341 Ch 11
Sarah is using the needs approach to determine how much life insurance to buy. Her cash needs are $30,000; her income needs are $140,000; and special needs are $100,000. Sarah has the following assets: $20,000 in bank accounts, $30,000 in retirement plans, and $40,000 in investment accounts. Sarah owns no individual life insurance. She is covered by a $50,000 grouplife insurance policy through her employer. Based on this information, how much additional life insurance should Sarah purchase?
$130,000
What is the length of the readjustment period which is considered when the needs approach is used to determine the amount of life insurance to own?
1 to 2 years
Which of the following $100,000 whole life insurance policies, issued by the same company to a man age 32, would require the highest first-year premium
10-payment whole life
Richard is using the capital retention approach to determine how much life insurance to purchase. Richard would like to provide $35,000 per year to his family, forever, if he dies. The assets that he has today will provide $25,000 in annual income without the liquidation of these assets. If life insurance proceeds can be invested to earn a 5 percent annual return, how much lifeinsurance should Richard purchase to fund the additional income needed to meet the $35,000 annual income goal
200,000
Julian, age 45, would like to determine how much life insurance to purchase using the humanlife value approach. He assumes his average annual earnings over the next 20 years will be $40,000. Of this amount, $20,000 is available annually for the support of his family. Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is Julian's human life value?
249,200
Which of the following statements about indexed universal life insurance is true
Although a minimum interest rate is guaranteed, the rate credited can be higher if a specified stock index performs well
All of the following are defects which limit the usefulness of the human life value approach in determining the correct amount of life insurance to purchase EXCEPT
Earnings during the individual's productive lifetime are ignored
All of the following statements about the conversion of a term policy are true EXCEPT
Evidence of insurability is required before a conversion is permitted.
Which of the following statements about endowment insurance policies is (are) true? I. The face amount is paid if the insured dies during the policy period or at the end of the policy period if the insured is still alive. II. The use of endowment insurance has increased in recent years because of its favorable tax treatment.
I only
Which of the following statements about life insurance cash values is (are) true? I. Cash values are a result of the level premium method of purchasing life insurance. II. The cash value of a policy must always exceed the policy's legal reserve.
I only
Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are) true? I. It involves an analysis of various family needs which must be met if a family breadwinner dies. II. Its use is appropriate only if a person currently has no life insurance protection.
I only
Which statement is true concerning the economic problem of premature death in the United States? I. The economic impact of premature death of the breadwinner varies for different types of families. II. Increased life expectancy has increased the economic problem of premature death over time.
I only
The purchase of term insurance is justified by which of the following circumstances? I. The insured wants to save money through the policy for a specific need. II. The insured has a temporary need for life insurance protection
II only
Which of the following statements about a variable universal life insurance policy is (are) true? I. There is a minimum guaranteed interest rate for the cash value. II. The policyowner has a variety of investment options for the investment of premiums.
II only
Which of the following statements about second-to-die life insurance is (are) true? I. The insurance is a form of endowment coverage. II. The premium is lower than the combined cost of purchasing a life insurance policy on each insured.
II only
Which of the following statements about the capital retention approach for determining life insurance needs is (are) true? I. It assumes that life insurance proceeds will be liquidated to provide income to survivors. II. It requires the preparation of a personal balance sheet.
II only
Which of the following statements about universal life insurance is (are) true? I. The current interest rate credited to the cash value at the time the policy is issued remains fixed for the life of the policy. II. A monthly deduction is made from the policy's cash value for the cost of insurance protection.
II only
Which of the following statements about variable universal life insurance is (are) true? I Variable universal life insurance has fixed premium payments. II. Variable universal life insurance allows the policyowner to decide where the premiums are invested
II only
Which of the following statements is (are) true regarding the results of studies by LIMRA and New York Life Insurance Company on the adequacy of life insurance owned by households in the United States? I. The average household is adequately insured against the risk of premature death. II. The average household is significantly underinsured against the risk of premature death.
II only
All of the following statements about universal life insurance are true EXCEPT
Interest credited to a policy's cash value is taxable for the policyowner in the year credited
All of the following statements about current assumption whole life insurance are true EXCEPT
It is a form of participating whole life insurance that pays annual dividends
Which of the following statements about limited-payment life insurance is true?
Its use may be appropriate if a person wants paid-up life insurance during retirement
Which of the following statements about industrial life insurance (also called home service life insurance) policies is true?
Most industrial life insurance policies are cash value coverage
Which of the following statements about term insurance is true?
Most policies can be renewed for additional periods without evidence of insurability.
All of the following statements describe the flexibility available to the owner of a universal life insurance policy EXCEPT
Policy loans are permitted on an interest-free basis
Which of the following statement is true regarding return of premium term insurance?
