Chapter 11 - Life Insurance

What is a variable universal life policy?

allows the policyholder to invest the premiums in a wide variety of investment (stocks, bonds); no minimum guaranteed rate of interest on the cash values and cash values are not guaranteed; policy has relatively high expense charges and a substantial investment risk

Describe cash needs

estate clearance fund if immediately needed when family head dies -- cash for burial expenses, medical bills

Expense charges under variable?

front-end load, back-end surrender, etc.

Why purchase ordinary life?

if you want lifetime protection or additional savings

Explain the basic characteristic of universal life policies

in notes

Describe income needs

income during the readjustment period, dependency period, and life income to a surviving spouse

Describe special needs

mortgage redemption fund, educational fund, and emergency fund

Define human life value

present value of the family's share of the deceased breadwinner's earnings -- crudely measures economic value of human life

explain the basic characteristics of ordinary life policies

provides lifetime protection; level premiums that are payable for life; has a savings element which is called cash surrender values (overpayment of premiums during the early years)

Why purchase term insurance?

when income is limited or a temporary need must be met -- can also guarantee future insurability

identify the major types of term insurance

yearly renewable term; 5, 10, 15, 20 year term; term to age 65; decreasing term; reentry term; and return-of-premium term

Difference between universal and variable universal?

under variable, policyholder can invest in wide variety of investments while universal cannot; there is not minimum guaranteed interest rate for variable while there is a minimum guaranteed interest rate for universal

How does variable universal life differ from typical universal life?

universal life has several limitations

What are the basic characteristics of term insurance

provides temporary protection; most are renewable and convertible; do not accumulate cash values

Steps in measuring the human life value

(1) estimate individual's average annual earnings, (2) deduct income taxes, SS taxes, health insurance premiums, and cost of self maintenance, (3) determine # of years from the person's present age to the contemplated age of retirement, (4) using a reasonable discount rate, determine the PV of the family's share of earnings

describe the basic characteristics of variable life insurance

death benefit and cash surrender value vary according to the investment experience of a separate account maintained by the insurer -- entire reserve is held in a separate account maintained by the insurer

Why does an ordinary life insurance policy develop a legal reserve?

insured pays moron beginning which causes a legal reserve to develop; as the legal reserve increases, the net amount at risk declines which makes lifetime protection possible

Identify the costs associated with premature death

loss of the human life value, additional expenses incurred, reduction in standard of living, and noneconomic costs

Explain the meaning of premature death

person dies with outstanding unfulfilled financial obligations such as children to support

Major limitations of term insurance?

premiums increase with age; not suitable for lifetime protection; not good for retirement or lifetime savings

Major limitation of ordinary life?

since premiums are so high, people can still be underinsured when purchasing ordinary life -- for the same price a higher amount of term insurance can be purchased