fin412 ch.9
Suppose that your husband was killed in a bank robbery. Which of the following is not one of the typical settlement options that would be available? A) Installment-payments B) Interest-only C) Conversion of spousal insurance D) Lump-sum E) Life annuity
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Roxanne has been stricken with a muscular degeneration disease that may potentially shorten her life span. However, she chose a renewable term insurance policy because she is able to be continually renew the policy for an agreed-upon period, regardless of her deteriorating condition.
true
Term life insurance provides protection for a specified amount of time; typically 1-30 years.
true
The beneficiary is the individual designated by the owner of the life insurance policy to receive the insurance policyʹs proceeds upon the death of the insured.
true
The earnings multiple approach is based on the notion that you want to replace a stream of annual income thatʹs lost due to the death of a breadwinner.
true
Sally brings home $50,000 a year to help provide financial support to her family, comprised of her husband and two children. She is considering purchasing life insurance. Using the earnings multiple approach, how much coverage should she purchase using a discount rate of 5% to replace 10 years of earnings.
386,000. PMT=-50,000 N=10 I/Y=5 FV=0 PV=CPT
A.M. Best, Standard & Poorʹs, Moodyʹs, and Weiss perform a vital service for the insurance industry. What do they do? A) They rate the quality level and performance of each company. B) They tell you the best price deals. C) They provide information on the best policies. D) They provide a listing of all agents. E) They provide a listing of all agents who have violated insurance laws.
A
Jenny and Joey have seven children and are expecting another. Joey is the primary income provider for his family, and the couple recognizes that the growing family is in need of life insurance. To begin the agent search process, Jenny and Joey make a list of prospects from reputable companies. Both Jenny and Joey prefer to speak to an agent with a life insurance certification. What life insurance agent designation do you recommend?
A) CLU
You might consider another insurance agent if your agent uses the ________ method to analyze the costs of a policy. A) TNC B) IANC C) NCO D) TLC E) none of the above
A) TNC
What is the name of the insurance policy that pays your beneficiary a specific amount of money if you die while covered by the policy, and this coverage is for a set number of years and must be renewed when it expires?
A) Term insurance
Andrew and Alice have health issues that may be passed on to their children. When the children are born would they be wise to obtain life insurance immediately on the infants prior to any of the medical conditions arising?
A) Yes, this would be wise as the infant is not likely to have to pass a physical exam.
You want to get a good buy on your life insurance contract. You find a book that compares insurance costs by incorporating the time value of money into its calculations. This method allows you to select wisely using the
A) interest-adjusted net cost method.
The ________ is the right of the policyholder to choose to receive the policyʹs cash value in exchange for the policyholder giving up his or her right to a death benefit.
A) nonforfeiture right
The settlement option that provides for ongoing payments for a period of time is called
A. An annuity
With decreasing term insurance A) the premiums remain constant, but the face amount of the policy declines. B) the premiums decline, and the face amount of the policy declines. C) the premiums remain constant, and the face amount of the policy remains constant. D) the premiums decline, and the face amount of the policy increases.
A. the premiums remain constant, but the face amount of the policy declines.
The nonforfeiture right gives the policyholder the cash value of the policy in exchange for the policyholder giving up his or her right to a death benefit.
true
A method of determining how much life insurance you require based on funds your family would require to maintain its lifestyle after your death is called the A) earnings multiple approach. B) needs approach. C) cash liquidity approach. D) funds analysis approach. E) none of the above.
B
What is the purpose of companies such as A.M. Best, Moodyʹs and Standard & Poorʹs? A) They sell life insurance directly to consumers without agents. B) They evaluate and rate the financial stability of the insurance industry. C) They provide reinsurance coverage to the insurance industry. D) They sell low cost term insurance via the Internet.
B
The alternative ways that a beneficiary can choose to receive the policy benefits upon the death of the insured are called
B settlement options
Alice and Tommy have 3 dependent children. Alice earns $125,000 per year. They are taking out insurance on Alice for the next 30 years. Tommy expects to get a 9.25% rate of return on the life insurance payoff. Using the earnings multiple approach calculate how much life insurance they need to take out on Alice.
B) $1,005,011
Suppose that you earn $50,000 annually. You expect expenses to drop by 22% for your family in the event of your death. Currently, if you die, you want to provide for your family for at least 15 more years, and the applicable after-tax and inflation return assumed is 5%. Using the earnings multiple approach provided in your textbook, what would be the amount of life insurance that you should purchase?
