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Financial Planning Project: Life Insurance
Transcript of Financial Planning Project: Life Insurance
To hire childcare to replace a home-maker's contribution
For estate protection
For mortgage protection
To fund a retirement
To protect a business against the loss of a key employee
As an employment benefit. What is the Purpose of Life Insurance? A beneficiary is the person or entity you designate to receive the proceeds (death benefit) from your life insurance policy. You can name a single beneficiary or multiple beneficiaries: one person, two or more people, a business, a trustee, a charity or your estate. Should you elect to have multiple beneficiaries, you can decide how the proceeds will be split between them. Your life insurance policy is meant to provide a safeguard between your family and the expenses that will be incurred upon your death. It will not make them any less upset, however it could provide them with a barrier between the expenses incurred upon your death and the continuation of their lives. It will allow them time to grieve and hopefully move on without needing to worry how far the next paycheck will stretch or how long the savings will hold out. Who is Life Insurance Meant to Benefit? Term Life Insurance requires fixed payments on a fixed schedule and provides coverage for a fixed duration (e.g. 10 years). The policy only pays a death benefit if the insured individual dies before the policy expires. Premiums are usually much lower for Term life insurance compared to whole life insurance.
Term life provides funds for people who depend on you for financial support.
Creates an estate to leave to your heirs, if you haven’t had a chance to build much wealth.
Level term life insurance premiums remain the same for the term of the policy. So, 20 year level term means your premiums stay the same for 20 years.
Provides the maximum life insurance protection for your dependents at the lowest cost.
Provides affordable life insurance protection to fit almost any budget.
Many term life policies offer you the option to convert your coverage to whole life insurance by some future date, (without having to prove insurability – taking a medical exam). Advantages Disadvantages If you outlive your term insurance policy, your premiums to buy a new policy will be much more expensive.
If you do convert your term insurance to whole life – your premiums will be much higher for the same amount of coverage.
Premiums usually increase with age, unless you buy level term life insurance.
When your policy expires, you may not be in good health, and unable to qualify for another life insurance policy at that time. What is a Beneficiary? Whole Life Insurance Universal Life Insurance requires fixed payments on a fixed schedule. These policies guarantee coverage up to a certain age (usually 100 years of age). These policies guarantee a death benefit, so even if the insured individual outlives the policy, a death benefit will still be paid. These policies carry cash value, which means that they can be liquidated. allows payments of any amount at any time (up to certain government-stipulated maximums). Coverage from these policies can be maintained indefinitely. These policies carry cash value, which means that they can be liquidated Permanent Life Insurance Advantages Permanent life insurance is a policy that will be on-going for the rest of your life
Flexible payments means you will be putting money into it either all at once, in a single lump payment, or every month
The money you put into a permanent life insurance policy accrues and earns interest, either through a rate offered by your insurance provider, or from interest earned by the cash value of your permanent life insurance being invested in something like the stock market
You can start accessing the cash value of your permanent life insurance policy once it builds value
A great way to plan for retirement Disadvantages The biggest disadvantage to a permanent life insurance policy is the cost
You may already have outside retirement investments linked to the stock market Permanent Life Insurance Differences b/w Types Of Life Insurances T
M term covers you for the possibility of you dying during the term period.
A term life policy is sometimes renewable (you can keep it but at a price that reflects your older age). At some point, as you get older, term goes up in price and may become too expensive for you to keep. W
E Whole life guarantees the death benefit for life, guarantees the cash value and guarantees the premium – period. Universal life insurance assumes an interest rate and the cost of insurance and comes up with a projected premium. If the insurance companies’ projections on their universal life policy do not come through, then you may have to come up with higher premiums later, have lower than expected cash values or even lose the policy U
L Death Benefit: A payment or series of payments made to a life insurance policy's beneficiaries upon the death of the policy's insured individual(s). The term "face value" in life insurance refers to the death benefit that is paid to beneficiaries upon the death of the insured. Face Value: An interest-bearing savings account included in permanent life insurance policies. Cash Value: When you own cash value life insurance, your premium payments are allocated three ways. First, a portion of each premium pays for the actual insurance costs. Like term insurance, a specific cost is associated with the policy's death benefit, based on your age, health, and other underwriting criteria. Second, a portion pays for the insurance company's operating costs and profits. The remainder goes toward the policy's cash value. How Does It Work? Policy Cancellation Upon, cancellation of a permanent life insurance policy the policyholder will recieve the cash value accumulated until that point.However, upon the cancellation of a term policy one does not recieve any money. Factors to be Considered to Determine the Amount of Coverage Needed The first step toward representing your best interests entails an in-depth discussion of how much life insurance you might or might not need. The formula is Future Financial Needs minus Current Assets equals Your Current Risk. How much you want to provide for your loved ones should you predecease them (A) minus how much you have that could be used to provide for the survivors (B) equals your surplus or shortage (C).
To the extent that a gap exists between your financial needs and your current assets, life insurance is the most efficient product available to provide tax-free dollars exactly when you need them. As you go through the life changes of marriage, children, and career, you should recalculate your need and revisit the life insurance you own. When members of a young family are making a decision about life insurance, six line items are significant.
1. Debts: The baggage of debt makes the journey toward financial success difficult. Avoid debt if possible, but if you have any, don't burden your family with it after you are gone. Being able to liquidate all credit card debt and car, home equity, and personal loans will give your surviving family the best chance at success in life.
2. Mortgage: Carrying a long-term fixed-rate mortgage keeps more money invested in the markets and qualifies you to enjoy a tax deduction on the interest. Leverage is a popular financial strategy of the rich. But if you would sleep better at night without a mortgage, sleep is more important. Either way, you need enough insurance or investments to pay off the mortgage.
3. Educational and child-care expenses: Depending on the age of your children, multiple expenses must be considered. If your children are preschoolers, the cost of child care may make it impractical for the surviving spouse to return to work. Consider the math. When the children are school age, will you want them to attend private school? Call the schools in your area and work the numbers. What percentage do you want to help with college? In-state tuition, room, board, books and transportation for college presently averages $6,185 annually. Private schools cost about $23,712 per year. Which do you want to fund?
4. Final expenses: Include a small amount for your funeral, approximately $10,000. The average funeral today costs $5,000 to $7,000, but expenses can exceed $10,000.
5. Family income: Estimating a young family's income needs is very challenging. To ease the mental strain, use seven times your adjusted gross income as a rule of thumb. A more accurate prediction requires either a financial calculator or a computer program.
6. Emergency fund: No one can forecast the exact amount a surviving family will actually need, but this category does absorb a potential miscalculation. Most gaps are filled by using 10% of the total of the other five line items: debts, mortgage, education, final expenses and family income. Now that you have an estimate of how much your family needs, compare the total with your current assets. Include only the assets the surviving spouse can use for expenses. So do not include your house because your spouse needs someplace to live; your car because transportation is essential; or your retirement assets, which the surviving spouse will need during retirement. Nor should you count any inheritance. The old adage is true: Don't count your chickens before they hatch. This category is the total of your current life insurance and all investment assets.
The easiest math remains: Your Total Future Financial Needs minus Your Current Assets equals The Current Risk you may want to insure against. To determine how much life insurance the other spouse should carry, trade places as the first to die and rerun the numbers. Clearly, if the bottom line is positive, you've done something right and either you have enough life insurance or you are self-insured. Congratulations. If the bottom line is negative, thankfully you still have time to take action. Financial planning is a lifelong process that covers multiple areas, including investments, insurance and taxation. Reviewing all of your financial affairs periodically with a trustworthy advisor who sits on your side of the table will ensure that you achieve your financial goals. The End