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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 group life insurance policy through her employer. Based on this information, how much additional life insurance should Sarah purchase?

$130,000

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 life insurance 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 human life 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

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

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.

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.

B) II only

All of the following statements about the conversion of a term policy are true EXCEPT

D) Evidence of insurability is required before a conversion is permitted.

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.

D) neither I nor II

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 the

D) opportunity cost of buying life insurance.

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.

Which of the following statements about accelerated death benefits riders is (are) true? I. Under a terminal illness rider, after a partial payment is made to the insured, there is a reduction in the face amount of insurance, cash value, and premiums. II. Benefits under a long-term care rider are for home health care only.

I only

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 assignment of a life insurance policy is (are) true? I. Under a collateral assignment, the policyowner assigns a life insurance policy to secure a loan. II. Under an absolute assignment, only limited ownership rights in a policy are transferred.

I only

Which of the following statements about the change of plan provision in a life insurance contract is (are) true? I. A change to a lower premium policy results in a refund of the difference in the cash values of the two policies. II. A change to a higher premium policy requires evidence of insurability.

I only

Which of the following statements about the grace period in a whole life insurance contract is (are) true? I. The purpose of the grace period is to prevent the policy from lapsing by giving the policyowner additional time to pay an overdue premium. II. If the insured dies during the grace period, the death benefit is reduced by 50 percent.

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

11) 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 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 dividend options is (are) true? I. The interest on dividends left to accumulate with the insurer is not considered to be taxable income. II. Paid-up additions are additional units of whole life insurance.

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 ownership of a life insurance policy is (are) true? I. Under the ownership clause, the policyholder and beneficiary equally share all contractual rights in the policy while the insured is living. II. The policyholder can designate a new owner by filing an appropriate form with the insurance company.

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 the entire contract clause is true?

It specifies that the life insurance policy and the attached application constitute the complete agreement between the parties.

Which of the following statements is true regarding an automatic premium loan provision?

Its purpose is to prevent a policy from lapsing because of nonpayment of premium.

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 statements about the guaranteed purchase option is true?

The additional coverage can be purchased without demonstrating insurability.

Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended?

The applicant had someone else take the medical examination required for policy approval for her.

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 the waiver-of-premium provision in life insurance is true?

The disability must occur before a stated age, such as 65, for premiums to be waived.

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.

All of the following are requirements that must be satisfied before premiums are waived under a waiver-of-premium provision EXCEPT

The insured must satisfy a 2-year waiting period.

Which of the following statements about the assignment of a life insurance policy is true?

The insurer must be notified of any assignment or the death proceeds will be paid to the named beneficiary.

All of the following statements about the interest settlement option are true EXCEPT

The minimum guaranteed interest rate is usually equal to the prime rate.

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 by holding down expenses.

Which of the following statements about the guaranteed purchase option is true?

The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable.

Which of the following statements about life insurance policy loans is true

The policyholder must pay interest on a life insurance policy loan.

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.

All of the following statements about the requirements to reinstate a lapsed life insurance policy are true EXCEPT

There is no time limit on when the policy may be reinstated

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 statements about life insurance settlement options is true?

Under the fixed amount option, the beneficiary can be given the right to increase or decrease the fixed amount.

Which of the following statements about nonforfeiture options found in life insurance policies is true?

Under the reduced paid-up option, no additional premiums must be paid.

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

The transfer of all ownership rights in a life insurance policy can be accomplished through a(n)

absolute assignment.

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.

Advantages of selecting the paid-up additions dividend option in a life insurance policy include which of the following? I. Evidence of insurability is not required to purchase additional insurance. II. The additions are purchased at net rates without a loading for expenses.

both I and II

Disadvantages of life insurance settlement options include which of the following? I. Higher yields can often be obtained elsewhere. II. Life income options have limited usefulness at younger ages.

both I and II

Reasons for NOT purchasing an accidental death benefit rider include which of the following? I. Most people die as a result of a disease rather than from an accident. II. The economic value of a human life is not increased if death occurs because of an accident.

both I and II

Sources of life insurance dividends include which of the following? I. Excess interest earned on the assets necessary to maintain legal reserves II. Favorable mortality experience

both I and II

Which of the following statements about a typical accidental death benefit rider is (are) true? I. Accidental injury must be the cause of death for the increased benefit to be paid. II. The accidental death must occur prior to some specified age for the increased benefit to be paid.

both I and II

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

The cost-of-living rider typically bases increases in the policy face value on changes in the

consumer price index.

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 provision will 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

Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract?

entire contract clause

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.

A dividend option that allows the policyholder to purchase 1-year term insurance is referred to as the

fifth dividend option.

Cal purchased a whole life policy 6 years ago. The policy requires annual premium payments. Cal forgot to pay the premium that was due 2 weeks ago. He wonders if his life insurance is still in force. Which life insurance policy provision is designed to keep the policy in force for a short time even if the premium payment is late?

grace period

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.

Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application?

incontestable clause

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

12) 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.

Bert purchased a life insurance policy 4 years ago. He inadvertently stated that he was 1 year younger than his actual age. If Bert dies today, how much will the insurance company pay?

less than the policy face value

) 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.

13) 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 beneficiary designations is (are) true? I. The primary beneficiary is entitled to the death proceeds of a life insurance policy only if the contingent beneficiary dies before the insured. II. If a revocable beneficiary designation is used, the insured must obtain the beneficiary's permission of exercise most policy rights.

neither I nor II

Which of the following statements about life income settlement options is (are) true? I. Under a joint-and-survivor life income option, payments cease at the death of the first annuitant. II. Under a life income with guaranteed period, a contingent beneficiary is guaranteed a minimum number of payments regardless of when the primary beneficiary dies.

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.

Which life insurance policy provision specifies that it is the policyholder, and not the insured or beneficiary, who possesses all contractual rights while the policy is in force?

ownership clause

Which of the following is a common dividend option found in a participating life insurance policy?

paid-up additions

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.

A contingent beneficiary in a life insurance policy has the right to

receive the policy proceeds if the primary beneficiary dies before the insured

All of the following are nonforfeiture options found in cash value life insurance policies EXCEPT

reduction of premiums.

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.

What major feature distinguishes a participating policy from a nonparticipating policy?

the payment of dividends

Which of the following pieces of information is needed to calculate a person's human life value?

the person's cost of self-maintenance.

Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company?

the premiums paid for the policy

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

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.

The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a

viatical settlement.

Becky is considering the purchase of a whole life policy on her own life. She is concerned that if she becomes disabled, paying premiums will become a burden. Which provision can Becky attach to her life insurance policy to address this concern?

waiver-of-premium provision

Under the needs approach, when is the dependency period of a surviving spouse assumed to end?

when the youngest child reaches age 18