B) $404,820
Letʹs assume you are the beneficiary of your great Auntʹs life insurance policy. Sadly she passed away yesterday. You elect to receive annual payments from this policy for the next 20 years. The settlement amount is $500,000 and the interest accruing on the policy is an annual 8%. What will be your annual life insurance annuity payments?
B) $50,926
Brendaʹs husband Bob died last week. Her agent told her she could receive the death proceeds tax-free and a monthly check until her death. He is talking about the ________ settlement option.
B) life annuity
John purchases a life insurance policy on his wife Betty where he pays the premium and he will receive the life insurance money when she dies. John is both the ________ and the ________ who will receive the ________ upon the death of Betty, the ________. A) insured; beneficiary; money; policyholder B) policy owner; beneficiary; face amount; insured C) policy owner; insured; face amount; beneficiary D) beneficiary; premium payer; face amount; policy holder E) none of the above
B) policy owner; beneficiary; face amount; insured
The policy owner must pay the premium during the grace period or they forfeit the policy.
true
The incontestability clause states that the insurance company cannot dispute the validity of the contract after a specified period of time, usually
B. 2 years
The coverage grace period gives you an extension of generally ________ in which to make your premium payment without cancelling your policy.
B. 30 days
Suppose that you have decided to buy some life insurance. Which method of determining your life insurance needs calculates the annual loss of income stream?
B. Earnings multiple approach
Riley knows her ex-husband would not think about taking out a life insurance policy on himself to protect their two children in the event of his untimely death. As a result, Riley is taking out a policy on him and paying for it herself. That makes Riley the ________ and her children are the ________.
B. Policy owner, beneficiaries
Your agent has told you to think about immediate needs at the time of death, debt elimination funds, immediate transitional funds, dependency expenses, spousal life income, educational expenses for the children, and retirement income. What has he described? A) The multiple earnings need approach B) The needs approach C) The standard approach D) The combination approach E) The long-term approach
B. The needs approach
Using the needs approach to determine the amount of coverage looks from the perspective of the
Beneficiary
Special provisions that may be added to your policy which either provide extra benefits to the beneficiary or limit the companyʹs liability under certain conditions are known as A) alternative provisions. B) secondary provisions. C) riders. D) attachments. E) none of the above.
C
The ________ rider increases your death benefits at the same rate as inflation without forcing you to complete a new medical exam. A) waiver of premium for disability B) living benefits C) cost-of-living adjustment (COLA) D) guaranteed insurability E) accidental death benefit
C
Life insurance buying is a new experience for many people. Which of the following is not a basic consideration when determining life insurance needs? A) Whether or not you need life insurance at this time B) The amount of coverage you need now and in the future C) The settlement options D) The type of life insurance that fits your needs E) Shopping around for the best agent and price
C Settlement options
Joleene is a single parent with two children and earns $45,000 per year. She is purchasing term life insurance for 15 years until her youngest child is self supporting. Assuming her survivors can receive a 3% after-tax, inflation return on insurance proceeds, use the earnings multiple approach to calculate the face value of Joleeneʹs policy.
C) $397,548
Luke is 30 years old and earns an annual salary of $55,000. His wife wants to take out a life insurance policy on him until he turns 67. Using the earnings multiple approach, how large should the face value of his insurance policy be assuming his wife can earn an annual rate of return of 8.5% on his life insurance pay off?
C) $430,803
Nancy and Leonard are married. They have two children who will be financially dependent for the next 20 years. They are taking out life insurance on Leonard, the bread winner and earns an annual salary of $80,000. Nancy is sure she is able to get a 9.5% rate of return on the policy settlement. Using the earnings multiple approach calculate how much life insurance they should take out on Leonard.
C) $549,893
Charles is the sole beneficiary of his late uncleʹs life insurance policy. The face value of the policy is $785,000. Charles has decided to accept annual annuity payments of $95,000. The interest rate on the policy is 5%. How many annual payments will Charles receive from this policy?
C) 10.92 years worth of payments
Which of the following is not an insurance rating service?
C) Standards & Fitch
Using the earnings multiple approach is determining the present value of an annuity as a means to determine the face value of the insurance policy one needs to purchase.
true
Cash value policies include a ________ clause that allows you to borrow against the cash value of the policy.
