Chapter 10 - Financial Planning with Life Insurance (Problems & Solutions)
Your variable annuity charges administrative fees at an annual rate of 0.2 percent of account value. Your average account value during the year is $122,000. What is the administrative fee for the year? (Round your answer to the nearest whole dollar) (LO10-4)
Annual administrative fee = Fee rate x Account value = 0.0020 x $122,000 = $244
You and your spouse are in good health and have reasonably secure careers. Each of you makes about $44,000 annually. You own a home with an $88,000 mortgage, and you owe $19,000 on car loans, $9,000 in personal debts, and $8,000 on credit card loans. You have no other debts. You have no plans to increase the size of your family in the near future. Estimate your total insurance needs using the (Dual Income, No Kids) DINK method. Assume funeral expenses of $6,000
Insurance need (DINK) = 1/2 debts + Funeral costs One half of mortgage = $44,000 One half of car loan = 9,500 One half of personal debts = 45,00 One half of credit card loans = 4,000 Funeral expenses = 6,000 Total Insurance Needs = $68,000
You are the wage earner in "typical family", with $70,000 gross annual income. Use the easy method to determine how much insurance you should carry.
Insurance need = Annual income x 7 x 0.70 (easy method) = $70,000 x 7 x 0.70 = $343,000
Use Exhibit 10-1 (see below) to find the average number of additional years a 40 - years old male and female are expected to live, based on the statistics gathered by the U.S. government as of 2009. (Round your answers to 1 decimal place)
Male 38.3 years Female 42.3 years
Shelly's variable annuity has a mortality and expense risk charge at an annual rate of 1.5 % of account value. Her account value during the year is $105,000. What was Shelly's mortality and expense risk charge for the year?
Mortality and risk expense charge = Fee rate x Account value = 0.015 x $105,000 = $1,575
Shaan and Anita are married and have two children, ages 3 and 5. Anita is a "non working" spouse who devotes all of her time to household activities. Estimate how much life insurance Shaan and Anita should carry. (Use the "non working" spouse method)
Multiply the number of yours before the youngest child reaches age 18 by $10,000. Insurance need = (18 - Age of youngest child) x $10,000 =(18-3) x $10,000 = $150,000
Sophia purchased a variable annuity contract with $90,000 purchase payment. Surrender charges begin with 8 percent in the first year and decline by 2 percent each year. In addition, Sophia can withdraw 11 percent of her contract value each year without paying surrender charges. In the first year, Sophia needed to withdraw $16,000. Assume that the contract value had not increased or decreased because of investment performance. What was the surrender charge Sophia had to pay?
Surrender charges of annuities: The insurance company will assess a "surrender" charge if you withdraw money within a certain period, usually with 6 to 8 years. Generally, he surrender charge defines gradually over a period of 7 to 10 years. Surrender charge = [Withdraw all amount - (Free withdraw all % x Account value)] x Surrender charge = [$16,000 - (0.11 x $90,000)] x 0.08 = $488
