Chapter 13 Life Insurance

Which of the following will not affect the premiums on a term life insurance policy? A) Age of the policyholder B) Percentage earned on savings portion of premium C) Gender of the policyholder D) Family medical history of the policyholder

B) percentage earned on savings portion of premium

The most accurate method of determining life insurance needs is A) the income method. B) the budget method. C) subtracting your annual income from $1 million. D) having enough insurance to provide $50,000 per year for 20 years.

B) the budget method

A disadvantage of whole life policies is that A) the premiums are not predictable. B) they are much more expensive than term policies. C) the face value of the policy can change over time. D) the cash value is frozen and not available to policyholders.

B) they are much more expensive than term policies.

The income method, used to calculate your life insurance coverage, multiplies your current annual income by A) your expenses per month. B) your number of dependents. C) some arbitrary number, such as 10. D) your life expectancy.

C) some arbitrary number, such as 10.

Life insurance may be obtained through all of the following except A) financial institutions. B) private insurance companies. C) the federal government. D) your employer.

C) the federal government

If a policyholder with a universal life insurance policy skips a payment, then the policy A) is terminated. B) refunds the amount paid and terminates the policy. C) uses an amount from savings to pay the premium. D) has the premium increased.

C) uses an amount from savings to pay the premium

Using the income method, if Jenny has an annual income of $50,000, debt of $20,000, and a factor of 10, then she should purchase ________ of life insurance. A) $100,000 B) $200,000 C) $300,000 D) $500,000

D) $500,000

The only reason a person would buy life insurance is to eliminate or substantially reduce the financial consequences of that person's death by providing income to his or her dependents. (true/false)

False

The problem with the cash value build up of a whole life insurance policy is that the money can only be used to pay off the policy or buy additional insurance. (true/false)

False

The services that insurance companies provide should not be a factor in selecting a life insurance company. (true/false)

False

Universal life insurance is the same from one insurance company to another and is, therefore, the most common and popular form of life insurance. (true/false)

False

Advantages of whole life insurance policies are that they provide long-term coverage, the rates are fixed, and they have a savings or cash value feature. (true/false)

True

Disadvantages of term insurance are that it increases in cost when you renew it and that it has no value when it matures or you discontinue your policy. (true/false)

True

Term life insurance is considered temporary insurance, since the policy is only in effect for a relatively short period of time. (true/false)

True

Universal life insurance is similar to whole life, but allows the policyholder more choices of how the savings portion of their premiums are invested. (true/false)

True

Using the budget method of determining life insurance needs, a family's future expected expenses is considered. (true/false)

True

Whole life policies can be structured to provide a higher level of death benefits to beneficiaries in the early years of the policies or for the policies to be paid off in a certain time period, for example twenty years. (true/false)

True

All of the following are true of the income method of determining life insurance needs except it A) is easy to use. B) does not consider your age. C) factors in the number of children in your family. D) doesn't figure in savings or investments.

C) factors in the number of children in your family

Whole life insurance has a ________ premium and has ________ cash value build up over the life of the policy. A) fixed; no B) variable; a C) fixed; a D) variable; no

C) fixed; a

Life insurance proceeds are not used to A) pay off a mortgage. B) support parents or other relatives. C) fund the policyholder's retirement. D) fund charities.

C) fund the policyholder's retirement

Which of the following is not an option as a way to use the cash value of your whole life policy? A) Borrow the money at a low rate of interest B) Use the proceeds to buy term insurance in the same value as your whole life policy C) Have the insurance company invest your cash value in stocks or mutual funds of your choosing D) Cancel the policy and get your cash value returned to you

C) have the insurance company invest your cash value in stocks and mutual funds of your choosing

Life insurance affects everything except your A) liquidity. B) net worth. C) life expectancy. D) peace of mind.

