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10 Financial Planning With Life Insurance

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Primary Purpose of Life Insurance: Protect someone who depends on you from financial loss related to your death Reduces financial burdens of survivors – PowerPoint PPT presentation

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Title: 10 Financial Planning With Life Insurance


1
10 Financial Planning With Life Insurance
  • Primary Purpose of Life Insurance
  • Protect someone who depends on you from financial
    loss related to your death
  • Reduces financial burdens of survivors
  • Life insurance
  • Obtained by purchasing a policy
  • The insurance company promises to pay a lump sum
    (death benefit) to a named beneficiary at the
    time of the policy holders death (or sometimes
    while they are still alive)

10-1
2
Objective 1Define Life Insurance and Determine
Your Life Insurance Needs
  • Other reasons to buy life insurance
  • Pay off a mortgage or debts
  • Lump-sum endowments for children
  • Provide an education or income for children
  • Make charitable donations
  • Provide retirement income
  • Accumulate savings
  • Establish a regular income for survivors
  • Set up an estate plan (e.g., fund trusts with
    life insurance)
  • Pay estate and gift taxes (e.g., business owners)

10-2
3
The Principle of Life Insurance
  • Mortality Tables-provide odds on your dying,
    based on your age and sex.
  • Premium is based on life expectancy and
    projections for payouts for persons who die
    (called actuarial tables)
  • Older people pay more because they will die
    sooner
  • Face Amount- the dollar value of protection
    listed in the policy and amount used to calculate
    the premium (e.g., 100,000)
  • Group Term Insurance- issued to people as members
    of a group rather than as individuals

10-3
4
Do You Need Life Insurance?
  • Do you have people you need to protect
    financially? Will your death cause them financial
    hardship?
  • Are you single and have a lot of debt?
  • Do you have parents, relatives, or a charity that
    you want to support?
  • Avoid being persuaded to buy unnecessary life
    insurance!

10-4
5
Estimating Your Life Insurance Requirements
  • The Easy Method
  • 70 of your salary for seven years while your
    family adjusts
  • Assumes typical family
  • The DINK Method
  • Dual income, no kids
  • Assumes spouse earnings will continue
  • Cover funeral ½ debts
  • The Nonworking Spouse Method
  • years until the youngest child reaches 18 X
    10,000
  • The Family Need Method
  • More thorough than the first three methods
  • Considers employer provided insurance, Social
    Security benefits, income and assets

10-5
6
Objective 2Distinguish Between the Types of Life
Insurance Companies and Analyze Various Types of
Life Insurance Policies These Companies Issue
10-6
7
Stock Life Insurance Companies
  • Owned by the shareholders
  • 95 are of this type
  • Sell non-participating (non-par) policies
  • If you want to pay the same premium each year ?
    choose a non-participating policy with guaranteed
    premiums
  • Consider the financial stability of the insurance
    company

10-7
8
Mutual Life Insurance Companies
  • Owned by the policyholders
  • 5 of policies are from this type of
    company
  • Participating policy premiums are higher than
    non-participating policies
  • Part of the participating premium is refunded to
    the policyholders annually in the form of a
    policy dividend

10-8
9
Term Life Insurance
  • Term Life
  • Protection for a specified period of time
  • At the end of term (or if you stop paying
    premiums), coverage stops
  • Many types
  • Renewable Term- can renew higher premium charged
  • Multiyear Level Term- same premium for set period
  • Conversion Term- allows change to permanent
    policy
  • Decreasing Term- face value decreases over time
  • Return-of-Premium Term- can get premium back

10-9
10
Whole Life Insurance
  • Straight-Life or Whole-Life Insurance
  • Pay the premium as long as you live
  • Amount of premium depends on age when you start
    the policy
  • Provides death benefits
  • Accumulates a cash value you can borrow against
    or draw out at retirement
  • Look carefully at the rate of return your money
    earns
  • Types
  • Limited Payment Policy
  • You pay premiums for a stipulated period
  • Policy then paid up and you remain insured for
    life
  • Variable Life Policy- Fixed premiums investment
    accounts
  • Adjustable Life Policy- Can change coverage with
    needs
  • Universal Life- Can change premium, time period,
    benefit

10-10
11
Comparison of Premium Dollars for Life Insurance
12
Other Types of Life Insurance Policies
  • Group life insurance
  • Term insurance
  • Often provided by an employer
  • No physical is required
  • Credit life insurance
  • Debt paid off if you die
  • Mortgage, car, furniture
  • Also protects lenders
  • Expensive protection (usually overpriced)
  • Endowment Life Insurance- pays policyholder a
    lump sum if still living at end of the endowment
    period

