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Life Insurance

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Financial Planning with Life Insurance ... are they still trying to sell you whole life when you have already told them three times that you want term life insurance? – PowerPoint PPT presentation

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Title: Life Insurance


1
CHAPTER 10
Financial Planning with Life Insurance
Buy Term and Invest the Difference! The Wealthy
Barber
2
An Introduction to Life Insurance
  • Life insurance is obtained by purchasing a
    policy, with the insurance company promising to
    pay a lump sum at the time of the policy holders
    death
  • Some types will pay while the policy holder is
    still alive if they live long enough
  • (Whole life policies for stupid people)

uninformed
3
An Introduction to Life Insurance
(continued)
  • 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 leave as part of your estate / avoid estate
    taxes
  • Careful! The IRS often looks unfavorably at some
    of these tactics (only affects the very wealthy)
  • Usually promoted by unscrupulous insurance agents
  • To save money for retirement or childrens
    education
  • (Whole life policies for uninformed people)

4
An Introduction to Life Insurance
(continued)
  • People should buy life insurance so that when
    they die, their assets combined with their
    insurance proceeds can allow for the proper
    winding down of their financial affairs, and
    provide the desired standard of living for their
    dependents.
  • Really, life insurance is better termed
  • financial protection for dependents or
  • income replacement insurance.

The Wealthy Barber
5
The Basis of Life Insurance
  • 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
  • You are essentially betting the insurance company
    that you will die
  • It is a bet that you hope you lose
  • And so does the insurance company
  • They have a very good idea how many people will
    die and how many will live Actuaries

Lets Play The Longevity Game!
6
Two Types ofLife Insurance Companies
  • Stock life insurance companies are owned by the
    shareholders
  • 75 are of this type of company
  • Sell non-participating policies
  • 79 of policies are non-participating
  • Amount of premium stays the same

2012 American Council of Life Insurers
www.acli.org
7
Two Types ofLife Insurance Companies
(continued)
  • Mutual life insurance companies
  • Owned by the policyholders
  • 25 are of this type of company
  • With participating policies the premiums are
    higher than non-participating policies
  • 21 of policies are participating
  • However part of the premium is refunded to the
    policyholders annually
  • This is called the policy dividend
  • Not the same as dividends from stocks or credit
    unions that are taxable
  • They are non-taxable transactions since they are
    simply not charging you what they said they would
    charge you

8
Determining Your LifeInsurance Needs
  • Do you need life insurance? Ask Yourself
  • Are there any people who depend upon my income
    for their living expenses?
  • If the answer is, Yes, then it is not a
    question of whether or not you need insurance
  • It is how much life insurance you need!
  • If the answer is, No, then you do not need life
    insurance!
  • No matter what the life insurance agent says!

9
But Even If You Are Single, You Will Be Told By
An Insurance Agent
  • Of course, you need life insurance!
  • Your policy is acting as a savings vehicle
  • Insurance is cheaper when you are younger
  • You should buy insurance now while you are
    healthy and can get it
  • Your response to each of these should be
  • Nonsense! The rate of return is awful
  • Nonsense! Why buy something you do not need?
  • Nonsense! Only 2 of people are turned down

10
And Do Not Ever Buy Life Insurance for a Child!
  • Would you be devastated emotionally if your child
    dies?
  • Yes!
  • Would you be devastated financially if your child
    dies?
  • No!
  • Excuse me for being callous, but you will be
    better off financially if your child dies
  • Do not ever buy life insurance for a child!

11
But If You Have Children
  • Young married couples or single people with one
    or more children almost always need life
    insurance
  • The question for them is not, Do we need it?
    but rather, How much do we need?
  • Often the answer to that is, More Than You
    Think!

We will discuss how much in a bit
12
And Do Not Forget the Non-wage Earner Spouse
  • Normally, it makes sense to have some insurance
    on a non-wage earner spouse (a.k.a. stay-at-home
    mom or dad)
  • Have enough to pay off the debts, and
  • Replace the services that the non-wage earner
    provided
  • Men usually remarry quickly, women do not
  1. Married Men
  2. Single Women
  3. Married Women
  4. Single Men

13
Some Examples
Who needs life insurance?
  • A young married couple with no children
  • A young married couple with two children
  • Single adult or an unmarried couple
  • Single adult who is a partner in a business
  • A married couple with children
  • Both parents are high-wage earners
  • A middle-aged couple
  • Children gone and house paid off
  • Same middle-aged couple taking care of one or
    more of their aged parents

14
Estimating Your LifeInsurance Requirements
Da Book sez
  • 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 because it also considers employer
    provided insurance, Social Security benefits, and
    income and assets

