Chapter 08 - Insuring Your Life

7) Understanding universal life insurance Amount added to cash value 1) Year 1 2) Year 2 3) Year 3

1) $2,359 2) $1,972 3) $1,340

7) Understanding universal life insurance Amount added to cash value 1) Year 1 2) Year 2 3) Year 3

1) $2,414 2) $1,918 3) $1,307

7) Understanding universal life insurance Amount added to cash value 1) Year 1 2) Year 2 3) Year 3

1) $2,510 2) $1,873 3) $1,315

1) Risk Avoidance

One of four ways of dealing with your exposure to risk, involves avoiding an act that would create a possible loss. This is the simplest way to deal with risk since, if successful, eliminates your exposure to risk in the first place. The other three methods for dealing with risk are loss prevention and control, risk assumption, and risk transfer (insurance).

1) Multiple of Earnings Approach

One of two techniques intended to identify a potential policyholder's need for insurance coverage. Under the multiple of earnings method, an insured's minimum necessary insurance coverage is calculated by multiplying the insured's gross annual earnings by some selected, and often arbitrary, number. Many insurance agents apply a 5x to 10x factor to your current income to determine your recommended minimum level of insurance coverage. The advantage of this method is that it is simple to use. Its principal, and more significant, disadvantage of this method is that it fails to recognize both your financial obligations and your financial resources—and can result in you carrying too little insurance coverage.

6) Understanding whole life insurance Based on this information alone, you recommend that he purchase a _________________________________ whole life policy.

continuous premium

8) After completing law school, Raphael finds a job with a good law firm and wants to switch to a plan that provides a savings component as well. He can achieve this without changing insurance companies as long as his original policy included a ______________________ provision.

convertibility

5) Understanding term life insurance Caroline is a 60-year-old female who has recently become the legal guardian and sole caretaker of her three-year-old grandson. Ideally, she would like to purchase permanent insurance coverage, but her primary concern is making sure her grandson will be taken care of financially if she dies before he begins college. Given her current financial situation, she is interested in a term life insurance policy that will last 15 years. Caroline goes to an insurance broker to purchase a policy and is shown the following two rate tables to help her choose between annual renewable and level premium term life insurance. This example is representative of why, in general, people today purchase ___________________________ term life insurance.

level premium

5) Understanding term life insurance Cho is a 25-year-old female with limited financial resources and a four-year-old son. Ideally, she would like to purchase permanent insurance coverage, but her primary concern is making sure her son will be taken care of financially if she dies before he graduates from college. Given her current financial situation, she is interested in a term life insurance policy that will last 20 years. Cho goes to an insurance broker to purchase a policy and is shown the following two rate tables to help her choose between annual renewable and level premium term life insurance. This example is representative of why, in general, people today purchase _____________________________ term life insurance.

level premium

6) Understanding whole life insurance Based on this information alone, you recommend that he purchase a ___________________________ whole life policy.

single premium

3) Finally, to determine the value of life insurance Lorenzo and Neha should purchase, complete Step 3 of the needs analysis method by subtracting the total financial resources available from the total financial resources needed. Step 3: Additional Life Insurance Needed Additional life insurance needed: ____________________

$827,100

6) Understanding whole life insurance The graph projects the cash value and death protection for a $200,000 whole life policy. If the client were to die at age 70, his beneficiaries would receive roughly $______________ in death protection _____________________ the $________________ cash value. If instead, at age 60, the client were to cancel or borrow against the policy, he would be able to withdraw up to $____________ because of the _______________________________ associated with whole life insurance.

- $115,000 - in addition to - $85,000 - $60,000 - nonforfeiture right

6) Understanding whole life insurance The graph projects the cash value and death protection for a $200,000 whole life policy. If the client were to die at age 90, his beneficiaries would receive roughly $______________ in death protection ____________________ the $_____________ cash value. If instead, at age 70, the client were to cancel or borrow against the policy, he would be able to withdraw up to $___________ because of the _____________________________ associated with whole life insurance.

- $40,000 - in addition to - $160,000 - $85,000 - nonforfeiture right

9) Comparing policies Which of the following are appropriate next steps for Lucia? Check all that apply.

- Compare quotes for $200,000 whole policies online. - Ask Eleanor if she can recommend a good agent, since attorneys tend to be good sources. - Find out whether Hans Honestman has a professional designation, such as Chartered Financial Consultant (ChFC).

