Chapter 15 Life insurance and Annuities

___________ pays only until the annuitant dies.

Straight life annuity

(TRUE or FALSE?) A lapse occurs in a life insurance contract when the policyholder makes extra premium payments.

F

*Incorrect* a. term insurance provides pure death protection coverage b. in a typical universal life insurance policy, the policyholder has considerable flexibility in the payment of premiums c. in a variable life policy, cash value grows at an uncertain rate that depends on premium payments, expense and profit loading, mortality charges, and interest rates d. in whole-life insurance policy, cash value grows according to a fixed schedule over time e. cash value policies provides both death protection and savings accumulation

variable life policy, cash value grows at an uncertain rate that depends on premium payments, expense and profit loading, mortality charges, and interest rates

*Incorrect* a. with a life insurance contract, the death benefit amount to beneficiaries is not included in taxable income b. with a term life insurance policy, the insured pays more than the cost of pure life insurance protection at the beginning of the protection period c. none of the above d. while life insurance policyholder is alive, the income earned on cash value is not taxed e. term life insurance policy typically provides death coverage with increasing premiums every year

with a term life insurance policy, the insured pays more than the cost of pure life insurance protection at the beginning of the protection period

*Incorrect* a. "Annuity certain" pays until the death of annuitant. b. Whole life policies are not unbundled (bundled); policyholder does not see all the details of cash value accumulation. c. An annuity that pays over a fixed period of time regardless of death is called an annuity certain. d. Most of the answers are correct. e. In a typical whole life policy, death benefit (face value of the contract) is at level and predetermined.

"Annuity certain" pays until the death of annuitant.

You are 30 year-old now and planning for your retirement. Your health is good and your family history points out to a long life up to the 90 year-old age. Based on your expectation, you will be content with an annual income of $100,000 (year-end payments) starting at the retirement age of 65 until the 90 year-old age. Assuming interest rate is 10% and expected to stay that way for a long time, how much year-end annual contributions will be sufficient if you start to contribute this year?

*Step 1:* N=25, I/YR=10, PV=?, PMT=100,000, FV=0 => PV=$907,704, *Step 2:* N=35, I/YR=10, PV=0, PMT=?, FV=907,704 => PMT=$3,349.16

You are 20 year-old now and planning for your retirement. You are healthy and therefore expect that you might live up to the 100 year-old age. Based on this forecast, you feel that a monthly income of $10,000 starting at the retirement age of 65 (at the end of 1st month) until the 100 year-old age will be enough. Assuming annual interest rate is 10% in the distribution period and 8% in the accumulation period, how much monthly contributions will be sufficient if you start to contribute at the end of this month (month-end contributions)?

*Step 1:* N=35x12=420, I/YR=10/12=0.83333, PV=?, PMT=10,000, FV=0 => PV=$1,163,233.77, *Step 2:* N=45x12=540, I/YR=8/12=0.66667, PV=0, PMT=?, FV=1,163,233.77=> PMT=$220.54

___________ usually pays dividends to the policyholders.

Participating life insurance policy

___________ provides death protection benefits only and there is no savings accumulation.

Term life insurance

*Incorrect* a. Universal life policies provides flexibility in the payment of premiums, usually with a minimum and maximum amount of premium payment specified. b. Most of the answers are correct. c. Universal life policy premiums depends on the market value of a portfolio with stocks and bonds. d. Term life insurance premiums generally increase with face amount of the policy. e. "Joint and last survivor" annuity contracts pay until the both beneficiaries; usually a wife and husband, pass away.

Universal life policy premiums depends on the market value of a portfolio with stocks and bonds.

A policy which pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called:

endowment policy

A mutual life insurance firm promises to pay dividends in all its policies and their policies said to be:

participating

*Correct* A.Whole life is a cash value policy. b. In a typical universal-life insurance policy, the cash value depends on the returns of a portfolio stocks and bonds. c. If the objective of your life insurance program is to get the greatest death protection for your insurance dollars, you should choose a whole life insurance policy. d. All the answers are incorrect. e. Whole life policies are not bundled (unbundled); policyholder can see all the details of cash value accumulation.