The coverage is expensive and is not free when time value of money is considered
Which of the following statements about a decreasing term insurance policy is true?
The face amount of the policy decreases during the policy period, but the premium remains level.
All of the following statements about ordinary life insurance are true EXCEPT
The face amount of the policy is paid if the insured lives to age 65
Which of the following statements about savings bank life insurance is true?
The objective of savings bank life insurance is to provide low-cost insurance to consumers byholding down expenses
Which of the following statements about variable life insurance is true?
The policyowner has the option of investing the cash value in several investment accounts
What happens to the premiums for yearly renewable term insurance as an insured gets older?
They increase at an increasing rate
Which of the following types of families is likely to have the least need for a large amount of life insurance?
a single person family
Bill is attempting to determine how much life insurance to purchase. He has two dependent children and his wife does not work outside of the home. An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning. One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again. This period is called the
blackout period
The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the
blackout period
Which of the following statements about policies sold to preferred risks is (are) true? I. Preferred risks are people whose mortality experience (deaths per thousand at a given age) is expected to be more favorable than average. II. Insurers require preferred risks to purchase at least a minimum amount of life insurance, such as $250,000.
both I and II
Which of the following is a cost/expense that an estate clearance fund is designed to pay?
burial expenses
Tamara purchased a term insurance policy when she had high life insurance needs and limited income. Now Tamara can afford whole life insurance. What term life insurance provisionwill permit Tamara to switch her term insurance to whole life insurance without having to show that she is still insurable?
conversion provision
Dave purchased a life insurance policy. The policy is nonparticipating and the cash values are based on the insurer's present mortality, investment, and expense experience. After 2 years, the insurer will recalculate the premium based on the mortality, investment, and expense experience at that time. Dave purchased
current assumption whole life
Michael wants to make sure that life insurance proceeds are available to pay his outstanding mortgage balance if he dies. He purchased a type of life insurance in which the amount of coverage gradually declines, just as his outstanding mortgage balance gradually declines. This type of life insurance is called
decreasing term insurance
When using the needs approach, several "special needs" should be considered. One special need is money to cover unexpected events, such as major car repairs, dental bills, or home repairs. Money set aside for this purpose is called a(n)
emergency fund
A common use of second-to-die life insurance is
estate planning
A legal reserve in life insurance is a result of
excess premiums in the early policy years being invested at compound interest
The net amount at risk for an ordinary life insurance policy is the difference between the
face amount of the policy and the legal reserve
To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include
income taxes
Gwen purchased an interesting life insurance policy. A minimum interest rate is guaranteed on the cash value, but additional interest may be credited based on the investment performance of a group of common stocks. There is also a cap on the additional interest credited to the policy. Based on this information, what type of life insurance did Gwen purchase?
indexed universal life insurance
When the capital retention approach is used to determine how much life insurance to purchase, all of the following are subtracted from total assets to calculate the capital available to produce income EXCEPT
investments in stocks and bonds
A whole life insurance policy in which premiums are reduced for an initial period (e.g. 3 years) and are higher thereafter is an example of a
modified life policy
Disadvantages of the capital retention approach include which of the following? I. Assets are often liquidated too quickly. II. It underestimates the amount of life insurance needed
neither I nor II
Which of the following statements about yearly renewable term insurance is (are) true? I. It requires evidence of insurability for renewal. II. It is most appropriate when an insured needs lifetime protection
neither I nor II
The difference between the legal reserve of a whole life policy and the face amount of insurance is the
net amount at risk
Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called theA) estimated cost of life insurance
opportunity cost of buying life insurance
Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has made 20 premium payments, his life insurance policy is considered
paid-up
The human life value is defined as the
present value of the family's share of a deceased breadwinner's future earnings
Jessica is an agent for LMN Life Insurance Company. She met with Brad, who was interested in purchasing life insurance. Jessica explained the various uses of life insurance, including income for Brad's wife during the 1- or 2-year period following Brad's death. This period is known as the
readjustment period
Tom and Nancy Boyle provide financial support for their two children. In addition, they provide financial support for Tom's aged father and Nancy's aged mother. The Boyle family can be described as a
sandwiched family
Which of the following pieces of information is needed to calculate a person's human life value?
the person's cost of self-maintenance
Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying
universal life insurance
Carl would like to purchase life insurance. He would also like to invest in a mutual fund. An agent told Carl about a form of life insurance in which Carl could select where the saving component is invested. This form of life insurance has fixed premiums and the cash value is not guaranteed. This type of life insurance is called
variable life insurance
Under the needs approach, when is the dependency period of a surviving spouse assumed to end?
when the youngest child reaches age 18