FINN 1003 (CHAPTER 10)
83. Tim and Tammy are updating their financial plan and are concerned that they might not have enough ife insurance coverage for their family, which includes two children, ages 5 and 12. They have determined that their annual income is $60,000 and their net worth is now $150,000. What is the amount of life insurance they should carry using the "Nonworking" Spouse Method?
A. $130,000
48. Molly is thinking about buying a life insurance policy, but she is not sure about how much she will need in the next few years. Which of the following policies would meet her needs?
A. Adjustable Life
58. Amy bought a life insurance policy and named Ben as her beneficiary. She has since died. Who will receive the benefits from her policy?
A. Ben
82. Tim and Tammy are updating their financial plan and are concerned that they might not have enough They have determined that their annual income is $60,000 and their net worth is now $150,000. What is the amount of life insurance they should carry using the Easy Method?
B. $294,000 The Easy Method uses the calculation of: Current Income × 7 × 70 percent = $60,000 × 7 × 70% = $294,000
61. Frank, age 38, was hit by a car and died. Which of the following riders provided an additional benefit for his heirs?
B. Accidental death benefit
23. A person who is named to receive the benefits from an insurance policy is a(n)
B. Beneficiary
38. If you want to purchase term insurance, you will receive all of the following except
B. Cash value
67. All of the following are major rating agencies for insurance except
B. Dun & Bradstreet
32. Todd plans to purchase a life insurance policy from a stock life insurance company. What kind of policy would he plan to purchase?
B. Nonparticipating policy
33. Jeanne wants to purchase a life insurance policy with guaranteed premiums. What kind of policy would she want to purchase?
B. Nonparticipating policy
24. Most people buy life insurance to
B. Protect the people who depend on the insured from financial losses caused by his or her death
57. The policy loan provision means that
C. The policy owner can borrow any amount up to the cash value of the policy.
45. Which of the following is NOT a feature of whole life insurance?
C. The policy will return all premiums if you survive to the end of the policy
42. If you have a conversion term policy,
C. You can convert your term policy to a permanent policy
41. If you have a multiyear level term policy,
C. Your premium will be the same for the duration of your policy
74. Which of the following statements is INCORRECT?
D. An annuity is more advisable for people in poor health than for those who are likely to live longer than average.
46. What is the most positive feature of whole life insurance listed below?
D. It builds cash value
35. Which of the following is NOT a type of permanent insurance?
D. Term life
49. Polly wants the opportunity to change the amount she pays for her annual premium through the life of her insurance policy without changing her coverage. Which of the following policies would meet her needs?
D. Universal Life
77. Which of the following statements is correct?
E. It is better to fund an IRA, Keogh, or 401(k) before buying an annuity.
71. The settlement option in which the company acts as trustee and pays interest to the beneficiary is called
E. Proceeds left with the company
55. Georgia was supposed to pay her premium by the 15th of the month. Which of the following provisions allows her to keep her coverage if she is a couple of weeks late with paying her premium?
E. The grace period
47. Megan wants to purchase a life insurance policy that will allow her to invest in stock. Which of the following policies should she buy?
E. Variable Life
22. An investment in an annuity is the same as an investment in a certificate of deposit.
FALSE
14. The beneficiaries of someone who dies by suicide will never be eligible to receive any benefits from his or her life insurance policy.
FALSE After two years, beneficiaries receive the full value of death benefits.
21. Annuities are most beneficial for individuals who expect to live only a short time.
FALSE Annuities are most beneficial for those who expect to live longer than average.
9. Another name for straight term is renewable return-of-premium term.
FALSE Another name is multiyear level term.
4. Life expectancy for men is longer than that for women.
FALSE Life expectance for women is longer than for men.
20. If you switch life insurance policies, you will automatically still be insurable.
FALSE You may have to meet medical and other qualification requirements.
92. What is a group life insurance policy and who can benefit from it?
A group life insurance policy is a variation of term insurance. It covers a large number of people in the group (usually an employer). A benefit is that people included in the group do not need medical examinations to get the coverage. It is also easy for employees to sign up for coverage.