. Whole life is a cash value policy.

(TRUE or FALSE?) "Annuity certain" type of annuity product pays over a fixed period of time regardless of the death of annuitant.

T

(TRUE or FALSE?) "Joint and last survivor" annuity contracts pay until the both beneficiaries; usually a wife and husband, pass away.

T

(TRUE or FALSE?) A policy which pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called an endowment policy.

T

(TRUE or FALSE?) As a person gets older, term life insurance premiums will increase.

T

(TRUE or FALSE?) If the objective of your life insurance program is to get the greatest death protection for your insurance dollars, you should choose a term life insurance policy.

T

(TRUE or FALSE?) In a typical whole life policy, death benefit (face value of the contract) is at level and predetermined.

T

(TRUE or FALSE?) Life insurance premiums are determined basically by the use of mortality tables.

T

*Incorrect* a. A life insurance contract's renewability implies that a policyholder can extend the coverage term without re-qualifying for the coverage. b. Most of the answers are correct. c. Death benefit means how much the insured will receive personally if she dies d. Life insurance agents usually use an ad-hoc benchmark and recommend that life insurance policyholders buy coverage 5 to 10 times of their annual income. e. Universal life policy premiums depends on expected losses due to mortality rates, loadings, and market interest rates that the insurer uses.

c. Death benefit means how much the insured will receive personally if she dies.

*Incorrect* a. Universal life policy premiums depends on expected losses due to mortality rates, loadings, and market interest rates that the insurer uses. b. As a person gets older, term life insurance premiums will increase. c. Variable life insurance provides pure life insurance coverage only and no savings accumulation. d. A participating whole life policy is one that can and usually does pay dividends. e. Most of the answers are correct

c. Variable life insurance provides pure life insurance coverage only and no savings accumulation.

*Correct* a. Endowment insurance pays the face amount only when the policyholder dies. b. All the answers are incorrect. c. Term life insurance contracts are not usually guaranteed renewable and their premium decreases over time. d. Women tend to have lower mortality risk at any given age compared to men. e. An annuity that pays over a fixed period of time regardless of death is called an "straight life annuity." Check

d. Women tend to have lower mortality risk at any given age compared to men.

Variable annuity

has the return credited to the annuity contract that varies with the return on stock and bond funds that policyholder chooses and there is no minimum rate of return.

Face amount:

is the stated amount of coverage of a life insurance policy

*Incorrect* a. with a whole life insurance policy, the insured pays more than the cost of pure life insurance protection during the early years the policy is in force b. whole life insurance policy provides protection at a level premium for the entire lifetime of the insured c. with a whole life insurance policy, the insured pays more than the cost of pure life insurance protection during the late years the policy is in force e. there is no possibility of partial loss in life insurance as there is in the case of property and casualty insurance

with a whole life insurance policy, the insured pays more than the cost of pure life insurance protection during the late years the policy is in force

What is the main reason that term life insurance premiums increase over time?

a. Mortality tables show that probability of dying increases with age

*Incorrect* a. Most of the answers are correct. b. "Straight-life annuity" pays over a fixed period of time regardless of the death of annuitant. c. Policyholders are entitled to receive back a portion of a whole life policy's cash value if they terminate, lapse, or surrender the policy. d. With a typical whole life insurance policy, the death benefit is kept at level and squency of cash values grow according to a fixed schedule over time e. Variable life insurance provides both pure life insurance coverage and savings accumulation.

"Straight-life annuity" pays over a fixed period of time regardless of the death of annuitant.

(TRUE or FALSE?) Smokers of all ages have significantly higher mortality risk than non-smokers.

T

(TRUE or FALSE?) Whole life insurance premiums are higher at the beginning of the policy period than that of term-life policy.

T

(TRUE or FALSE?) With the whole life insurance contracts, premiums generally do not increase over time.

T

Annuity certain:

c. pays over a fixed period of time regardless of death.

