Session 8- Life Insurance

8/8/2019 Session 8- Life Insurance

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Lecture -8

Life Insurance


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An Introduction to Life Insurance

Life insurance - Purchase policy; insurancecompany promises to pay a lump sum atthe time of the policy holders death, orsometimes while they are still alive.

Purpose of life insurance: Protect someonewho depends on you from financial lossrelated to your death. Other reasons are.

To leave as part of your estate. To save money for retirement or for income

or education for children.

To pay off a mortgage or debts at the time

of death. 12-2


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The Principle of Life Insurance

Mortality tables provide odds on yourdying, based on your age and sex.

Your premium is based on your life

expectancy and the projections for thepayouts for persons who die.

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Determining Your Life Insurance

Needs - Ask Yourself...

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 yourdependents should you die today?

When do you want to retire, and what incomedo you think youll need?

How much will you be able to pay for yourinsurance program?

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Estimating Your

Life Insurance Requirements

The Easy Method.

You will need 70% of your annual salary forseven years while your family adjusts.

The DINK (dual income, no kids) Method. The Nonworking Spouse Method.

Multiply the number of years until the youngestchild reaches 18 by average annual expenses

The Family Need Method. More thorough than the first three because it

also considers employer provided insurance,Social Security benefits, and income andassets.

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Family need method

1) 5 times your annual income

2) Total approximate expense (beyond daily

living cost)

3) Emergency fund(3-6 monthsof living exp)

4) Estimated exp for your last rites

5) Total estimate of family needs =

1+2+3+4

6) liquid assets(bank,money market

bal,existing insurance plans, pension

plans -value till date)


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Types of Life Insurance Policies

Term life insurance.

Protection for a specified period of time.

If you stop paying premiums, coverage stops.

Lowest premium plain vanilla scheme.

Decreasing term insurance: Premium stays the

same, but the amount of coverage decreases as

you age.

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Advantages of Term Life

Pay down the mortgage or loan if

spouse dies

Enable to continue the business where

insurance is taken up on the partners ina firm.

Provide lumpsum amount to the family

in case of death of the insured After the term ends ( if you oulive the

term)- you get tax free lump sum

amount.


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Types of Life Insurance Policies

Whole life insurance - Also called straight

life.

You pay a premium as long as you live.

Amount of premium depends on your agewhen you start the policy.

Provides guaranteed death benefits and

accumulates a cash value.

You can borrow against the cash value ordraw it out at retirement.

Look carefully at the rate of return your money

earns.

(continued)

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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.

The premiums will never increase.

Client can surrender the policy at any time andreceive current cash value.

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Whole Life Policy Options

Advantages:

Whole life insurance policy, but you can

change your policy as your needs change.

You can change your premium payments to

increase or decrease coverage.

Estate creation

Universal life is permanent insurance with

tax sheltered investment portion. Can pay premiums at any time in almost any

amount. Amount of insurance can be

changed more easily than a traditional policy.

The increase in the cash value of the policy

(continued)

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Other Types of Life Insurance Policies

Group life insurance.

Term insurance.

Often provided by an employer.

Credit life insurance.

Debts such as car loan is paid off if you die.

Also protects lenders.

Expensive protection.

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Life Insurance Contract Provisions

Naming your beneficiary, and contingentbeneficiaries.

Length of grace period for late payments.

Reinstatement of a lapsed policy if it has

not been turned in for cash. Nonforfeiture: Keep accrued benefits if you

drop the policy.

Incontestability clause: After the policy has

been in force for awhile (3 years), thecompany cant dispute its validity for anyreason.

Suicide clause during first two years.

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Automatic premium loans. Uses the accumulated cash value to pay the

premium if you do not pay it during the graceperiod.

Policy loan provision to borrow againstcash value.

(continued)

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Waiver of premium disability benefit.

Accidental death benefit - double

indemnity.

Guaranteed insurability option.

Cost of living protection.

Accelerated benefits, also called living

benefits, pay to those who are terminally illbefore they die.

Second-to-die option, also called

survivorship, insures two lives.

(continued)

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Buying Life Insurance

Look at your present and future sources ofincome, other savings and incomeprotection, group life insurance, pensionbenefits, and Social Security benefits.

Determine from whom to buy your policy. Examine both private and public sources.

Look up the companys rating,

Talk to friends or colleagues. Research ratings on the web,

.

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Buying Life Insurance

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

insurance companies.

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(continued)


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Obtaining and Examining a Policy

1) Apply.

2) Provide medical history.

3) Usually no physical for a group policy.

4) Read every word of the contract. After you buy it, you have ten days to

change your mind.

6) Give your beneficiaries and lawyer a

photocopy.

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Choosing Settlement Options

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.

Pays interest to the beneficiary.

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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 thepremium will be.

Are you still insurable?

Can you get all the provisions you want?

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Financial Planning with Annuities

Annuity: Financial contract written by aninsurance 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.

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Session 8- Life Insurance

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Transcript of Session 8- Life Insurance