C) life expectancy

If no one else relies on your income, life insurance may not be necessary. (true/false)

True

The more savings a household has accumulated, the less life insurance they will need. (true/false)

True

How much insurance would be needed in order to provide for a family for 20 years if the pretax income necessary to cover living expenses is $50,000 and the money can be invested at 6 percent? A) $573,500 B) $1,000,000 C) $833,333 D) $2,100,000

A) $573,500

A person earning $75,000 per year has term life insurance at their place of employment equal to their annual income. Using the income method with a factor of 5, how much additional life insurance will s/he need? A) $375,000 B) $300,000 C) $75,000 D) $50,000

B) $300,000

Which of the following is not a type of life insurance covered in the text? A) Term B) Dependent life C) Whole life D) Universal life

B) Dependent life

Sam figures it will take $250,000 invested at 6% to provide suitable income to his family for 12 years. He would also like to have $40,000 set aside to educate his two children. Sam's current savings is $20,000. How much life insurance does he need using the budget method? A) $190,000 B) $250,000 C) $270,000 D) $310,000

C) $270,000

Which type of life insurance allows the policyholder to make his own individual investment decisions? A) Whole life B) Group life C) Variable life D) Deferred term life

C) Variable life

Term life insurance is A) often available in group policies through employers. B) less expensive when you renew it. C) pure insurance with no savings feature. D) Both A and C

D) Both A and C

On which type of insurance policy is choosing an insurance company with a high rating the most important? A) Disability insurance B) Automobile insurance C) Homeowner's insurance D) Life insurance

D) Life insurance

A limited payment option on a whole life policy pays a smaller share of the policy face value to beneficiaries during the first five years of the policy. (true/false)

False

A lump sum settlement option is usually the best choice, even if a beneficiary is not very good at managing sums of money. (true/false)

False

Whole life policies are the least expensive way to meet your life insurance needs. (true/false)

False

A disadvantage of variable life policies is that the cash value may actually decrease in value if stocks or other investments decline. (true/false)

True

A person's need for life insurance varies quite a bit over his or her lifetime. (true/false)

True

Life insurance may not be that important for a couple who both work full-time and who could each be self-sufficient without the other person's income. (true/false)

True

Term insurance will provide most of a young family's life insurance coverage due to its affordable cost. (true/false)

True

A universal life policy gives policyholders the right to select their ________ that whole life policyholders do not have. A) term B) investments C) savings D) amount

B) investments

Low cost life insurance, often available without a physical exam, is generally offered by A) Internet insurance companies. B) mutual insurance companies. C) employer-sponsored group insurance plans. D) independent insurance agents.

C) employer-sponsored group insurance plans

________ life insurance can only by used to pay off a home in the event of the policyholder's death. A) Mortgage B) Decreasing-term C) Universal life D) Homeowner

A) Mortgage

Which of the following does not represent a financial goal related to life insurance? A) Provide funds for retirement B) Maintain financial support for your dependents C) Provide funds to cover burial costs D) Provide funds to support your parents

A) Provide funds for retirement

________ insurance is life insurance that is provided over a specified time period and does not build cash value. A) Term B) Whole life C) Universal life D) Variable life

A) Term

The best time to buy a whole life insurance policy in terms of expense is A) as a child. B) when you are in college. C) when you have dependents. D) in your retirement.

A) as a child

The best substitute for mortgage insurance would be ________ insurance. A) decreasing term B) whole life C) universal life D) variable life

A) decreasing term

All of the following are limitations of the budget method except A) does not consider your family circumstances. B) inflation may cause you to underestimate you needs. C) someone in your household could experience an unanticipated illness. D) your income may not rise over time as expected.

A) does not consider your family circumstances

In the ________ method, life insurance is determined as a multiple of your annual income. A) income B) asset C) balance sheet D) budget

A) income

If you choose to receive your benefit in the form of equal payments for a certain number of years instead of a lump sum, you elected to receive a(n) A) installment payment settlement. B) interest payment settlement. C) lump sum settlement. D) limited settlement.

A) installment payment settlement

A disadvantage of term insurance is that A) it becomes more expensive when you renew it. B) the cash value portion of the premium is larger than other forms. C) you can only exchange your cash value for other insurance. D) it is expensive early in life when you need it the most.

A) it becomes more expensive when you renew it.

The least expensive form of life insurance is A) term. B) whole life. C) universal life. D) variable life.