Term insurance premiums generally increase with: a. insurer expense loadings b. all of the above c. none of the answers is d. policyholder's age Incorrect e. face amount of the policy

all of above

(TRUE or FALSE?) Cash value accumulates with a term-life insurance contract.

F

(TRUE or FALSE?) In a typical term life policy, the face amount remains fixed over the life of the policyholder but the death protection component decreases and the cash value component increases.

F

(TRUE or FALSE?) Life insurance premiums are determined basically by the use of present value tables applied to the expected future premiums.

F

(TRUE or FALSE?) One of the tax problem of life insurance is that high levels of income tax is paid on the annual increase in cash value while the policy in force.

F

(TRUE or FALSE?) Policyholders are entitled to receive back a portion of a term life policy's cash value if they terminate, lapse, or surrender the policy.

F

(TRUE or FALSE?) Universal life insurance provides pure life insurance coverage only and no savings accumulation.

F

(TRUE or FALSE?) Universal life policy premiums depends on the market value of a portfolio with stocks and bonds.

F

(TRUE or FALSE?) Variable life policies are bundled; policyholders cannot see the details of cash value accumulation.

F

(TRUE or FALSE?) Whole life policies are not bundled (unbundled); policyholder can see all the details of cash value accumulation.

F

*Incorrect* a. Whole life insurance has higher upfront premiums than that of term life insurance policy. b. Most of the answers are correct. c. In a typical term-life insurance policy, premiums are flexible and customized to insured's needs. d. Universal life policy premiums depends on expected losses due to mortality rates, loadings, and market interest rates that the insurer uses. e. A participating whole life policy is one that can and usually does pay dividends.

In a typical term-life insurance policy, premiums are flexible and customized to insured's needs.

*Correct* a. In a typical universal-life insurance policy, the cash value depends on the returns of a portfolio stocks and bonds. b. A lapse occurs in a life insurance contract when the policyholder makes extra premium payments. c. Smokers of all ages have significantly lower mortality risk than non-smokers. d. In a typical whole life policy, the face amount remains fixed over the life of the policyholder but the death protection component decreases and the cash value component increases.

In a typical whole life policy, the face amount remains fixed over the life of the policyholder but the death protection component decreases and the cash value component increases.

*Correct* b. Universal life policy premiums depends on expected losses due to mortality rates, loadings, and market interest rates that the insurer uses c. A lapse occurs in a life insurance contract when the policyholder makes extra premium payments. d. Term life insurance provides cash value equal to the face amount of the policy if the insured dies during the policy period. e. An insured usually chooses term life insurance in order to emphasize the savings portion.

b. Universal life policy premiums depends on expected losses due to mortality rates, loadings, and market interest rates that the insurer uses

*Correct* a. Whole life policies are not bundled (unbundled); policyholder can see all the details of cash value accumulation. b. Whole life insurance is a type of cash value life insurance. c. Term life insurance provides death protection and savings accumulation. d. All the answers are incorrect. e. With the term life insurance contracts, premiums generally do not increase over time.

b. Whole life insurance is a type of cash value life insurance.

Whole life insurance: a. none of the answers is correct. b. provides death protection and savings accumulation. c. all of the answers are correct. d. is a type of cash value life insurance. e. provides death protection equal to the face amount of the policy less the cash value.

c. all of the answers are correct.

*Incorrect* a. Most of the answers are correct. b. Variable life insurance provides pure life insurance coverage only and no savings accumulation. c. As a person gets older, term life insurance premiums will increase. d. Smokers of all ages have significantly higher mortality risk than non-smokers. e. Variable life cash value varies with the market value of a portfolio containing stocks and bonds, or other securities.

Variable life insurance provides pure life insurance coverage only and no savings accumulation.

*Incorrect* a. Smokers of all ages have significantly higher mortality risk than non-smokers. b. Most of the answers are correct. c. Whole life policies have relatively high level premiums because higher premium collected in early years must subsidize the higher cost of death protection in the later years. d. As a person gets older, term life insurance premiums will increase. e. Variable life insurance provides pure life insurance coverage only and no savings accumulation.