26. Judy and James have a four year-old child. They plan to purchase life insurance using the formula: Current income × 7 × 70 percent. Which method are they using to determine their life insurance needs?
A. Easy method
75. Which of the following allows an individual to receive a fixed amount of income over a certain period of time, or over his or her life?
A. Fixed annuity
56. Fred bought life insurance five years ago. He forgot to tell them that he had a heart condition, and, as a result of that condition, he recently died. Which of the following provisions prevents the life insurance company from refusing to pay his beneficiaries because of his original misrepresentation?
A. Incontestability clause
79. The Tax Reform Act of 1986
A. Preserved the tax advantage of annuities but curtailed deductions for IRAs.
60. Bill is worried about being able to pay his premium if he is totally and permanently disabled before age 60. Which of the following riders should he consider?
A. Waiver of premium disability benefit
36. Another name for permanent life insurance is:
A. Whole life
37. Which of the following is NOT temporary insurance?
A. Whole life
80. Stephanie is the wage earner in a "typical family" with $30,000 gross annual income. Use the Easy Method to determine how much insurance she should carry.
B. $147,000 The Easy Method uses the calculation of: Current Income × 7 × 70 percent = $30,000 × 7 × 70% = $147,000
28. Donald and Charlene are married and do not have any children. Each plans to continue to work after the other one dies. Which method are they using to determine their life insurance needs?
B. Dual Income, No Kids method
50. Pam just started working at XYZ Widget Company and finally wants to get insurance coverage. She does not want to take a medical exam to get coverage because she has some underlying health conditions and is concerned that she might not qualify for a policy. Which of the following life insurance policies should she apply for?
B. Group Life
69. The settlement option that pays the life insurance proceeds in equal periodic payments for a specified number of years after your death is called
B. Limited installment payment
54. Fred bought life insurance when he was 47, although he told the insurance company that he was 42. He has since died. Which of the following provisions will affect the amount of money his beneficiaries will receive?
B. Misstatement of age provision
43. This term life policy will guarantee that you will pay the same premium for the duration of your policy
B. Multiyear level term
44. Another name for a straight term policy is
B. Multiyear level term
40. If you have a renewable term policy,
B. Your premium may increase because you will be older
84. Marianne and Roger are in good health and have reasonably secure careers. Each earns $45,000 life insurance coverage for their family, which includes two children, ages 5 and 12. They have determined that their annual income is $60,000 and their net worth is now $150,000. What is the amount of life insurance they should carry using the "Nonworking" Spouse Method? annually. They own a home with a $100,000 mortgage; they owe $20,000 for their car loans, and have $6,000 in student loans. If one should die, they think that funeral expenses would be $10,000. What is their total insurance needs using the DINK method?
C. $73,000 The DINK Method uses the calculation of: Funeral Expenses + (one-half of all loans, and debt) = $10,000 + ($126,000 × 1⁄2) = $73,000
68. After you purchase a life insurance contract, you have a "free-look" period that lasts
C. 10 days
51. Which of the following is a poor choice for the amount of protection offered for an individual?
C. Credit life
59. Bonnie is most concerned about being able to buy additional insurance without undergoing medical exams. Which of the following riders should she consider?
C. Guaranteed insurability option
65. Which of the following is NOT important when buying life insurance?
C. Ignoring the reputations of local agencies
78. Annuities are often purchased for
C. Individual retirement accounts (IRAs)
52. Wendy has had a life insurance policy for five years. She was recently divorced. Which of the following provisions should she take action on?
C. Naming a beneficiary
81. Holly and Matt want to use the "Nonworking" spouse method to determine the amount of life insurance coverage. If their youngest child is 3 years old, how much do they need?
D. $150,000 The "Nonworking" Spouse Method uses the calculation of: (18 - youngest child's age) × $10,000 = (18 - 3) × $10,000 = $150,000
62. A young employee is buying individual life insurance and is worried about the impact inflation will have on his life insurance coverage. Which of the following riders should he consider?