15
Estimating Your LifeInsurance Requirements
The Wealthy Barber sez
  • Get out your Financial Statements
  • Use your Net Worth Statement to total your debts
  • Start with at least this much life insurance
  • The surviving spouse family will be debt-free
  • Create a second Cash Flow Statement without the
    persons income and without the person alive
  • This will tell you how much income the surviving
    family will need
  • Determine the principal needed to generate that
    income
  • Well learn this later when we get to investments
  • Add the first amount (debt) and second amount
    (principal) to get how much life insurance you
    need
  • By the way, the rule of thumb is 7 to 10 times
    your annual salary depending upon the level of
    debt

16
Types of Life Insurance Policies
  • Term life insurance The Only Type of Life
    Insurance!
  • Protection for a specified period of time
  • If you do not 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
  • If you are uninformed enough to actually buy a
    whole life policy

17
Types of Life Insurance Policies
(continued)
  • Whole life insurance (a.k.a. straight life,
    ordinary life, cash-value life, adjustable,
    variable, universal, etc. etc. etc. They keep
    changing the name! Why?)
  • 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 money
    earns It is almost always abysmal!

18
Types of Life Insurance Policies
(continued)
  • Whole life insurance (continued)
  • Every 5 to 10 years or so, the insurance industry
    changes the name of whole life insurance
  • Why? Because eventually consumers get hip to how
    they are being screwed
  • To confuse the issue, they just change the name
  • (Heaven forbid they stop selling the cursed
    things!)
  • The newest spin is permanent life insurance
  • Wouldnt you really rather have permanent whole
    life insurance instead of just temporary term
    life insurance?
  • Hint Do you have permanent car insurance?
  • How about permanent home insurance?

19
Whole Life Policy Options
  • 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
  • Such a deal! You overpaid for 30 years so that
    now you can have life insurance even though you
    dont need it any more!
  • Single payment policy
  • Allows someone to pay for the entire policy in
    one single payment
  • Popular form of compensation for some high-end
    executives

20
Whole Life Policy Options
(continued)
  • Variable life policy
  • A minimum death benefit guaranteed, but the death
    benefit can rise above it depending on yield of
    the dollars invested in a separate fund
  • Meant to give policyholders better returns (They
    lied)
  • Universal life
  • Lets you pay premiums in almost any amount
  • Combines term insurance and investment elements
  • Variable universal life
  • Combines the odious (uh, I mean, best) parts of
    both variable whole life and universal whole life

21
Term versus Whole Life
  • Review
  • Term life insurance
  • Life insurance without a savings component
  • Whole life insurance
  • Life insurance with a savings component

So what is the big deal, Paiano? If the
insurance company is offering to provide you with
life insurance and a savings plan, why not let
them?
22
Term versus Whole Life
(continued)
  • 500,000 Term Life Insurance Policy
  • 32-year-old male, preferred
  • 20-year term life policy
  • 250 per year
  • 500,000 Whole Life Insurance Policy
  • 32-year-old male, preferred
  • 250 per month!

Starting to see the difference yet?
23
Term versus Whole Life
(continued)
  • If a company came up to you and said,
  • To save at our institution, you must buy life
    insurance. You must pay for it even if you dont
    need it. Well take everything you deposit in
    the first few years for ourselves. In future
    years, well charge you to deposit money into
    your savings account. You can borrow the money
    at any time, but well charge you interest. If
    you happen to die while this loan is outstanding,
    well decrease the amount we were to pay your
    beneficiaries by the outstanding amount of the
    loan. If you dont borrow from this account and
    you die, well pay the beneficiary the face
    amount of the policy well keep your savings
    for ourselves. Oh, and finally, we dont offer
    the greatest rates of return. Usually between 1
    and 2.
  • Paraphrased from The Wealthy Barber

See any difference yet?
24
Term versus Whole Life
(continued)
  • Insurance companies are regulated by the states
  • For the last 50 years, virtually every Insurance
    Commissioners Office in every state has publicly
    stated that term life insurance is a better deal
    for consumers than whole life insurance
  • Virtually every consumers group recommends term
    life insurance over whole life insurance

How bout now?
25
Term versus Whole Life
(continued)
  • Buy Term and Invest the Difference
  • But Mr. Insurance Salesperson will tell you
  • But with our whole life policy, you get Forced
    Savings. Most people dont have the discipline
    to Buy Term and Invest the Difference. Even
    with the best of intentions, they will not do
    it.
  • Nonsense!
  • If you have the discipline to make the payments
    to the life insurance company, surely you have
    the discipline to make the payments to your own
    savings or investment plan!
  • Use an automatic contribution from your checking
    account

26
Term versus Whole Life
(continued)
  • So do you see why we call term life insurance,
  • The Only Type of Life Insurance?
  • It does not matter which type you buy, you are
    still paying for protection for your dependents
    in the event of your death
  • With term life, you are only paying for that
    protection
  • With whole life, you are paying far more for that
    protection plus you are being tapped for an awful
    savings plan that you may not even get to use
  • Lastly, if you do invest the difference, by the
    time you are nearing retirement, you will not
    need life insurance any more You will be
    self-insured!