Variable life insurance provides pure life insurance coverage only and no savings accumulation.

*Correct* a. Term life insurance has higher upfront premiums than that of whole life insurance policy. b. Whole life policies are not unbundled (bundled); policyholder does not see all the details of cash value accumulation. c. Term life is a cash value policy. d. All the answers are incorrect. e. Men tend to have lower mortality risk at any given age compared to women

Whole life policies are not unbundled (bundled); policyholder does not see all the details of cash value accumulation.

*Correct* a. "Straight life annuity" pays until the death of annuitant. b. "Joint and last survivor" annuity contracts pay for a specific number of years. c. An insured usually chooses term life insurance in order to emphasize the savings portion. d. All the answers are incorrect. e. Term life insurance premiums are higher at the beginning of the policy period than that of whole-life policy.

a. "Straight life annuity" pays until the death of annuitant.

*Incorrect* a. A policy which pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called a term life policy. b. Smokers of all ages have significantly higher mortality risk than non-smokers. c. Most of the answers are correct. d. Whole life insurance premiums are higher at the beginning of the policy period than that of term-life policy. e. Universal life policy premiums depends on expected losses due to mortality rates, loadings, and market interest rates that the insurer uses.

a. A policy which pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called a term life policy.

*Incorrect* a. in a typical variable life policy, the cash value grows at a guaranteed rate b. with a typical variable life policy, the policyholder pays premiums according to a fixed schedule c. a typical variable life policy provides a death benefit equal to a minimum amount plus the cash value of the policy d. most whole-life policies are endowment policies to age 100

a. in a typical variable life policy, the cash value grows at a guaranteed rate

*Correct* a. Term life insurance has higher upfront premiums than that of whole life insurance policy. b. A life insurance contract's renewability implies that a policyholder can extend the coverage term without re-qualifying for the coverage. d. With the term life insurance contracts, premiums generally do not increase over time. e. With variable annuities, the return credited to the contract varies with the premiums paid by the policyholder in the distribution period.

b. A life insurance contract's renewability implies that a policyholder can extend the coverage term without re-qualifying for the coverage.

*Correct* a. Universal life is a called a "market value policy." b. A policy which pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called an endowment policy. c. All the answers are incorrect. d. Cash value accumulates with a term-life insurance contract. e. A rare type of endowment life insurance is called decreasing endowment insurance and it usually has an increasing face value and premium.

b. A policy which pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called an endowment policy.

*Correct* a. With the term life insurance contracts, usually the policy period ends when insured reaches 100 and the term life insurance contract is equivalent to endowment policy to 100. b. One of the tax problem of life insurance is that death benefits are taxable as income (also they may be subject to estate taxes). c. A policy which pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called a term life policy. d. All the answers are incorrect. e. "Straight life annuity" pays until the death of annuitant.

e. "Straight life annuity" pays until the death of annuitant.

*Incorrect* a. Universal life policies provides flexibility in the payment of premiums, usually with a minimum and maximum amount of premium payment specified. b. In a typical variable-life insurance policy, the cash value depends on the returns of a portfolio stocks and bonds. c. Whole life insurance policy period ends when insured reaches 100 or 120. d. Most of the answers are correct. e. With an "annuity certain" contract, the insurer's payments end only after the death of two people, usually a husband and wife.

e. With an "annuity certain" contract, the insurer's payments end only after the death of two people, usually a husband and wife.

*Incorrect* a. none of the above b. cash value policies provide a tax-advantaged method of saving, including income tax deferral on savings accumulations c. variable life insurance policies require insurance agents and brokers to have additional certifications to assure that agents and brokers have authority to buy and sell commons stocks and other publicly traded securities d. whole-life policy premiums are higher toward to end of the contract e. term-life policy premiums are lower at the beginning years of the contract but gradually increases with age

e. term-life policy premiums are lower at the beginning years of the contract but gradually increases with age

Term life insurance:

provides a death benefit equal to the face amount of the policy if the insured dies during the policy period.

Which of the following life insurance contract does not have cash value component?

term life