D. Cost-of-living protection
64. What is the most important part of an insurance agent's job?
D. Help you select the proper kind of protection within your financial boundaries.
25. Which of the following households most likely has the greatest need for life insurance?
D. Household with children
72. Which of the following products allows an individual to receive payments beginning now?
D. Immediate annuity
70. The settlement option that pays the life insurance proceeds to the beneficiary for as long as she or he lives is called
D. Life income option
27. Jeff and Erica have two children. They plan to purchase life insurance using the formula: (18 - youngest child's age) × $10,000. Which method are they using to determine their life insurance needs?
D. Nonworking spouse method
31. You want to purchase a life insurance policy that pays a dividend. What kind of policy would you want to purchase?
D. Participating policy
53. Which of the following provisions requires the policyholder to pay overdue premiums with interest in order to have coverage?
D. Policy reinstatement
34. Another name for temporary life insurance is:
D. Term
76. Which of the following allows an individual to receive an amount of income that will change based on the income received from investments over a certain period of time, or over his or her life?
D. Variable annuity
30. About ___ percent of the U.S. life insurance companies are stock companies?
E. 95 percent
63. Mildred was diagnosed with terminal cancer and knows that she doesn't have long to live. Which of the following riders would allow her to receive cash now?
E. Accelerated benefits
66. Which of the following is NOT a factor that affects the price a company charges for a life insurance policy?
E. All of the above affect the price
73. Which of the following statements is correct?
E. An immediate annuity allows an individual to receive payments from an annuity beginning at once.
39. Which of the following is NOT a type of permanent life insurance?
E. Decreasing term life
29. Francisco and Maria have three children and want to complete a detailed worksheet to determine the amount of life insurance they need to purchase. Which method are they using to determine their life insurance needs?
E. Family needs method
1. Purchasing a life insurance policy is a basic and inexpensive task.
FALSE Life insurance is one of the most important and expensive purchases to be made.
8. Mutual life insurance companies specialize in the sale of nonparticipating policies.
FALSE Mutual life insurance companies specialize in participating policies that provide a dividend.
11. Return-of-Premium term pays out all premiums plus interest to a beneficiary.
FALSE Return-of-Premium term returns all premiums if you survive to the end of the policy term.
5. All individuals need life insurance.
FALSE Single people who live alone or with their parents usually have little or no need for life insurance.
18. If you change your mind about your insurance policy, you have 60 days to return it to receive a refund of your premium.
FALSE The "free-look" period is 10 days.
6. The "Nonworking" spouse method of estimating life insurance includes factors such as Social Security and liquid assets.
FALSE The definition is for the "Family Need" method.
3. The sooner a person is likely to die, the lower the premiums he or she will pay.
FALSE The sooner a person is likely to die, the higher his premiums will be.
86. Describe two of the methods used to determine the amount of life insurance needed.
Four methods were discussed in the text. 1. The Easy Method - this method assumes that a 'typical family' will need approximately 70 percent of salary for 7 years before they adjust to the financial consequences of a death. 2. The DINK Method (Dual income, no kids) - this method assumes that there are no dependents and the spouse earns at least as much as the policyholder does and will continue to work after the policyholder's death. The amount of coverage needed will be equal to funeral expenses plus one half of mortgage and other types of debt. 3. The Nonworking Spouse Method - this method suggests that extra costs of $10,000 per year may be required to replace the services of a homemaker in a family with small children. Therefore, the coverage needed equals $10,000 × the number of years until the youngest child is 18 years old. 4. The Family Need Method - this method is more detailed to determine the coverage needs. It considers annual income, expenses above and beyond, emergency fund, and more.
93. Wendy purchased a life insurance policy years ago and listed her husband as her beneficiary. Since then, they had three children, she was divorced, and remarried. However, she never updated her list of beneficiaries for her life insurance policy. What will happen to her benefits? Why?
