Bài giảng Personal Financial - Chapter 10: Financial Planning With Life Insurance

10 Financial Planning With Life InsurancePrimary Purpose of Life Insurance:Protect someone who depends on you from financial loss related to your deathReduces financial burdens of survivors Life insurance:Obtained by purchasing a policyThe insurance company promises to pay a lump sum (death benefit) to a named beneficiary at the time of the policy holder’s death (or sometimes while they are still alive)10-*1Objective 1Define Life Insurance and Determine Your Life Insurance NeedsOther reasons to buy life insurance:Pay off a mortgage or debtsLump-sum endowments for children Provide an education or income for childrenMake charitable donationsProvide retirement incomeAccumulate savingsEstablish a regular income for survivorsSet up an estate plan (e.g., fund trusts with life insurance)Pay estate and gift taxes (e.g., business owners)10-*2The Principle of Life InsuranceMortality 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 soonerFace 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 individuals10-*3Do 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-*4Estimating Your Life Insurance RequirementsThe Easy Method70% of your salary for seven years while your family adjustsAssumes typical familyThe DINK MethodDual income, no kidsAssumes spouse earnings will continueCover funeral + ½ debtsThe “Nonworking” Spouse Method# years until the youngest child reaches 18 X $10,000The “Family Need” MethodMore thorough than the first three methodsConsiders employer provided insurance, Social Security benefits, income and assets10-*5Objective 2Distinguish Between the Types of Life Insurance Companies and Analyze Various Types of Life Insurance Policies These Companies Issue2 Types of Life Insurance CompaniesType of CompanyOwned byStock life Insurance ShareholdersMutual life insurancePolicyholders10-*6Stock Life Insurance CompaniesOwned by the shareholders95% are of this typeSell non-participating (non-par) policiesIf you want to pay the same premium each year  choose a non-participating policy with guaranteed premiumsConsider the financial stability of the insurance company10-*7Mutual Life Insurance CompaniesOwned by the policyholders5% of policies are from this type of companyParticipating 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 dividend10-*8Term Life Insurance Term LifeProtection for a specified period of timeAt the end of term (or if you stop paying premiums), coverage stopsMany types:Renewable Term- can renew; higher premium chargedMultiyear Level Term- same premium for set periodConversion Term- allows change to permanent policyDecreasing Term- face value decreases over timeReturn-of-Premium Term- can get premium back10-*9Whole Life Insurance Straight-Life or Whole-Life InsurancePay the premium as long as you liveAmount of premium depends on age when you start the policyProvides death benefits Accumulates a cash value you can borrow against or draw out at retirementLook carefully at the rate of return your money earnsTypes:Limited Payment PolicyYou pay premiums for a stipulated periodPolicy then “paid up” and you remain insured for lifeVariable Life Policy- Fixed premiums; investment accountsAdjustable Life Policy- Can change coverage with needs Universal Life- Can change premium, time period, benefit10-*10Comparison of Premium Dollars for Life Insurance11Other Types of Life Insurance Policies Group life insuranceTerm insuranceOften provided by an employerNo physical is requiredCredit life insuranceDebt paid off if you dieMortgage, car, furnitureAlso protects lendersExpensive protection (usually overpriced)Endowment Life Insurance- pays policyholder a lump sum if still living at end of the endowment period 10-*12Key Provisions in a Life Insurance PolicyNaming your beneficiary and contingent beneficiaries (those who will receive benefits upon the insured’s death)Incontestability clause  after the policy has been in force for a specified period, the company can’t dispute its validity for any reason (usually 2 years)Length of grace period for late paymentsReinstatement 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 policyMisstatement of age provision (benefits paid on real age)Policy loan provision to borrow against cash valueSuicide clause during first two years (only get back premiums)Policy rider modifies the coverage by adding or excluding conditions or altering benefits10-*13Key Provisions in a Life Insurance PolicyLife Insurance Policy RidersWaiver of premium disability benefitAccidental 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 spouse10-*14Choosing Settlement Options Settlement Options = choices of how the insurance money is paid outLump-Sum Payment = most common methodLimited Installment PlanIn equal installments for a specific number of years after your death (10-year certain)Life Income OptionPayments to the beneficiary for lifeProceeds Left with the CompanyPays interest to the beneficiary10-*15Buying Life Insurance Consider:Present and future sources of incomeOther savings and income protectionGroup life insurancePension benefitsSocial Security benefitsFinancial strength of the insurance company10-*16Buying Life InsuranceDetermine from whom to buy your policyExamine both private and public sourcesResearch the company’s rating by major rating companies:A. M. BestStandard and Poor’sDuff & PhelpsMoody’sWeiss ResearchTalk to friends or colleaguesOnline premium quote services10-*17Choosing an Insurance AgentAsk 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-*18Buying Life InsuranceCompare policy costs based on:Company’s cost of doing businessReturn on company’s investmentsMortality rate among policyholdersPolicy features Competition from other firms Interest-adjusted index Used to compare policy costsLower index = lower cost policySee sites such as www.quotesmith.com10-*19Obtaining and Examining a PolicyFirst step = applySecond step = provide medical historyUsually no physical for a group policyRead every word of the contract10-day “free-look” period to change your mindGive your beneficiaries and lawyer a photocopy10-*20Should You Switch Policies?Switch if benefits exceed costs of getting another physical and paying policy set-up costsThe older you are, the higher the premiumAre you still insurable?Can you get all the provisions you want?Don’t cancel old policy until new policy is in hand10-*21Objective 4Recognize How Annuities Provide Financial SecurityFinancial Planning with AnnuitiesAn annuity = a financial contract written by an insurance company, providing a regular incomeCan supplement retirement income and shelter income from taxes (tax-deferred)Those who expect to live longer than average benefit most from annuitiesFully fund IRAs and 401(k)s/403(b)s BEFORE considering an annuity (lower costs and tax advantages)10-*22Why Buy Annuities?Provides retirement income for lifeCompounded interest grows tax-free (until money withdrawn)No maximum annual contribution (like IRAs)Beneficiary guaranteed no less than amount paid inImmediate annuity or deferred annuityTwo TypesFixed Annuity Annuitant receives fixed amount for lifeVariable Annuity Amount received depends on investment performance10-*23Wrap UpChapter QuizCase Study Project DiscussionForm groupsSelect casesHomework: Concept Checks 10-1, 10-2 (True/False Questions)24