C. Loan
Billyʹs occupation is a potentially dangerous one he is a skydiving instructor. His agent pointed out that the monthly premiums will be high. Billy wants a lot of value for his money. He could take advantage of ________ life insurance at this time to save money.
C. term
41) Sally Heath has the option of obtaining life insurance through her place of employment. She will not need to take a physical exam. This type of policy would be a/an ________ policy. A) universal life B) employerʹs life C) renewable term life D) group term life E) intermediate term life
D
For which of these situations is life insurance a good idea? A) Married with children B) Married, single-income couple with no children C) Single with no dependents D) Only A and B E) All of the above
D
What are the disadvantages of group term insurance? A) The premiums are usually subsidized by the employer. B) The cost to covert from group coverage to individual coverage if you leave the company may be cost prohibitive. C) Relying on group insurance may hinder your decision to leave the company. D) Both B and C are correct.
D
What are the main features of whole life insurance? A) The premiums stay constant for your entire life. B) The nonforfeiture right allows you access to the cash value account if needed. C) It provides your with permanent insurance regardless of age and health issues. D) All of the above are correct. E) All but B are correct.
D
You know you desperately need life insurance but donʹt have much money available for premiums. What is the best thing you can do to find affordable insurance? A) Buy directly from the insurance company. B) Buy term insurance. C) Use the Internet to shop around for the best quotes. D) All of the above
D
With term life insurance, the beneficiary receives a fixed death benefit.
true
Using the earnings multiple approach calculate how much life insurance Heather and Robert need to take out on Heather. She earns $80,000 and is 37 years old. They want coverage until she retires at age 67. Robert is sure he can get an annual rate of return on the policy settlement of 8%. They have no children.
D) $630,417
The needs approach to determining life insurance amounts considers which of the following? A) Immediate financial needs B) Debt elimination funds C) Dependency expenses D) All of the above
D. All of the above
What are the risks associated with term insurance policies? A) You may need to have insurance coverage past the term expiration date. B) The cash value does not earn a decent return. C) The renewal premium may be cost prohibitive. D) Both A and C are correct.
D. Both a and c
All of the following are types of life insurance annuity settlements except A) straight life annuity. B) period certain annuity. C) refund annuity. D) joint life and survivorship annuity. E) variable annuity.
E
At what point does whole life insurance pay the death benefit? A) When the insured turns 100 years old B) When the maximum stated age is reached by the insured C) Upon due proof of death of the insured D) When the cash value equals the death benefit E) Either A, B, or C above
E
Barry Blair wants to select a good life insurance agent. His dad has had several negative experiences with life insurance agents in the past. What should Barry consider when selecting an agent? A) Has a professional designation B) Is a full-time agent C) Has the necessary experience and training D) Has references E) All of the above
E
Choose the option(s) available in the nonforfeiture clause of a cash-value life policy. A) Exchange the policy for a paid-up term policy of equal face value. B) Receive the policyʹs cash value. C) Retain rights to a death benefit. D) Exchange the policyʹs cash value for a paid-up policy with a reduced face value. E) A, B, and D above
E
With the needs approach, you should take into consideration any additional insurance policies that have been taken out on your life.
true
Most likely, when you apply for life insurance, you will have to fill out a detailed medical history and take a physical exam. Why is this true? A) The insurance company wants to see if you have any pre-existing conditions. B) It prevents sick people from purchasing insurance. C) It determines how you will be rated and what premiums you will pay. D) All of the above E) All but B are correct.
E
Sonny Coltraine was told by a friend that universal life is the best policy. He will find that A) it will have a tax-deferred savings feature. B) death benefits are not taxable income. C) death benefits and premiums are fixed. D) death benefits and premiums are flexible. E) A, B, and D above.
E
Which of the following factors is connected with convertible term life insurance? A) A medical exam is not required. B) It helps make a smooth transition from term to cash-value insurance. C) There is a corresponding increase in premium cost. D) Generally, the conversion feature is only offered during the first two years. E) All of the above
E
Your agent argues in favor of cash-value life insurance. You counteract with term to A) have a larger policy and keep things simple. B) enjoy a relatively low cost per each $1,000 of coverage. C) have a lot of insurance at affordable prices when you need it the most. D) save the difference you would pay, invest it, and come out ahead. E) all of the above.