10-12
13
Key Provisions in a Life Insurance Policy
  • Naming your beneficiary and contingent
    beneficiaries (those who will receive benefits
    upon the insureds death)
  • Incontestability clause ? after the policy has
    been in force for a specified period, the company
    cant dispute its validity for any reason
    (usually 2 years)
  • Length of grace period for late payments
  • Reinstatement of a lapsed policy if it has not
    been turned in for cash (must qualify again and
    pay overdue premiums)
  • Non-forfeiture clause allows you to keep accrued
    benefits in a whole life policy if you drop the
    policy
  • Misstatement of age provision (benefits paid on
    real age)
  • Policy loan provision to borrow against cash
    value
  • Suicide clause during first two years (only get
    back premiums)
  • Policy rider modifies the coverage by adding or
    excluding conditions or altering benefits

10-13
14
Key Provisions in a Life Insurance Policy
  • Life Insurance Policy Riders
  • Waiver of premium disability benefit
  • Accidental death benefit double indemnity
  • Guaranteed insurability option (can buy
    additional insurance at specified intervals
    without a medical exam)
  • Cost of living protection (helps maintain
    purchasing power)
  • Accelerated benefits, also called living benefits
    (make payments to those who are terminally ill
    before they die)
  • Second-to-die option, also called survivorship
    life (insures two lives, typically a married
    couple) benefit paid upon death of second spouse

10-14
15
Choosing Settlement Options
  • Settlement Options choices of how the
    insurance money is paid out
  • Lump-Sum Payment most common method
  • Limited Installment Plan
  • In equal installments for a specific number of
    years after your death (10-year certain)
  • Life Income Option
  • Payments to the beneficiary for life
  • Proceeds Left with the Company
  • Pays interest to the beneficiary

10-15
16
Buying Life Insurance
  • Consider
  • Present and future sources of income
  • Other savings and income protection
  • Group life insurance
  • Pension benefits
  • Social Security benefits
  • Financial strength of the insurance company

10-16
17
Buying Life Insurance
  • Determine from whom to buy your policy
  • Examine both private and public sources
  • Research the companys rating by major rating
    companies
  • A. M. Best
  • Standard and Poors
  • Duff Phelps
  • Moodys
  • Weiss Research
  • Talk to friends or colleagues
  • Online premium quote services

10-17
18
Choosing an Insurance Agent
  • Ask friends, parents, and neighbors for
    recommendations.
  • Does the agent belong to professional groups or
    is a Chartered Life Underwriter (CLU)?
  • Is the agent willing to take the time to answer
    questions and find a policy that is right for
    you?
  • Does the agent ask about your financial plan?
  • Do you feel pressured?
  • Is the agent available when needed?

10-18
19
Buying Life Insurance
  • Compare policy costs based on
  • Companys cost of doing business
  • Return on companys investments
  • Mortality rate among policyholders
  • Policy features
  • Competition from other firms
  • Interest-adjusted index
  • Used to compare policy costs
  • Lower index lower cost policy
  • See sites such as www.quotesmith.com

10-19
20
Obtaining and Examining a Policy
  • First step apply
  • Second step provide medical history
  • Usually no physical for a group policy
  • Read every word of the contract
  • 10-day free-look period to change your mind
  • Give your beneficiaries and lawyer a photocopy

10-20
21
Should You Switch Policies?
  • Switch if benefits exceed costs of getting
    another physical and paying policy set-up costs
  • The older you are, the higher the premium
  • Are you still insurable?
  • Can you get all the provisions you want?
  • Dont cancel old policy until new policy is in
    hand

10-21
22
Objective 4Recognize How Annuities Provide
Financial Security
  • Financial Planning with Annuities
  • An annuity a financial contract written by an
    insurance company, providing a regular income
  • Can supplement retirement income and shelter
    income from taxes (tax-deferred)
  • Those who expect to live longer than average
    benefit most from annuities
  • Fully fund IRAs and 401(k)s/403(b)s BEFORE
    considering an annuity (lower costs and tax
    advantages)

10-22
23
Why Buy Annuities?
  • Provides retirement income for life
  • Compounded interest grows tax-free (until money
    withdrawn)
  • No maximum annual contribution (like IRAs)
  • Beneficiary guaranteed no less than amount paid
    in
  • Immediate annuity or deferred annuity
  • Two Types
  • Fixed Annuity
  • Annuitant receives fixed amount for life
  • Variable Annuity
  • Amount received depends on investment performance

10-23
24
Wrap Up
  • Chapter Quiz
  • Case Study Project Discussion
  • Form groups
  • Select cases
  • Homework Concept Checks 10-1, 10-2 (True/False
    Questions)
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