7) Understanding universal life insurance Universal life insurance combines elements from term life insurance and whole life insurance. Term policies provide a death benefit _____________________ savings component, whole life policies provide a death benefit ________________________ savings component, and universal policies provide a death benefit __________ savings component. To understand how universal premiums are allocated, consider the following example.

- and no - bundled with a - and a separate

9) Comparing policies Shopping for Life Insurance Lucia has determined that a $200,000 whole life insurance policy would best suit her needs. she consulted with one insurance broker, Hans Honestman, who quoted him a monthly rate of $300. she remembers learning in her personal finance course that premiums ______________________________________ for similar policies, so she plans to ___________________________________________________________________. Before doing anything else, she decides to consult her aunt Eleanor, an attorney, about the features of her life insurance policy. She tells Lucia that she has a 10 year, $100,000, level term life policy.

- can vary considerably - collect quotes from other companies as well

7) Understanding universal life insurance Carlos is a 42-year-old lawyer who has taken out a universal life insurance policy to protect his two children (ages 13 and 16) in the event of death. Each year, Carlos chooses how much would like to contribute to the policy, as shown by the first row of the table below. The insurance company subtracts from this an administrative fee along with the cost of the death benefit (the ______________ portion of the policy) then puts the remainder into the cash value (or _____________________) portion of the policy. This money earns interest at a ___________ rate of return. Based on the given information, calculate the amount that is added to the cash value portion of the policy in each of the first three years.

- pure insurance - savings - fixed

5) Understanding term life insurance Cho is a 25-year-old female with limited financial resources and a four-year-old son. Ideally, she would like to purchase permanent insurance coverage, but her primary concern is making sure her son will be taken care of financially if she dies before he graduates from college. Given her current financial situation, she is interested in a term life insurance policy that will last 20 years. Cho goes to an insurance broker to purchase a policy and is shown the following two rate tables to help her choose between annual renewable and level premium term life insurance. Given her age and desired policy term, she can purchase an annual renewable term life policy and pay $_____ in the first year and a total of $_____ over the course of the policy. Alternatively, she can purchase a level premium term life policy and pay a premium of $____ per year for a total of $________ over the course of the policy.

1) $119 2) $3,777 3) $95 4) $1,900

5) Understanding term life insurance Caroline is a 60-year-old female who has recently become the legal guardian and sole caretaker of her three-year-old grandson. Ideally, she would like to purchase permanent insurance coverage, but her primary concern is making sure her grandson will be taken care of financially if she dies before he begins college. Given her current financial situation, she is interested in a term life insurance policy that will last 15 years. Caroline goes to an insurance broker to purchase a policy and is shown the following two rate tables to help her choose between annual renewable and level premium term life insurance. Given her age and desired policy term, she can purchase an annual renewable term life policy and pay $_________ in the first year and a total of $______________ over the course of the policy. Alternatively, she can purchase a level premium term life policy and pay a premium of $_____ per year for a total of $_________ over the course of the policy.

1) $252 2) $11,987 3) $295 4) $4,425

2) Tim and Yvette Cohen are 37 years old and have one daughter, age 5. Tim is the primary earner, making $87,000 per year. Yvette does not currently work. The Cohens have decided to use the needs analysis method to calculate the value of a life insurance policy that would provide for Yvette and their daughter in the event of Tim's death. Tim and Yvette estimate that while their daughter is still living at home, monthly living expenses for Yvette and their child will be about $3,700 (in current dollars). After their daughter leaves for college in 13 years, Yvette will need a monthly income of $3,100 until she retires at age 65. The Cohens estimate Yvette's living expenses after 65 will only be $2,700 a month. The life expectancy of a woman Yvette's age is 87 years, so the Cohen family calculates that Yvette will spend about 22 years in retirement. Using this information, complete the first portion of the needs analysis worksheet to estimate their total living expenses. Life Insurance Needs Analysis Worksheet 1) a. period 2 2) a. period 3 3) b. period 1 4) b. period 2 5) b. period 3 6) d. period 1 7) d. period 2 8) d. period 3

1) $3,100 2) $2,700 3) $44,400 4) $37,200 5) $32,400 6) $577,200 7) $558,000 8) $712,800