A) term

The job marketability of your spouse A) would be a factor considered in the budget method of determining life insurance needs. B) is used in the income method of determining life insurance needs. C) is really not that important in determining life insurance needs. D) is the main factor in determining whether or not you even need life insurance.

A) would be a factor considered in the budget method of determining life insurance needs

Life insurance would be necessary in all of the following situations except A) you are single and have no dependents. B) you are married and your spouse has no income. C) you have three school-aged children. D) you financially support your disabled mother.

A) you are single and have no dependents

Which of the following is not a method of settlement options for life insurance? A) Lump-sum settlement B) Deferred-value settlement C) Installment payments settlement D) Interest payments settlement

B) Deferred value settlement

In using the Internet to price insurance, which of the following is not true? A) It is fast and convenient. B) It is usually more expensive. C) There is less pressure. D) You can compare rates among several companies at once.

B) It is usually more expensive.

Which of the following insurance type is strictly intended to provide only insurance in the event of death? A) Whole life B) Term C) Universal life D) Variable life

B) Term

Which of the following best explains the reason that approximately 1/3 of households in the U.S. do not have life insurance? A) People like to focus on more enjoyable events B) There is no immediate benefit C) People don't want to make the periodic payments D) People don't want to think about it

B) There is no immediate benefit

Which of the following insurance is intended to provide a limited choice of investments and an insurance component in the event of death? A) Whole life B) Universal life C) Term insurance D) Mortgage life

B) Universal life

Life insurance proceeds are generally not taxable to the A) insured. B) beneficiary. C) administrator. D) benefactor.

B) beneficiary

If you wanted to provide more coverage to your family early in life when they need it the most and decrease this amount of coverage in later years, yet continue to pay the same premiums, you should buy a(n) ________ policy. A) whole life B) decreasing term C) universal life D) variable life

B) decreasing term

Term insurance provided to a designated group of people with a common bond is called A) decreasing term insurance. B) group term insurance. C) whole life insurance. D) universal life insurance.

B) group term insurance

One advantage of whole life insurance over term life insurance is A) premiums are not affected by age. B) whole life insurance forces people to save money. C) whole life insurance is less expensive than term life. D) whole life builds more cash value that term life.

B) whole life insurance forces people to save money

The budget method is based upon all of the following except A) the amount of debt you owe. B) your annual income. C) the value of your existing savings. D) special expenses you will need.

B) your annual income

Using the income method, determine the amount of insurance an individual would need, employing a factor of 10, if their net income is $65,000, their assets total $280,000, their liabilities total $130,000, their two children's anticipated college education needs total $730,000, and their invalid mother's future nursing home expenses total $290,000. A) $2,850,000 B) $1,500,000 C) $650,000 D) $730,000

C) $650,000

Which of the following is false concerning term life insurance? A) The premiums increase as you renew the policy B) It will expire and be of no value if not renewed C) Has a cash value or savings feature as long as you keep the policy active D) It provides the same amount of cash to a beneficiary as whole life policies

C) Has a cash value or savings feature as long as you keep the policy active

Insurance companies are assigned ratings by all of the following except A) Moody's. B) Standard and Poor's. C) Securities and Exchange Commission. D) A.M. Best.

C) Securities and Exchange Commission

Your need for life insurance will last for 20 years. You also wish to save some money over that same time period. What kind of life insurance would fill this requirement? A) Term B) Decreasing term C) Universal life D) Deferred life insurance

C) Universal life

A lump-sum insurance settlement would be most appropriate for A) a surviving spouse with small children. B) parents living in a nursing home. C) a disciplined beneficiary. D) a former spouse.

C) a disciplined beneficiary

If you buy a term insurance policy with a conversion option, this means that you A) will get most of your premiums back if you terminate the policy before its expiration. B) can convert the policy to a larger term policy after one year. C) can convert your term policy to a whole life policy during the conversion period. D) will be able to change the term of your policy and automatically extend it.

C) can convert your term policy to a whole life policy during the conversion period

In comparison to an equivalent amount of term insurance, mortgage life insurance A) costs less. B) costs the same. C) costs more. D) the cost depends on the age of the house.

