Unit 6Insurance: Protecting What You Have

Part IVLife Insurance

Resources: NEFE High School Financial Planning Programhttp://money .cnn.com/magazines/moneymag/money101/lesson20/index.htm

What is Life Insurance?

Life Insurance provides financial support for the people who depend on you in the event of your untimely death.

Who needs life insurance?

Anyone who has someone, like a spouse, children, an elderly parent, etc, who depends on your income in order to survive financially.

Types of Life Insurance

Whole Life Insurance – a type of permanent insurance policy that combines life insurance coverage with an investment fund

– Part of the premium goes to a fixed amount of life insurance– The other part of the premium goes into an investment fund

that build cash value tax-deferred as long as it is kept in the fund

The policy holder can borrow money from the fund without being taxed

– The amount you pay usually does not change through the life of the policy.

Types of Whole Life Insurance

Universal Life – a type of permanent life insurance that combines insurance with a money market type investment that pays a market rate of return. These policies do not generally pay a certain rate.

Variable Life and Variable Universal Life Insurance – permanent policies with an investment fund tied to a stock or bond mutual fund investment. Returns are not guaranteed.

Term Insurance

Term Insurance– Has no investment component– Lasts for a set period of time as long as you pay your

monthly premium– Annual renewable term is purchased year by year– Very cheap to purchase when you are young– As you get older, premiums to purchase steadily increase– Level-premiums terms have somewhat higher, but fixed

premium for longer periods ranging from 5 to 30 years

Strategies for Getting the Right Policy

Insurance sales persons work almost entirely on commission

Whole life commissions can be as much as 80% of the first years premium

Premiums for whole life can be as high as 5 times the price of term policies

Typical term policy commissions is about 10% The vast majority of those who need insurance

should buy term.

Strategies for Getting the Right Policy

Price – 40 year old non-smoking male can get a

$500,000 policy for about $500 a year– 30 year old healthy non-smoking woman can get

a $500,000 for about $260 a year

Whole Life Insurance

Advantages– Can keep for the rest of your

life– Can build cash in them tax-free– Can borrow money from them

Disadvantages– Very expensive– Very high fees and

commissions– Surrender charges build into

the policy (if you want to cancel the policy) which leaves you with almost no money in the policy often even after 10 or 15 years

– There are better ways to build tax-free money through IRA’s and other investment vehicles which offer high yield and complete portability

How Much Coverage Do You Need?

No simple answers, but here are some suggestions– Enough to replace 5-7 years of your salary– If you have children enough to replace at least 10

years of your salary Example – a person making $50,000 a year should have

between $250,000 and $500,000 or more worth of coverage

How Much Coverage Do You Need?

Purpose of life insurance is to allow the dependents to maintain their current life style if you die. Consider…

– Will the surviving spouse have additional childcare expenses with you not their?

– Do you have other assets to draw from?– Will your children be on their own soon?

It is usually better to buy a little more rather than not enough life insurance to make sure that your dependent are taken care of in the manner that you want them to be.

How Long A Term?

You don’t need life insurance for your whole life.

You would want to cover your children until they are at least 22 and out on their own.

You would probably want to cover your spouse until at least retirement age, 65 or so.

It is very difficult and even unattainable to get term covered past age 70

Retirement and Life Insurance

Life insurance is not a substitute for retirement Life insurance may be needed later in life if, for

example,…– You start a family later in life– You have complex estate planning issues

Do not buy mortgage insurance policies which pay off he balance of your mortgage if you die. Include these payments in the amount you need for your term policy.

Health

Life Insurance is hard to obtain if you not in good health.

If you are grossly overweight or take heart medication, you may pay 50 percent more than preferred rates.

Health

Other factors that increase life insurance rates– Smoking– Risky occupation– Risky sports like skydiving

Shop around for your policy Underwriting = how a company estimates the risk of

your condition to get insurance Internet and phone quote services are not set-up to

deal with nonstandard policies

Health

Insurance company do require medical tests in order to quality for insurance and in order to make sure that the insurer is aware of as much risk as possible.

Why Tell the Insurance Company Negative Information?

Insurers may investigate suspicious claims and if they find that you lied, the claim may be denied or your heirs can be tied up in court for years.

Good idea to get a policy early in life when you are still in good health, but it does not make sense to buy one until you have dependents.

Websites for Life Insurance

Places to look for life insurance– Insure.com

Quotes from 90 companies Details on policies Ratings on insurers from A.M. Best

– Insweb Good worksheets and advice Save quotes for later retrieval Lists 800 number

– Accuquote 1,600 plus policies in its database Need to fill out lengthy form to get a quote The site is an independent service

Things to Know About Life Insurance

All policies are either term policies or pure insurance coverage. Whole life has many variants which combine investment and insurance.

Insurance is sold not bought. The insurance industry has a vested interest in selling whole life policies due to high commissions and high profits.

Things to Know About Life Insurance

Whole life is expensive and has significant surrender charges,

Keep your investing and insurance strictly separate. Buy enough coverage to fill your needs. Rates are

at a historical low. Match the term of the policy to your needs. Be

aware of the factors that effect the term that you should choose.

Things to Know About Life Insurance

Buy when you are healthy, but don’t buy until you have dependents.

Tell the truth. It does not pay to lie to the insurer because you claim can later be denied because of the lie.

Use the web to compare and research. You can get a ton of quotes and avoid the pushy sales people.