Personal finance 6th madura chapter 13 life insuarance

Personal Finance

SIXTH EDITION

Chapter 13
Life Insurance

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Chapter Objectives (1 of 2)
13.1 Provide a background on life insurance
13.2 Describe the types of life insurance that are available
13.3 Identify the factors that influence insurance needs
13.4 Review the contents of a life insurance policy

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Chapter Objectives (2 of 2)
13.5 Discuss how to select a life insurance company
13.6 Explain how life insurance fits within your financial plan

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Background on Life Insurance (1 of 2)

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Life insurance: insurance that provides a payment to a specified beneficiary when the

policyholder dies

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Role of life insurance

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Maintain financial support for dependents
Leave money for heirs

Psychology behind the life insurance decision

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Easier to focus on happy events

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Hard to pay ongoing premiums for benefit you might not need

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Background on Life Insurance (2 of 2)

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Role of life insurance companies

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Help clients determine the type and amount of insurance they need

Applying for life insurance

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Application includes medical and lifestyle history

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Types of Life Insurance (1 of 13)

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Term insurance: life insurance that is provided over a specified time period and does
not build a cash value

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Premiums on term insurance

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Paid monthly, quarterly, semi-annually or annually

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Types of Life Insurance (2 of 13)

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Determinants of term insurance premiums

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The longer the term, the higher the premium
The older the policyholder, the higher the premium
The greater the amount of insurance coverage, the higher the premium
Premiums higher for males than females
Premiums higher for smokers
Premiums higher for those with medical problems

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Types of Life Insurance (3 of 13)

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Types of Life Insurance (4 of 13)

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Types of Life Insurance (5 of 13)

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Types of Life Insurance (6 of 13)

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Types of Life Insurance (7 of 13)

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Reviewing premiums on term insurance using the Internet

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www.insure.com
www.insweb.com
Go to the finance section of Yahoo.com and insert the search term “insurance quotes”
By shopping online you can obtain quotes without being subjected to a sales pitch

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Types of Life Insurance (8 of 13)

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Decreasing-term insurance: a form of term insurance in which the benefits that will be paid to
the beneficiary are reduced over time and the premium remains constant

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Mortgage life insurance: life insurance that pays off a mortgage in the event of the
policyholder’s death

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Types of Life Insurance (9 of 13)

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Group term insurance: term insurance with generally lower than typical premiums that is
available to people within a defined group

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Commonly employee groups

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Financial Planning Online

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Go to
This Web site provides quotes from various insurance companies for a specific term
insurance policy based on information that you specify.

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Types of Life Insurance (10 of 13)

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Whole life insurance (permanent insurance): life insurance that continues to provide
insurance as long as premiums are paid; not only provides benefits to the beneficiary
but also has a cash value

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Types of Life Insurance (11 of 13)

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Whole life insurance premiums

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Can vary substantially, but influenced by the same factors as term insurance

Forms of whole life insurance

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Limited payment policy: allows you to pay premiums over a specified period but remain insured for life

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Types of Life Insurance (12 of 13)

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Comparison to term insurance

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Whole life has higher premiums
Whole life accumulates savings
Whole life premiums remain constant

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Types of Life Insurance (13 of 13)

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Universal life insurance: life insurance that provides insurance over a specified term
and accumulates savings for the policy holder over this time

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Variable life insurance: life insurance that provides insurance over a specified term and allows
policyholders to invest residual funds, after the term portion is paid, in various types of
investments

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Determining the Amount of Life Insurance (1 of 5)

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Income method: a method that determines how much life insurance is needed based
on the policyholder’s annual income

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For example, 10 times your annual income, so, using this method, a person with an annual
income of $40,000 would need $400,000 of life insurance coverage

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Easy, but doesn’t consider individual circumstances

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Determining the Amount of Life Insurance (2 of 5)

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Budget method (needs method): a method that determines how much life insurance is
needed based on the household’s expected future expenses

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Annual living expenses
Special future expenses
Debt
Job marketability of spouse

Value of existing savings

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Determining the Amount of Life Insurance (3 of 5)

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Using the Internet to determine your insurance coverage

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Limitations in estimating need

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Budget method doesn’t consider an unanticipated major illness or disability
Family income may not rise
Weak economic conditions impact income
Inflation could cause you to underestimate needs
Debt level could increase

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Determining the Amount of Life Insurance (4 of 5)

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Check out the Life Happens Needs Calculator app (by Life and Health Insurance
Foundation for Education)

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Search for “Life Happens Needs” app on your mobile device

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Helps compute the amount of life insurance you may need

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Determining the Amount of Life Insurance (5 of 5)

– Distinguishing between needs and dreams
 Decide what necessities must be covered for the household to survive
 Consider other preferences such as college educations for children

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Contents of a Life Insurance Policy (1 of 5)

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Beneficiary: person named to receive benefits of an insurance policy

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Grace period

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Living benefits: benefits that allow the policyholder to receive a portion of death
benefits prior to death

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