C) costs more

You are putting $100 a month into a passbook savings account to pay for your child's college education. You worry that if you die before you get enough saved, your child will not be able to get a college education. Which of the following types of life insurance would best fit your needs at the lowest cost? A) Whole life B) Universal life C) Decreasing term D) Variable life

C) decreasing term

Which of the following policies will not give you a cash settlement if you terminate the policy? A) Whole life B) Universal life C) Decreasing term life D) Variable life

C) decreasing term life

A life insurance premium is ________ related to your age. A) somewhat B) occasionally C) directly D) inversely

C) directly

Of the following statements dealing with premiums on life insurance, which is not true? A) Some factors that affect premiums are decided at birth. B) Premiums will increase if you buy insurance when you are older. C) The kind of policy you buy will determine your premiums. D) There are very few things you can do to reduce your life insurance premiums.

D) There are very few things you can do to reduce your life insurance premiums

Which of the following will increase your need for life insurance? A) Your spouse graduates from college B) You receive a large inheritance C) Your only child graduates from college D) You get married

D) You get married

Which of the following factors does not affect your life insurance premiums? A) Your gender B) Your health C) The cash value of the policy D) Your level of education

D) Your level of education

The income method of determining how much life insurance coverage you need is A) based on future family expenses. B) based on the age of your children. C) based on the amount of your 401(k). D) a good starting point.

D) a good starting point

The easiest method of estimating your life insurance needs is the A) life cycle approach. B) budget approach. C) financial approach. D) income approach.

D) income approach

If your life follows the pattern of college-marriage-kids-retirement, your need for life insurance will A) steadily increase. B) steadily decrease. C) stay the same. D) peak and then decline.

D) peak and then decline

Whole life insurance is also referred to as A) endowment life insurance B) universal life insurance. C) group life insurance. D) permanent insurance.

D) permanent insurance

Life insurance premiums are based on all of the following except A) the amount of coverage you desire. B) your age when you take out the policy. C) your health habits. D) the age of your children when the policy is taken out.

D) the age of your children when the policy is taken out

When choosing a life insurance company, you should consider all of the following criteria except A) the financial condition of the company. B) the cost of the policy. C) the types of policies offered. D) the length of the application.

D) the length of the application

If the premium on a term insurance policy is not paid by the due date, which of the following is true? A) The policy is immediately terminated. B) The death benefit of the policy is reduced by the amount of the premium owed. C) The premium will be deducted from the cash value of the policy. D) The policyholder is given a grace period to pay after which the policy will be terminated if premium is not paid.

D) the policyholder is given a grace period to pay after which the policy will be terminated if premium is not paid.

Life insurance that provides insurance over a specified term and allows policyholders to invest residual funds is known as A) whole life insurance. B) term life insurance. C) universal life insurance. D) variable life insurance

D) variable life insurance

Brad earns $50,000 per year as a manufacturer's rep and his wife, Nancy, earns $100,000 per year as an Oncologist. When they had children, Nancy left her practice to become a full-time mother. The family's expenses are $35,000 per year, which includes an amount being saved for the children's college education. Brad and Nancy have two children, ages 2 and 5. They receive an average return of 6% on their investments. Nancy has retained her active medical license and plans to return to work full-time when the children enter school. Using the budget method, how much life insurance should the family have in the event of Brad's death? A) $344,100 B) $573,500 C) $1,147,000 D) zero

D) zero

During the time the policy is in effect, term life insurance has a good savings and investment component. (true/false)

False

If you want to borrow money from the cash value of your whole life policy, the interest rates are relatively high and the terms of the loan are quite strict. (true/false)

False

Life insurance is an indication of good financial planning, since it provides a payment to the policyholder upon his or her death. (true/false)

False

The beneficiaries of life insurance policies can only be family members or those directly impacted by a person's death. (true/false)

False

The constitutional beneficiary is the person who will receive the death benefits if the primary beneficiary is no longer living when the policyholder dies. (true/false)

False

The income method, basing life insurance needs on multiples of current income, is the easiest and most accurate method of determining how much life insurance a person should buy. (true/false)

False

Life insurance is critical to protect a family's financial situation in the event that a breadwinner dies. (true/false)

true