This lesson focuses on the following topics:
•WHAT IS A LIFE INSURANCE POLICY?
•REASONS FOR PURCHASING LIFE POLICIES
•LIFE INSURANCE: AN ASSET
•ESTIMATING LIFE NSURANCE NEED



WHAT IS A LIFE INSURANCE POLICY?

In a life insurance policy, the most common event is the death of the person who is nsured—in which case the payment is made to the beneficiary. Depending on the type f policy, it sometimes may be the insured person attaining a certain age, or the owner equesting to surrender the policy for its cash value, or to take that cash value out in the orm of monthly payments for a set number of years of the insured's life.

REASONS FOR PURCHASING LIFE POLICIES:

People purchase life insurance for many reasons. Some of them are discussed here:

• Family protection :

To provide financial security to surviving family members upon he death of the insured.

• Insurance to cover a particular need :

Such as paying off a mortgage or onsumer debt upon the insured’s death.

• Business insurance :

To compensate a company on the death of a key employee r to provide a surviving partner the esources to buy out the deceased partner’s hare of the business.

• To provide funds :

To pay estate taxes or other final obligations necessary to settle deceased person’s estate.

LIFE INSURANCE: AN ASSET:

A reasonable way to approach life insurance is to think of it as an asset rather than a
necessary expenditure. In fact, life insurance is akin to investment in property. Some of
the advantages of buying life insurance are listed below:
• It is a very secure asset
• The policy owner need not worry about closely managing it
• It is purchasable in any affordable amount
• It provides a reasonable rate of return
• Proceeds are payable immediately
• The policy owner can choose his/her method of premium payment.

ESTIMATING LIFE INSURANCE NEED:

There are several simple methods used to estimate an applicant’s life insurance need.
Next we will review these methods along with examples.
The most basic rule of thumb is the Income Rule, which states that the insured’s
insurance need would be equal to 6 or 8 times his/her gross annual income.
Example: Allie is earning a gross annual income of $60,000. She should have between
$360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.
The Income Plus Expenses Rule states that the insured’s insurance needs to be
equal to 5 times his/her gross annual income plus the total of any mortgage, personal
debt, final expenses, and special funding needs (i.e., college, university etc.).
Example: Assume that Fredrick earns a gross annual income of $60,000 and has
expenses that total $160,000. His insurance need would be equal to $460,000 ($60,000
x 5 + $160,000).