27
Types of Policies Issued Surprised?
2012 American Council of Life Insurers Fact Book
www.acli.org
28
Amount of Insurance Issued
2012 American Council of Life Insurers Fact Book
www.acli.org
29
Huh? I Do Not Understand
  • The number of whole life policies is far greater
    than the number of term life policies
  • Mostly because life insurance salespersons get
    far greater commissions from whole life
  • But the amount of insurance in force for term
    life is far greater than whole life
  • Because term life is far less expensive than
    whole life, you can buy the amount you actually
    need

So after the insurance agent convinces the poor
slob that she needs whole life, the agent sells
her far less insurance than she needs because the
poor slob can not afford to pay the huge premiums
for the amount of insurance her family really
needs! Personally, I believe this behavior
should be criminal because if the poor slob
actually dies, her family suffers. Whole Life
Illustration
30
Other Types of Life Insurance Policies
  • Group life insurance
  • Always term insurance
  • Often provided by an employer or professional
    association Usually a very good deal (not
    always)
  • Sometimes free (SWC employees get 50,000)
  • No physical is required
  • Credit life insurance
  • Debt is paid off if you die
  • Mortgage, car, furniture, credit cards
  • By the way, it protects the lenders What?!
  • Very expensive protection Do not buy it
  • Accidental Death or Double Indemnity
  • Is he dead? Oh, how sad How did he die? Good!

31
Life Insurance Contract Provisions
  • Name your beneficiary and contingent
    beneficiaries
  • Update it when necessary (example divorce)
  • Suicide clause during first two years
  • Misstatement of age provision
  • Accelerated benefits, viatical settlements
  • Waiver of premium disability benefit
  • Loan provision
  • Premiums paid from cash value
  • (Whole life policies for uninformed people)
  • Return of Principal for Term Life policies
  • Sometimes a good deal, usually not

32
Choosing Your Insurance Agent
  • Life insurance is sold, not bought
  • Get a good referral
  • Is the person willing to take the time to answer
    your questions and find a policy that is right
    for you?
  • Are they available when needed?
  • Do they ask about your financial plan?
  • Do you feel pressured?
  • Most importantly, are they still trying to sell
    you whole life when you have already told them
    three times that you want term life insurance?

33
Obtaining and Examining a Policy
  • 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
  • (Whole life policies for uninformed people)
  • Give your beneficiaries and your lawyer a
    photocopy

34
Choosing Settlement Options
  • Options are the choices for how you want the
    money paid out
  • Lump-sum payment is most common
  • Almost always the best choice
  • 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
  • Pays interest to the beneficiary

35
Payment of Insurance Benefits
  • No matter what the life insurance company says,
    Take The Lump Sum and Invest It!
  • Leave a letter of instruction if you are the
    insured
  • By the end of this class, you will have a
    rudimentary knowledge of investments that will
    give you a rate of return that is at least 2 to 5
    times better than anything the life insurance
    company will offer you
  • The life insurance companies love to prey upon
    the surviving spouse
  • Well give you an income for the rest of your
    life
  • Well screw you for the rest of your life

36
Should You Switch Policies?
  • Switch a term life policy if the benefits exceed
    costs of getting another physical, paying
    policy set up costs
  • Are you still insurable? Dont cancel the old
    policy until the new policy is in force

Normally, the only reason people switch whole
life policies is because a life insurance
salesperson convinced them to switch. Why did
they want them to switch? Because if they were
uninformed enough to buy a whole life policy in
the first place, theyre probably uninformed
enough to switch to another policy. And the
salesperson gets a ton of new commissions!
Several years ago a few insurance companies got
into hot water for pushing elderly folks to
switch policies.
37
Financial Planning with Annuities
  • An annuity is a financial contract written by an
    insurance company that provides you with a
    regular income, often for the rest of your life
  • Further discussion of annuities will take place
    when we get to investments and retirement planning

While annuities are insurance products, they
really belong with investments and retirement
planning. We will revisit them in the next
chapter. The book includes a section on
annuities in this chapter because the insurance
companies often try to get the beneficiaries to
purchase an annuity with their life insurance
benefits instead of taking the lump sum.
(Usually a bad idea!)
38
The Bottom Line
Need Life Insurance?
Buy Term and Invest the Difference!
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