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Title:

Insuring Your Life

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Life Insurance -- Who Needs It? Single person, without dependents ... How Much Life Insurance? Earnings multiple. 5 to 15 times gross annual salary ... – PowerPoint PPT presentation

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Title: Insuring Your Life


1
Chapter 8
  • Insuring Your Life

2
Logic Behind Insurance
  • Risk pooling -- individuals share their financial
    risks
  • Reduces catastrophic losses from death
  • Protects those left behind

3
Life Insurance -- Who Needs It?
  • Single person, without dependents
  • Double-income married couple, without dependents
  • Married, but unemployed, individual without
    dependents
  • Retired persons

4
How Much Life Insurance?
  • Earnings multiple
  • 5 to 10 times gross annual salary
  • Multiple depends on life circumstances
  • Dont forget the effects of inflation

5
How Much Life Insurance?
  • Funds Needs Approach
  • Add total funding needs
  • Subtract current insurance coverage and other
    available assets
  • Result amount of additional insurance needed

6
Major Types of Life Insurance
  • Term insurance --based on your probability of
    dying
  • Cash-value insurance -- Combines life insurance
    and savings plan

7
Term Insurance
  • Specific time of coverage
  • Pays only if you die
  • Least expensive insurance
  • Premiums based on probability of death

8
Term Insurance Types
  • Straight term insurance
  • Renewable term insurance
  • Level-premium term insurance
  • Decreasing term insurance
  • Group life insurance
  • Convertible term life insurance

9
Cash-Value Insurance
  • Whole life --Permanent insurance
  • Universal life --Death benefit and savings plan

10
Whole Life Insurance
  • Permanent -- insurance that does not expire
  • Savings feature (cash value) fixed return
    borrow against cash value
  • Continuous payment (straight life) level
    premium (lower when purchased young)
  • Limited payment pay until certain age then paid
    up
  • Single payment one up-front payment

11
Universal Life
  • More flexible than whole life insurance
  • Term insurance combined with savings portions
    identified separately in premium
  • Rate of return varies
  • Premium paid from earnings transferred between
    savings and insurance portions.
  • As cash value becomes very large, amount of
    insurance has to be increased for tax reasons

12
Term Versus Cash-Value
Premiums
Term Premiums
600
Cash-Value Premiums
300
100
Time
Older
Younger
13
Premium Comparison 100K
For 20-year term Policy stays at this
premium for life
14
The Right Insurance?
  • Term insurance becomes very expensive BUT need
    declines with age.
  • Cash-value insurance provides for a simple means
    of savings BUT you lose control of savings.

15
The Right Insurance?
  • Cash-value insurance may eventually pay its own
    premiums BUT might not.
  • Cash-value insurance savings grow tax-deferred
    BUT so do IRAs, 401(k)s.

16
Key Features of Life Insurance Types
17
Buying the Best Life Insurance Policy
  • Insurance agents earn commissions
  • Figure your needs first
  • Difficult to compare across policies
  • Select a high-quality insurance company based on
    company ratings

18
Contract Features
  • Beneficiaries
  • Settlement Options
  • Policy Loans
  • Grace Period
  • Premium Payment Intervals

19
Questions?
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