2) In addition to these monthly expenses, other future outlays must be accounted for. Before they had a child, Yvette worked as a financial consultant, but her knowledge and skills are now somewhat outdated. Therefore, they include $30,000 for Yvette to go back to school. Additionally, Tim and Yvette want to create a college fund of $35,000 to fund their child's college education. They estimate that final expenses (funeral costs and estate taxes) will amount to $12,000. Finally, they have taken out a loan for a business venture of $40,000 and an automobile loan of $3,000. Because the Cohens are renters, they have no outstanding mortgage. Using this information, complete the next portion of Step 1 to determine the total financial resources needed. 1) 2a. Spouse's education fund 2) 2b. Child's college fund 3) 3. Final expenses (funeral costs and estate taxes) 4) 4a. House mortgage 5) 4b. Other loans 6) 4c. Total debt (4a + 4b) 7) 5. Total financial resources needed (add right-hand column plus the Total Living Expenses you calculated):

1) $30,000 2) $35,000 3) $12,000 4) $0 5) $43,000 6) $43,000 7) $1,968,000

3) Lorenzo and Neha Zambetti have completed Step 1 of their needs analysis worksheet and determined that they need $2,745,000 to maintain the projected lifestyle of Neha (age 38) and their two children (ages 8 and 10) in the event of Lorenzo's (the primary earner's) death. The Zambettis also have certain financial resources available after Lorenzo's death, however, so their life insurance needs are lower than this amount. If Lorenzo dies, Neha will be eligible to receive Social Security survivors' benefits—approximately $3,000 a month ($36,000 a year) until the youngest child graduates from high school in 10 years. After the children leave home, Neha will be able to work full-time and earn an estimated $46,000 a year (after taxes) until she retires at age 65. After Neha turns 65, she'll receive approximately $2,400 a month ($28,800 a year) from her own Social Security and retirement benefits. The life expectancy for a woman within Neha's demographic is 87. The couple has also saved $42,300 in a mutual fund, and Lorenzo's employer provides him a $100,000 life insurance policy. Using this information, complete Step 2 of the needs analysis worksheet to estimate their total financial resources available after death. (Note: If the value of a certain entry is zero, be sure to enter "0" to receive credit.) Life Insurance Needs Analysis Worksheet (Part 2) 1) 1b. Surviving spouse's annual income - period 2 2) 1d. Annual income (1a + 1b + 1c) - period 2 3) 1d. Annual income (1a + 1b + 1c) - period 3 4) 1f. Total period income (1d x 1e) - period 2 5) 1f. Total period income (1d x 1e) - period 3 6) 2. Savings and investments 7) 3. Other life insurance

1) $46,000 2) $46,000 3) $28,800 4) $782,000 5) $633,600 6) $42,300 7) $100,000

4) Choosing the policy that meets your needs Each type of life insurance has its own benefits and drawbacks, and policyholder preferences and circumstances make certain features more important to some individuals than to others. The following table shows statements about life insurance policies. Indicate which policies address the concern or desire expressed by each statement. Check all that apply. 1) I want a large amount of coverage but can only pay a small amount in the near future. 2) I want to use my life insurance as a savings vehicle as well. 3) If I decide to cancel my policy while I'm still alive, I want access to the cash value. 4) I want flexibility in the amount I pay in premiums in each month.

1) Term Life Insurance 2) Whole Life Insurance Universal Life Insurance 3) Whole Life Insurance Universal Life Insurance 4) Universal Life Insurance

4) Choosing the policy that meets your needs Each type of life insurance has its own benefits and drawbacks, and policyholder preferences and circumstances make certain features more important to some individuals than to others. The following table shows statements about life insurance policies. Indicate which policies address the concern or desire expressed by each statement. Check all that apply. 1) I'm worried that my health might decline and want to secure a steady premium that won't be contingent on passing medical exams in the future. 2) I want flexibility in the amount I pay in premiums in each month. 3) I want lifelong coverage. 4) I don't want to pay heavy fees.

