Finance Quiz #2 - C11

Assume a breadwinner would provide $25,000 annually to his or her family for 25 years. At an interest rate of 6%, what is the HLV?

$319,584

Which $50,000 life insurance policy, if purchased at age 32, would have the highest cash value when the insured was 50 years old? whole life paid up at age 65, 10-year level term insurance, continuous premium whole life insurance, 10-payment whole life insurance

10-payment whole life insurance

Human life value approach calculation

A((1-(1+i)^-n)/i) = Pv

Two income families

DINKs (double income no kids), DIWKs (double income with kids)

Needs Approach

Determine assets/income, and obligations, difference is life insurance

T/F A blended family is one in which a son or daughter with children is also supporting an aged parent or parents

False, blended is divorced/widowed with children remarries to family with children

T/F The blackout period is the one- or two-year period following the death of the breadwinner.

False, called the readjustment period

T/F Indexed universal life insurance increases the amount of life insurance in force each year to keep pace with inflation

False, cash value is indexed

T/F Coverage ceases after the last premium is paid on a limited-payment whole life policy

False, coverage remains for life

T/F Premature death is defined as death before reaching life expectancy

False, death of family head with outstanding financial obligations

T/F Industrial life insurance is group term coverage sold to industrial workers

False, individual, cash value, life insurance, collected at house

T/F The difference between the face amount of a life insurance policy and the legal reserve is the cash value

False, net amount at risk

T/F Under the level premium method of providing life insurance protection, premiums paid during the early years are lower than what is needed to pay death claims

False, premiums paid in early life are higher under level premium method

Which statement is true with regard to the human life value approach? I) it crudely measures the economic value of a human life. II) It considers the specific needs of the family in determining the amount of life insurance to purchase.

I only

T/F Financial dependency is a major justification for the purchase of life insurance

True

T/F Preferred risks have a lower-than-average probability of death

True

T/F Whole life premiums may be paid until death, or for a limited period

True

T/F Yearly renewable term insurance premiums increase at an increasing rate as the insured grows older

True

T/F the dependency period refers to the period until the youngest child reaches the age 18

True

T/F Term life insurance may be renewable and/or convertible to whole life without the insured having to prove he/she is still insurable

True, limits the renewability (age)

Which statement about second-to-die life insurance is true? I) second-to-die life insurance is often used in estate planning. II) second-to-die life insurance costs less than purchasing two separate policies

both I and II

Which statement about universal life insurance is true? I) Universal life allows the policyowner to vary premium payments. II) Universal life allows the policyowner to earn a market-based rate of interest on the cash value

both I and II

The ____ of whole life insurance may be borrowed at interest. Outstanding loans reduce the benefit paid to beneficiary if insured dies.

cash value

Joint life insurance

covers two people, pays on first death

Second to die life insurance

covers two people, pays on second death (estate planning, married couple with kids)

Human Life Value Approach

crude estimate of the present value of family's share of deceased breadwinner's future earnings

Bill purchased a nonparticipating life insurance policy. The cash value was based on the insurer's present mortality, expense, and investment experience. His premium was guaranteed for an initial period, and is "redetermined" after three years. Bill purchased

current assumption whole life insurance

Major tax advantages of life insurance?

death benefits tax free, cash value accumulates on tax free basis, participating dividends are not taxable

Premature death

death occurs when obligations still need to be satisfied

Sandwiched families

different generations

Cost of premature death are

economic (loss of income to family), noneconomic (grieving, readjustment)

The economic justification for the purchase of life insurance is

financial dependency

Universal Life Insurance has a ____ premium, interest-sensitive life insurance that separates the savings and the protection elements.

flexible

Julie purchased a life insurance policy with these characteristics: nonparticipating, maximum premium was stated in policy, insurer can adjust premium based on anticipated future experience. What type of insurance?

indeterminate-premium whole life insurance

Universal life is popular when

interest rates are high

Premiums are ____ with whole life insurance. Exceeding the cost of mortality in early years and are less than the mortality cost in later years. Cash value develops

level

Juvenile life insurance

low face value that increases at certain age

UL Characteristics

minimum guaranteed interest rate, unbundling, flexibility, expenses, two forms, income tax treatment

One form of life insurance has a reduced premium for the first three to five years, with the premium increased after this initial period. This type of whole insurance is called

modified life insurance

The difference between the face amount of a life insurance policy and the legal reserve of the policy is called the

net amount at risk

VL has fixed premiums and

no cash value guarantees

Traditional family

one income family

Blended Families

parent with children joins another parent with children

Variable life insurance is

permanent insurance combined with a mutual fund

Whole life insurance is

permanent life insurance protection

All of the following are costs associated with premature death of the breadwinner except: loss of the family's share of the deceased breadwinner's future income, personal maintenance expenses of the deceased, reduction in the family's standard of living, additional expenses such as funeral and uninsured medical bills

personal maintenance expenses of the deceased

Variable-Universal Life is exactly like universal life, but has two exceptions

policyowner selects the investment, minimum interest rate is not guaranteed

Group life insurance

popular employee benefit, over 99% is term life insurance

Preferred risk

premium discount for superior risk

All of the following are characteristics of variable life insurance except: premium payments are flexible, cash value is not guaranteed, policyowner selects where the savings reserve is intended, minimum death benefit is guaranteed, death benefit can be higher if the investment is favorable

premium payments are flexible

Which statement is true with regard to yearly renewable term insurance? premiums remain level from year to year, premiums increase at an increasing rate from year to year, the insured must demonstrate insurability to renew the coverage, yearly renewable term premiums are unrelated to the probability of death

premiums increase at an increasing rate from year to year

Term life insurance

pure insurance for specified period, temporary, significant needs, not a lot of money

An important consideration in determining the amount of life insurance to purchase is the need for income during the one- or two-year period after the death of the breadwinner. This period is called the

readjustment period

In addition to caring for their young children, Lyle and Lynn Thomas also support Lyle's father and Lynn's mother. This type of family is called a

sandwiched family

Industrial life insurance

small face value, premium collected at insured's home (no longer popular)

Blackout period

survivor benefits until the child turns 16, ends when that person gets their own benefits at age 60+

Whole life insurance has no ______. It doesn't change with the current market.

volatility

Modified life insurance (shoehorn)

whole life premiums discounted initially, and higher thereafter

Which of the following $100,000 yearly renewable (YRT) policies would require the LOWEST premium? man age 30, woman age 30, man age 60, woman age 60

woman age 30