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Stock Agreement Life Insurance Protect Cash Value - DOC

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					 Chapter 10 - Financial Planning with Life Insurance


CHAPTER 10 LECTURE OUTLINE
 I. WHAT IS LIFE INSURANCE?
     A person joins a risk-sharing group by purchasing a contract. The insurance company promises to
      pay a sum of money at the time of the policyholder’s death in return for the insured’s agreement to
      pay it a sum of money (premium) periodically.
 The Purpose of Life Insurance
     Most people buy life insurance to protect someone who depends on them from financial losses
      caused by their death.
 The Principle of Life Insurance
     From records covering many years and including millions of lives, mortality tables have been
      prepared that show the number of deaths for various age groups during any year.
 How Long Will You Live?
 Life expectancy, shown in Exhibit 10-1, does not indicate the age at which a person has the highest
 probability of dying.

 Do You Need Life Insurance?
     If your death would cause financial stress for your spouse, children, parents, or anyone you want to
      protect, then you should consider purchasing life insurance.

 Estimating Your Life Insurance Requirements
     These are four general methods for determining the amount of insurance you might need.
      The easy method: A typical family will need approximately 70 percent of wage earner’s salary
        for seven years before it adjusts to the financial consequences of wage earner’s death.
      The DINK method: If you have no dependents and your spouse earns as much or more than you
        do, you have very simple insurance needs. All you need to do is ensure that your spouse will not
        be unduly burdened by debts should you die.
      Nonworking spouse method: To estimate how much life insurance a homemaker should carry,
        multiply the number of years before the youngest child reaches age 18 by $10,000.
      The family need method: The first three methods assume that you and your family are “typical”
        and ignore such factors as Social Security and rate of return on money that you may leave behind.


 II. TYPES OF LIFE INSURANCE COMPANIES AND POLICIES
 Types of Insurance Companies
    There are two types of insurance companies:
      stock life insurance companies owned by stockholders generally sell nonparticipating policies.
      mutual life insurance companies, owned by their policyholders, usually sell participating
          policies.
    There has been long and inconclusive debate on whether stock companies or mutual companies offer
     the least expensive insurance.
 Types of Life Insurance Policies
    Exhibit 10-2 shows common types of policies issued by life insurance companies.


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Chapter 10 - Financial Planning with Life Insurance


Term Life Insurance
   Term life insurance is protection for a specified period of time, usually 1, 5, 10, or 20 years or up to
    age 70.

       Renewability option: term insurance can be continued if you have a renewable option.
       Conversion option: if you have convertible term insurance you can exchange it for a whole life
        policy.
       Decreasing term insurance: term insurance is available in a form that pays less to the beneficiary
        as time passes.

Whole Life Insurance
   The most common type of permanent life insurance is the whole life policy (also called a straight life
    policy or an ordinary life policy) in which you pay a specified premium each year for as long as you
    live. Common features in a whole life policy are:
     Cash value is an amount that increases over the years and that you receive if you give up the
         insurance.

   Several types of whole life insurance policies have been developed to meet different objectives.
    Popular types are:
     Limited payment policy: you pay premiums for a stipulated period, but you remain insured for
       life.
     Variable life insurance policy: the cash values of variable life insurance fluctuate.
     Adjustable life insurance policy: you can change such a policy as your needs change.
     Universal life: a policy that combines term insurance and investment elements. Universal life is
       actually a more flexible version of whole life insurance.

Other Types of Life Insurance Policies
      Group life insurance covers a large number of people under a single policy.
   Credit life insurance is used to repay a personal debt should the borrower die before doing so.
     Endowment life insurance provides coverage for a specific period of time and pays an agreed-
       upon sum of money to the policyholder, if he/she is still living.
III. SELECTING PROVISIONS AND BUYING LIFE INSURANCE
Key Provisions in a Life Insurance Policy
 Here are some of the most common provisions:
Naming Your Beneficiary
   A beneficiary is a person who is designated to receive life insurance proceeds from someone.
Incontestability Clause
   Incontestability Clause is a provision stating that the insurer cannot dispute the validity of a policy
    after a specified period.
The Grace Period
   The grace period allows 28 to 31 days to elapse, during which time the premium may be paid without
    penalty.




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Chapter 10 - Financial Planning with Life Insurance


Policy Reinstatement
   A lapsed policy can be put back in force—reinstated—if it has not been turned in for cash.
Non-forfeiture Clause
   This clause prevents the forfeiture of accrued benefits if you choose to drop the policy.
Misstatement of Age Provision
   If the company finds out that the insured’s age was incorrectly stated, it will pay the benefits that the
    insured’s premium would have bought if his or her age had been correctly stated.
Policy Loan Provision
       A loan from the insurance company is available on a whole life or endowment policy after the
     policy has been in force for specified years
Suicide Clause
A suicide clause is a provision stating that if the insured dies by suicide, the death benefit will equal the
amount of the premium paid.
Riders to Life Insurance Policies
 A rider is a document attached to a policy that modifies its coverage.
    waiver of premium disability benefit
    accidental death benefit
    guaranteed insurability option
    cost of living protection
    accelerated benefits
    second-to-die option
Buying Life Insurance
In buying your life insurance, consider your present and future sources of income, other savings and
    income protection, group life insurance, group annuities, and Social Security.


From Whom to Buy?
 Buy insurance coverage from financially strong companies with professionally qualified
  representatives.
   Sources. Protection is available from a wide range of private and public sources. (insurance
      companies, employers, labor unions, professional organization, Medicare and Social Security,
      and other financial institutions)
   Rating insurance companies. Exhibit 10-5 describes the rating system used by A.M. Best and the
      other big four rating agencies.
   Choosing your insurance agent. Agents who belong to a local Life Underwriters Association are
      often among the more experienced agents.
Comparing Policy Costs
 The price of life insurance policies varies considerably among life insurance companies. Ask your
  agent to give you interest-adjusted indexes.
Obtaining and Examining a Policy
   The insurance company determines your insurability by means of information in your application, the
    medical examination, and the inspection report.



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Chapter 10 - Financial Planning with Life Insurance


   Read every word of the contract and, if necessary, ask your agent for point-by-point explanation of
    the language.
   You have a 10-day “free-look” period.
Choosing Settlement Options
   The most common settlement options are lump-sum payment, limited installment payment, life
    income option, and proceeds left with company.




Switching Policies
If you already own whole life insurance, think twice if someone suggests that you replace it.


IV. FINANCIAL PLANNING WITH ANNUITIES

   An annuity is a financial contract written by an insurance company to provide you with a regular
    income. As a general rule, annuities are not advisable for persons with poor health.
Why Buy Annuities?
   A prime reason for buying an annuity is to give you retirement income for the rest of your life.

Tax Considerations
 The interest on the principal, as well as the interest compounded on that interest, builds up free of
   current income tax.
    With an annuity, there is no maximum annual contribution.




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