situation • A young single person – not much • An older person with family responsibilities – depends – Number of dependents – Magnitude of financial liabilities (mortgages, loans, etc.) – Magnitude of income – Social Security survivor benefit – Example #1: Family (spouse, children, household expenses) • 7 times 70% of yearly income • More if dependents are under 7 years of age. – Example #2: Dual Incomes no Kids (DINKs) • Enough to cover debts • Provide a financial cushion Personal Finance 4 LIFE INSURANCE COMPANIES • Types of Insurance Companies – Stock: Owned by the stockholders – sell nonparticipating polices – Mutual: Owned by the policy holders – sell participating policies – Participating Policies (Mutual): • Mutual LICs return a portion of its investment profits as dividend • Premiums are invested in investment quality bonds and other high degree of safety investments (function of legal list requirements) Personal Finance 5 INSURANCE COMPANIES • Type of Policies (1) – Term • Coverage for a specified number of years. • After that period, policy may continue but typically with higher premiums. • Categories – Renewable – Level – Conversion (to whole life) – Decreasing – Return of Premium Personal Finance 6 INSURANCE COMPANIES • Type of Policies (2) – Whole Life (cash value / straight life / ordinary) • Permanent premium paid for lifetime of insured • Accrues cash values • Cash values can be used as collateral for loans – Limited Life (paid up after 20 or 30 years) – Variable Life (value a function of stock market investment performance) – Universal Life (ability to change premiums based on cash values) – Group Polices • Associated with employment or affinity groups – Credit Life – pay off a debt if you die before debt is paid – Endowment Life – pays a sum at maturity to policy holder Personal Finance 7 SELECTING PROVISIONS • What are the Key Provisions in a Policy? – Naming the Beneficiary (ies) – Incontestability – policy cannot be cancelled after a certain period of time – Grace Period (limit to late payment) – lapsed policy – Reinstatement – Policy loan provision (borrow against cash values) – Suicide clause (within 1 year – no benefits) – Typical Riders • Accidental death (2x) • Waiver of premium if permanently disabled (age limit) Personal Finance 8 BUYING LIFE INSURANCE • Decision Criteria – AM Best rating – Costs and Features – Availability of local agents – Recommendations of Friends – Articles in Kiplinger, WSJ, Money • Choosing Settlement Options – Lump-sum – Installments – Life income Personal Finance 9 FINANCIAL PLANNING WITH ANNUITIES • What is an Annuity? – An particular type of insurance plan structured to provide you with a fixed payment each [month] for a set period of years. • What are the Principal Types of Annuities? – Immediate – Deferred – Variable [rate] – Indexed [to a mix of stocks and bonds] • Why do People Buy Annuities? – Main reason is to remove market risk. – There are also certain tax advantages. • Thoroughly Investigate before you Buy! Personal Finance 10 HOMEWORK A. Questions: 1. What is an Annuity? 2. What are the Principal Types of Annuities? 3. Why do People Buy Annuities? B. Be Your Own Personal Financial Planner* 1. 1 – Calculating your insurance need (w/s 47) 2. 6 – Set up a layered Term Insurance Program (w/s 48) * These are simulated situations. Personal Finance 11