Chapter 12

Using the Multiple of Income Method to estimate life insurance needs, what is the minimum amount of insurance needed for Susan Smith if her annual income is $60,000? Multiple Choice $60,000 $100,000 $150,000 $200,000 $300,000

Ans: $300,000 Math 60,000 x 5= $300,000

Term insurance is protection for a specified period of time, usually: Multiple Choice 1 year 5 years 10 years 20 years Any of these intervals are offered

Any of these intervals are offered

Suppose you are 47 and have a $90,000 face amount, 13-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $315. The cash value of the policy is expected to be $3,600 in 13 years. Using time value of money and assuming you could invest your money elsewhere for a 6 percent annual yield, calculate the net cost of insurance. Use Exhibit 1-B. (Do not round intermediate calculations. Round time value factor to 3 decimal places and final answer to the nearest whole number.)

At a 6 percent annual yield, your account would have accumulated to $5,948 in 13 years. You have paid $2,348 for 13 years of insurance protection.

The method of determining life insurance requirements that considers factors such as Social Security and your liquid assets is called the: Multiple Choice easy method. single-income method. DINK method. "nonworking" spouse method. "family need" method.

"family need" method.

How many different types of life insurance companies are there? Multiple Choice 1 2 3 4 5

2

Using Exhibit 12-2, determine the average number of additional years males alive at age 50 may expect to live. (Round your answer to 1 decimal place.)

A male age 50 is expected to live on average an additional 29.8 years. Based on the table provided

Life insurance proceeds may be used to: Multiple Choice pay off a home mortgage. cover funeral costs. make charitable bequests. pay estate taxes. All of these

All of these

Which of the following questions are important to consider when choosing an insurance agent? Multiple Choice Is your agent available when needed? Does your agent advise you to have a financial plan? Is your agent happy to answer questions? Does your agent keep up with changes in the insurance field? All of these

All of these

Mutual companies issue only nonparticipating policies. True or false

False

Term insurance continues for the entire term even if you stop paying the premiums. True or false

False

Who has the greatest need for life insurance? Multiple Choice Households with small children Singles living alone Singles living with parents Dual income couple Retired person

Households with small children

Using the "nonworking" spouse method, what should be the life insurance needs for a nonworking spouse whose youngest child is 11 years old?

Life insurance need =Number of years until the youngest child is 18 × $10,000 =(18 - 11) × $10,000 =$70,000

Tim and Allison are married and have two children, ages 9 and 15. Allison is a "nonworking" spouse who devotes all of her time to household activities. Estimate how much life insurance Tim and Allison should carry to cover Allison.

Life insurance need =Number of years until the youngest child is 18 × $10,000 =(18 - 9) × $10,000 =$90,000

Jane Curtain has a participating life insurance policy that returns part of her premiums at the end of the year. What is another name for this policy? Multiple Choice Cash Value Par Nonpar Rider Double Indemnity

Par

Taylor Jones has a life insurance policy that returns every cent she pays in premiums if she outlives the term of the policy. She knows this policy costs 30 to 50 percent more than a traditional policy but thinks it is worth it. What type of term life insurance does Taylor have? Multiple Choice Straight Renewable Convertible Decreasing Return-of-premium

Return of Premium

Before you buy life insurance, you should determine whether you really need life insurance. True or false

True

Credit life insurance is used to repay a personal debt should the borrower die before doing so. True or false

True

The amount of your whole life insurance premium for each $1,000 of coverage depends primarily on the age at which you purchase the insurance. True or False

True

The premium that is refunded to policyholders of a participating policy is called the policy dividend. True or false

True

Suppose you are 35 and have a $75,000 face amount, 15-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $675. The cash value of the policy is expected to be $3,000 in 15 years. Using time value of money and assuming you could invest your money elsewhere for a 8 percent annual yield, calculate the net cost of insurance. Use Exhibit 1-B. (Do not round intermediate calculations. Round time value factor to 3 decimal places and final answer to the nearest whole number.)

At a 8 percent annual yield, your account would have accumulated to $18,328 in 15 years. You have paid $15,328 for 15 years of insurance protection.

You and your spouse are in good health and have reasonably secure jobs. Each of you makes about $36,000 annually. You own a home with a $95,000 mortgage, and you owe $17,700 on car loans, $9,800 in personal debt, and $3,300 in credit card loans. You have no other debt. You have no plans to increase the size of your family in the near future. You estimate that funeral expenses will be $6,500. Estimate your total insurance needs using the DINK method.

DINK Method One half of mortgage: $47,500 One half of car loan: 8,850 One half of personal debts: 4,900 One half of credit card loans: 1,650 Funeral expenses: 6,500 Total insurance need =$69,400

Which of the following attributes would not be used by an underwriter to determine the appropriate premiums to charge for insurance? Multiple Choice Marital status Gender Health Age Occupation

Marital Status

You have a gross annual income of $59,000. Use the multiple of income method to determine the maximum amount of life insurance you should carry.

Maximum insurance need =$59,000 × 10 =$590,000

Allen has purchased a whole life policy with a death benefit of $180,000. Assuming that he dies in 10 years and the average inflation has been 4 percent, what is the value of the purchasing power of the proceeds? Use Exhibit 1-A. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)

Purchasing power of proceeds =Death benefit / FVIF4%, 10 =$180,000 / 1.480 =$121,621.62 FVIF4%, 10 value (1.480) received from table

Susan has purchased a whole life policy with a death benefit of $600,000. Assuming that she dies in 8 years and the average inflation has been 5 percent, what is the value of the purchasing power of the proceeds? Use Exhibit 1-A. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)

Purchasing power of proceeds =Death benefit / FVIF5%, 8 =$600,000 / 1.477 =$406,228.84 FVIF5%, 8 (1.477) retrieved from provided table

Using Exhibit 12-2, determine the life expectancy of a 10-year-old male. (Round your answer to 1 decimal place.)

life expectancy =Current age + Expected additional years =10 + 67.1 =77.1 years

Fundamentally, group life insurance is ____________ insurance. Multiple Choice term whole life ordinary life permanent universal life

term

The Multiple of Income method of determining life insurance needs: Multiple Choice assumes you have only two children. assumes your spouse does not work. assumes your insurance needs are complex. uses your annual income as the sole factor. assumes your spouse is in an occupation with an uncertain future.

uses your annual income as the sole factor.