E
Life insurance may not be necessary if A) youʹre single and donʹt have any dependents. B) youʹre married, a double-income couple, with no children. C) youʹre married but arenʹt employed. D) youʹre retired. E) all of the above.
E all of the above
What are the advantages of term life insurance? A) It allows you to increase your insurance coverage for specific reasons and specific time periods. B) With decreasing term coverage, your premiums get smaller as you get older. C) It has no investment feature so it costs less than other forms of insurance. D) All of the above are correct. E) Only A and C are correct.
E) Only A and C are correct.
The money that the policy holder is entitled to if the policy is terminated is known as the face value.
False
When the Affordable Care Act is fully implemented, 100 percent of Americans will have health care insurance.
False
The policy feature that allows you to pay the premium late but still retain coverage is known as the
Grace period
Life insurance and health insurance are designed to transfer the catastrophic risk you canʹt afford to keep onto the insurance companies.
True
________ is insurance that provides permanent insurance coverage as whole life does; however the policyholder, not the insurance company, takes on the investment risk.
Variable Life insurance
Sharing the financial consequences associated with risk in the insurance industry is sometimes called
a. risk pooling
The primary advantage of term insurance is
affordability
According to the Keown book, ________of U.S. households have no life insurance coverage.
b. 30%
Statisticians who specialize in estimating the probability of death based on personal characteristics are called
b. Actuaries
Wayne and Sarah are trying to manage the risk they face in life a best as they can. They are following Principle 7 which states
b. protect yourself against major catastrophies
The individual designated by the owner of the life insurance policy to receive the policyʹs proceeds upon the death of the insured is called the
beneficiary
Javier Jimenez was pleasantly surprised to find out that within three to five years after expiration of a previous life insurance policy, he can A) change beneficiaries. B) void the grace period. C) reinstate the policy subject to current qualifications. D) change the incontestability clause. E) both A and D above.
c
According to the Keown book, 50 percent of U.S. households have no life insurance coverage.
false
Convertible term life insurance can be converted into cash-value life insurance, depending on the insuredʹs medical condition pending a medical exam.
false
Currently only 10% of Americans receive some type of government health care entitlements such as Medicaid or Medicare.
false
Most life insurance settlements are based on the named insured dying from an accidental death.
false
One of the best features of term insurance is that you are able to borrow against the face value.
false
Practically all insurance contracts include a suicide clause stating that the insurance company wonʹt pay off for suicide deaths that occur within the first five years of the contract.
false
Sandra is terrible at saving; therefore her insurance advisor suggested a term life insurance policy for her since it has a saving/investing aspect.
false
Term life insurance has a life insurance component and a savings plan.
false
The Patient Protection and Affordable Care Act was signed into law in 2010; however many of its aspects do not go into effect until 2020.
false
The advantage of whole life insurance is that it is generally cheaper than term life insurance per dollar of coverage.
false
The primary advantage of term insurance is a flexible premium.
false
The suicide clause will pay double the face value to the beneficiary if the named insured commits suicide.
false
With decreasing term insurance, each time the term insurance is renewed the premium decreases.
false
With decreasing term life insurance, the face amount of the policy remains constant, but the premiums decrease.
false
A disadvantage of term insurance is that the cost rises each time the policy is renewed.
true
A guaranteed insurability rider allows you to increase your face value even if your health fails.
true
A universal life insurance policy is a type of cash-value insurance combining term insurance with a tax-deferred savings feature in a package in which both the premiums and the benefits are flexible.
true
According to the Keown book, two recommended online insurance quote services are accuquote.com and insure.com.
true
Actuaries are statisticians who specialize in estimating the probability of death based on personal characteristics, such as your age and general health, as well as lifestyle specifics such as whether or not you exercise.
true
All life insurance policies should have a contingent beneficiary designated.
true
An insurance policy is a contract with an insurance company that spells out what losses are covered, what the policy costs, and who receives the payment if a loss occurs.
true
Cash-value insurance is any policy that provides both a death benefit and an opportunity to accumulate cash value.
true
In dealing with risk, one can either avoid it, manage it, or transfer it for a fee.
true
Life insurance is not meant to benefit you, its purpose is to protect others in the event of your death.
true
One of the reasons insurance is so expensive is due to the expense of developing, testing and verifying new drugs. This cost is passed on to consumers.
true