Since she never updated her beneficiaries, her benefits will go to her ex-husband. Her children and current husband will not be eligible for any of the proceeds from her policy.
12. A Limited Payment Policy is a whole life policy that requires premiums to be paid for a certain period.
TRUE
13. Premium payments are fixed with a Variable Life Policy.
TRUE
15. Competition among companies with comparable policies can affect the price a company charges for life insurance.
TRUE
16. An interest-adjusted index is a method of evaluating the cost of life insurance by taking into account the time value of money.
TRUE
17. The lower the interest-adjusted index, the lower the cost of a life insurance policy.
TRUE
19. The most common settlement option for a life insurance program is the lump-sum payment.
TRUE
2. Life insurance benefits may be used to pay off a home mortgage or other debts at the time of death.
TRUE
7. The "Family Need" method of estimating life insurance includes factors such as Social Security and liquid assets.
TRUE
10. Decreasing term pays less to the beneficiary as time passes.
TRUE The benefit paid decreases over time, not the premium.
90. Contrast permanent and temporary insurance. Provide at least two characteristics that are unique to each.
Temporary insurance is term insurance. This type of insurance covers the insured for a specific period. At the end of the term, the insured may be able to renew or convert to a whole life policy (depending on the specifics of the term policy); however, the premium will increase because the insured will be older. Permanent insurance is whole life. This type of insurance covers the insured for the rest of his or her life. It can serve as an investment because it builds cash value - it provides both a death benefit as well as a savings component. The rate (premium) remains level for the rest of the insured's life. `
91. Explain why whole life insurance is like buying a house and term insurance is like renting an apartment.
Term insurance is coverage for a specific period of time, like renting an apartment. At the end of the apartment lease, you would need to sign another lease. At the end of the term insurance period, you would need to purchase another policy, if you still wanted the coverage. Whole life insurance is like buying a house because it allows you to accumulate cash value (like equity in a house) and you can have it for rest of your life. In a similar vein, if you choose, you can live in a house you own for the rest of your life.
87. Don and Diane are updating their financial plan and are concerned that they might not have enough life insurance coverage for their family, which includes two children, ages 4 and 8. They have determined that their annual income is $50,000 and their net worth is now $150,000. Using the "Nonworking" spouse method, calculate the amount of life insurance they should carry.
The "Nonworking" spouse method uses the calculation of: (18 - youngest child's age) × $10,000. Since their youngest child is 4 years old, the amount needed is: (18 - 4) × $10,000 = $140,000.
88. Don and Diane are updating their financial plan and are concerned that they might not have enough life insurance coverage for their family, which includes two children, ages 4 and 8. They have determined that their annual income is $50,000 and their net worth is now $150,000. Using the Easy Method, calculate the amount of life insurance they should carry.
The Easy Method uses the calculation of: Current Income × 7 × 70% = $50,000 × 7 × 70% = $245,000
89. Don and Diane are updating their financial plan and are concerned that they might not have enough life insurance coverage for their family, which includes two children, ages 4 and 8. They have determined that their annual income is $50,000 and their net worth is now $150,000. Using both the Easy Method and the "Nonworking" spouse method, calculate the amount of life insurance they should carry. Remember that they want to be certain that they have enough coverage, so explain your answer.
The Easy Method uses the calculation of: Current Income × 7 × 70% = $50,000 × 7 × 70% = $245,000 The "Nonworking" spouse method uses the calculation of: (18 - youngest child's age) × $10,000. Since their youngest child is 4 years old, the amount needed is: (18 - 4) × $10,000 = $140,000. Since they are concerned about the level of coverage, they should use the higher of the two calculations, or the Easy Method = $245,000.
85. People buy life insurance for many reasons. List three.
• Paying off a home mortgage or other debts at the time of death • Providing lump-sum payments through an endowment for children when they reach a specified age • Providing an education or income for children • Making charitable donations after death • Providing a retirement income • Accumulating savings • Establishing a regular income for survivors • Setting up an estate plan • Paying estate and gift taxes
