CH10: Financial Planning with Life Insurance Flashcards
Life insurance protects those who purchase _______
a policy
What is life insurance?
an agreement that the insurer will pay a lump sum to a named beneficiary at the time of the policy holder’s death
What is the purpose of life insurance?
protect someone who depends on you for financial loss related to your death
What can life insurance be used for?
paying mortgage, lump sum to children, children’s education, donations to charity, retirement income, savings, regular income for survivors, pay estate and gift taxes, set up estate
a __________ _________ provides the odds of your death based on age and sex
mortality table
If you are more likely to die, your insurance premium is _________
If you are less likely to die, your premium is ______
high, low
Life expectancy in 1900
Life expectancy in 2010
male: 46.3, 76.4
female: ?, 81.2
Do you need life insurance?
do people depend on you for income, single with a lot of debt, support family
the ‘easy method’
70% of your salary for 7 years
the DINK method
dual income, no kids; spouse makes as much or more than you do
funeral + half of debts
what are the 2 types of insurance companies
stock and mutual
Stock life insurance is owned by _______ and offers a _______ policy
shareholders, non-participating
Mutual life insurance is owned by ______ and offers a ______ policy
policy holders, participating
The dividends from stock insurance goes to the ______
shareholders
the dividends from mutual insurance goes to the __________
policyholders
Most life insurance companies are what type?
Stock
Policy holders with _______ companies pay higher premiums
mutual
what are the types of LI policies?
term, whole, group, credit, endowment
Term LI is ________
temporary
With ________ LI you pay the premium as long as you live; the amount is determined by…
whole; age when policy starts
Whole LI _______ cash value and provides ________
accumulates, death benefits
Options for whole LI
limited payment, variable, adjustable, universal
With limited WLI, premiums are paid _______ or until ________
for a stipulated time (20, 30 yrs); holder reaches a specified age (65)
With variable WLI, a minimum death benefit is _______
guaranteed
Universal WLI allows the most ______. The premium can be changed _________ without altering ______
flexibility; unlimitedly, coverage
Group LI
offered by employer; termed LI, no physical required
Credit LI
debts will be paid off if you die–also protects lenders; expensive
Endowment LI
coverage for a specific period of time that pays holder if alive at the end of the term
Key Provisions of LI
beneficiary and contingents; incontestability clause, length of grace period, reinstatement of lapsed policy, policy loan provision, suicide clause, policy rider
An incontestability clause prevents the issuer from _______ for any reason
disputing the policy
What is a policy rider?
modifies the coverage through exclusions and altering benefits
Examples of policy riders
waiver of premium disability benefit, accidental death benefit, guaranteed insurability option, cost-of-living protection, accelerated benefits, second-to-die option
What to consider when buying LI
present and future income, other savings, group LI, annuities and pension, Social Security, financial strength of financial institution
Examine _____ and _____ when looking to purchase insurance
private and public sources
Popular rating companies
AM Best, Standard and Poor’s, Duff and Phelps, Moody’s
Steps of obtaining a policy
apply, provide medical history, read contract (10-day look policy), give copy to lawyer and beneficiaries
Settlement options
lump-sum payment, life income
What is an annuity?
financial contract written by insurance company providing you with regular income
Uses for an annuity
supplement retirement, shelter income from taxes, longer life = more benefit
What should be funded before considering an annuity?
IRA, Keogh, 401(k)
Benefits of Annuity?
retirement income for life, compounded interest grows tax free until withdrawn, no max annual contribution, beneficiary guaranteed minimum amount
Types of annuities
immediate, deferred, index, fixed, variable
a ______ ______ will be applied to an annuity if withdrawn within a specified time period
surrender charge
A mortality and expense risk charge is ____ of account value
1.25%
Administrative fees on annuities
$25-30/yr, 0.25%/yr
Main difference between annuity and LI
annuity pays while alive, LI pays after death
With variable annuities, the monthly payments can _____ based on ______
vary; stocks and other investments