1) Whole Life Insurance 2) Universal Life Insurance 3) Whole Life Insurance Universal Life Insurance 4) Term Life Insurance Whole Life Insurance

10) Key features of life insurance policies The following is an excerpt from a hypothetical conversation between an insurance agent and a client who is in the final stages of purchasing a $200,000 whole life insurance policy. Fill in the blanks to provide the correct information regarding key features of life insurance policies. 1) AGENT: We need to discuss a few things before finalizing your policy. First, the beneficiary clause. Who would you like to name as your _______________ beneficiary, that is, the person who will receive the entire death benefit? 2) AGENT: Okay, and in the event that she does not outlive you, the benefits will be distributed among your ________________ beneficiaries. Who will those be? 3) AGENT: In that case, I recommend ______________________ settlement option. 4) AGENT: _____________________________________________________________________

1) primary 2) contingent 3) a fixed-amount 4) Yes, that is guaranteed by the nonforfeiture option of your policy

10) Key features of life insurance policies The following is an excerpt from a hypothetical conversation between an insurance agent and a client who is in the final stages of purchasing a $200,000 whole life insurance policy. Fill in the blanks to provide the correct information regarding key features of life insurance policies. 1) AGENT: We need to discuss a few things before finalizing your policy. First, the beneficiary clause. Who would you like to name as your primary beneficiary, that is, the person who will _________________________________________________. 2) AGENT: Okay, and ______________________________________________ will go to your secondary beneficiaries. Who will those be? 3) AGENT: In that case, I recommend ________________________ settlement option. 4) AGENT: _____________________________________________________________________

1) receive the entire death benefit 2) if she does not outlive you, all benefits 3) a fixed-period 4) The value of the loan plus interest will simply be subtracted from the proceeds of the policy.

10) Key features of life insurance policies The following is an excerpt from a hypothetical conversation between an insurance agent and a client who is in the final stages of purchasing a $200,000 whole life insurance policy. Fill in the blanks to provide the correct information regarding key features of life insurance policies. 1) AGENT: We need to discuss a few things before finalizing your policy. First, the beneficiary clause. Who would you like to name as your primary beneficiary, that is, the person who will _________________________________________________. 2) AGENT: Okay, and ______________________________________________ will go to your secondary beneficiaries. Who will those be? 3) AGENT: In that case, I recommend ____________________ settlement option. 4) AGENT: _____________________________________________________________________

1) receive the entire death benefit 2) if she does not outlive you, all benefits 3) a life income 4) This is possible, given that your contract includes a change-of-policy provision.

2) The second half of the needs analysis worksheet is not shown on this page. To complete the worksheet and determine the value of the life insurance policy the Cohens should purchase, they need to factor in additional information. True or False: Tim's future salary (if he does not die) should be accounted for in the remaining portion of the form.

False

6) Understanding whole life insurance True or False: The actual cash value of the plan is subject to change based on the policyholder's future medical conditions.

False

7) Understanding universal life insurance True or False: Under the terms of a standard universal policy, if Ana stops paying her premiums, then her policy will be cancelled and the value of the cash portion will be paid out to her immediately.

False

7) Understanding universal life insurance True or False: Under the terms of a standard universal policy, if Yvette stops paying her premiums, then her policy will be put on hold until she resumes payment (and pays back all missed premium payments).

False

1) Guaranteed Purchase Option

Is an optional provision of some insurance policies that gives the policyholder the right to purchase additional coverage at specified time intervals without providing additional evidence of insurability. This option is frequently offered to whole life policyholders who are under age 40, and the increases in coverage can usually be purchased every three, four, or five years in sums equal to the original amount of the policy or $10,000, whichever is lower.

1) Whole Life Insurance

Is designed to offer ongoing insurance protection during an individual's life, and offers both a death benefit and a cash value that accumulates over the life of the policy. The return generated by the policy is normally fixed and guaranteed to more than a specified minimum rate (3-5%).

1) Underwriting

The process by which insurance companies decide if they will accept a particular applicant and the appropriate premium based on the rate-classification schedules that they developed.

1) Policy Loan

This is a cash advance, secured by the cash value of a whole life insurance policy, made by an insurer to the policyholder.

1) Insurance Policy

This is a contract between an insurance company and insured in which the insurer agrees to reimburse the insured for any losses suffered according to the terms of the contract. A contract between an insurance company and insured in which the insurer agrees to reimburse the insured for any losses suffered according to the terms of the contract is called an insurance policy. The policy allows the policyholder to transfer his or her risk to the insurance company, and the company to accept the risks covered by the policy in return for the earned premium payments.

1) Renewability

This is a provision of a term life policy that allows the insured to renew policy at the end of its term without having to show evidence of his or her insurability. Provision of a term life policy allows you to renew the policy at the end of its term without having to show evidence of your insurability. Generally term policies are renewable at end of each term until you are 65 or 70 years of age, and allow your policy to renew even if you become uninsurable due to accident or other illness during the original policy period.

1) Group Life Insurance

This is life insurance that provides a master policy for a group of eligible members, and for which the premium is based on the characteristics of the entire group rather than on the attributes of an individual member. a master policy is written for the entire group of covered members, and each insured member receives a certificate of coverage. The premium charged to the group is a function of the characteristics of the entire group rather than the characteristics of each individual group member.

1) Fixed Period Settlement

This method of settling a life insurance policy requires the insurer to disburse the face amount of policy and any interest earned to the beneficiaries over a fixed time period. In general, the settlements of life insurance policies can be paid in many ways. A fixed period settlement requires the insurance company to distribute the face amount of the policy and any interest earned to the policy's named beneficiaries over a specified period of time. This settlement option provides flexibility to the beneficiary in selecting when he or she may want to receive the death proceeds. Other possible settlement options include the lump-sum, interest-only, fixed amount, and life income settlements.

3) True or False: Alternatively, the Zambettis could have estimated their life insurance needs using the multiple-of-earnings method, a less complicated but less accurate method than the needs analysis.

True

6) Understanding whole life insurance True or False: The actual cash value of the plan is subject to change based on annual market rates of return.

True

7) Understanding universal life insurance True or False: Under the terms of a standard universal policy, if Carlos stops paying his premiums, then the administrative fee and cost of death benefit will be deducted from the savings portion of his policy (assuming sufficient cash value accumulation,) and the policy will remain active.

True

6) Understanding whole life insurance Suppose you are a life insurance broker with a client who is interested in buying a whole life insurance policy. You explain to him the three major types of whole life insurance: continuous premium, also known as ___________________, limited payment, and single premium. Your client is a 33-year-old man and a father of four who is looking for the policy that provides the most permanent death protection for a given number of premium dollars.

straight life

6) Understanding whole life insurance Suppose you are a life insurance broker with a client who is interested in buying a whole life insurance policy. You explain to him the three major types of whole life insurance: continuous premium, also known as ____________________, limited payment, and single premium. Your client is a 33-year-old man who does not have children and would like to provide a death benefit for his wife. He currently has considerable cash resources, so he is primarily interested in using the policy as a tax-sheltered investment vehicle.

straight life

7) Understanding universal life insurance The cost of the death benefit portion of universal policies is only fixed for certain periods and rises with age, as is the case with ___________ life insurance policies. Suppose that in the 9th year of his policy, his cost of death benefit has risen substantially. At the same time, he is paying to have major repairs done on his home and currently cannot afford to pay his life insurance premium.

term

8) Choosing policies based on circumstances Which insurance policy is best? Raphael and Susan are a young couple with two children, ages 2 and 3. Raphael is in law school and currently has $80,000 in student loan debt. Susan works part-time at a software company earning $42,000 a year. Their current financial resources are limited; therefore, the savings components associated with some insurance policies would not be of much use to them at the moment (since their first priority is paying off loans). Raphael expects to provide for his family as a lawyer in the future, however, and wants to ensure that they will be taken care of in the event of his premature death. Because of the relatively low premiums and high face value, the best option for Raphael is a _______ life insurance policy.

term

8) Suppose, instead, Crystal is uncertain as to whether she will want to continue working once she has children, and Brian is considering going back to school to become a pharmacy technician. They still want a plan that serves as a savings vehicle, but given the uncertainty of their future finances, they might be better off choosing a __________________ life insurance.

universal

8) Choosing policies based on circumstances Which insurance policy is best? Brian and Crystal are a married couple in their mid-thirties who are planning to start a family. Crystal works as a real estate agent and earns $250,000 a year, and Brian works as a dental assistant earning $40,000 a year. They would like to have two children and are looking to take out a life insurance policy that will provide lifelong coverage in the event of Crystal's death. Given her established career, they do not expect much volatility in their future financial situation and prefer a plan that offers consistent premiums over a lifetime rather than one that offers more flexibility without the guarantee of future affordability. Because it offers fixed future premiums, the best option for Crystal is a ___________ life insurance policy.

whole