Personal Finance Ch. 8

Universal: You're covered for ___ increments and premiums ___ over time. Interest rate is ___, but has a guaranteed ___. There are high ___, but have flexibility to pay premiums with ___

1 month increase variable minimum fees savings

The first question that the needs analysis method asks is: What financial resources will my survivors need should I die tomorrow? When answering this question, you should consider the following five items:

1- Income needed to maintain adequate lifestyle 2- extra expenses if primary income provider dies 3-special needs of dependents 4-debt liquidation 5-liquidity

What 3 things should you prioritize your money towards when you get out of school?

1- debt 2- cash reserves (10k-12k) 3- retirement

The rule of thumb used by many insurance agents is that your insurance coverage should be equal to ___ to ___ times your current income

5-10

what benchmark is commonly used to determine the current rate of interest for universal life policies?

90-day U.S. Treasury bill rate

life insurance decisions can be made easier by following this step-by-step approach: Do you ___ life insurance? If so, how ___? Which ___ of life insurance is best, given your financial ___? What ___should you consider in making the final ___ decision?

Need much type, objectives factors, purchase

What are the two benefit options for universal life?

Option A Option B

revives the original contractual relationship between the company and the policyholder. Most often, the policyholder must do this within a specified period (three to five years) after the policy has lapsed.

Reinstatement

Regarding stock portfolios, people do the opposite of what you're supposed to do when the market return increases or drops! What do they do that is wrong?

They buy high and sell low

There are good reasons for many young people to buy whole life, but it should seldom be purchased by anyone simply because the annual premium will be lower now than if it's purchased later. Why?

They'll pay less annually, but more in total because they start paying the premium sooner

With universal life, part of your premium pays ___fees, and the remainder is put into the ___ (___) portion of the policy, where it earns a certain rate of return

administrative fees cash-value (savings)

The annual premium on a straight term policy may increase each year, as with ____ policies, or remain level throughout the policy period, as with ____ policies.

annual renewable term level premium term

2 types of premiums in straight term policy: Which has become more popular?

annual renewable term policy level premium term policy level premium term policy

A lot of insurance types are intended to protect you and your family from the financial consequences of losing ___ or ___ when a(n) ___, illness, or ___ occurs.

assets, income accident, death

The simplest way to deal with risk is to ___ the act that creates it

avoid

A person who receives the death benefits of a life insurance policy after the insured's death. All policies should have one or more

beneficiary

If a high percentage of your wealth is in illiquid assets (real estate), the cash proceeds from life insurance can be used to pay the ___ and maintain ___ until they can be sold at a fair market value.

bills, assets

The advantage of universal and variable life policies over term and whole policies is that they can use ___ to pay for premiums. Can also increase ___ at anytime while keeping level ___ by tapping into savings

cash value coverage premium/payments

Universal life: each month the cost of 1 month's term insurance is withdrawn from the ___ to purchase the required death protection. So long as there's enough in the ___ portion to buy death protection, the policy will ___ in force

cash value savings stay

Universal life's flexibility in making premium payments, although an attractive feature, is also one of its two major drawbacks. Why?

changing premiums and protection levels heavy charges and fees

Why are insurance companies willing to accept the risk they do? They ___ the loss experiences of large numbers of people, and, by using statistical information known as ___ data, they estimate the risk of loss faced by the insured population

combine actuarial

Under a(n) ___ whole life policy—or ___, as it's more commonly called—individuals pay a level premium each year until they either die or exercise a nonforfeiture right

continuous premium straight life

If lifelong death protection is the primary aim of the life insurance policy, then the insured should purchase ___ whole life instead of ___

continuous premium limited payment

Three major types of whole life policies that are available:

continuous premium, limited payment, and single premium

Another option that can help overcome some of the limitations of term insurance is a(n) ___ provision which allows the insured to convert the policy to a comparable whole life policy.

convertibility

One of the biggest advantages of term life is ___. Term life usually offers lower initial ___ than other types of insurance, especially for younger people

cost premiums

One disadvantage of whole life insurance is its ___. It provides ___ death protection per premium dollar than term insurance does

cost less

For similar cash-value policies, you may find it useful to compare interest-adjusted ___ that are often shown on policy illustrations. The ___ measures the policy's cost if you surrender it after a certain period, typically 10 or 20 years, assuming that premiums and dividends earn 5 percent interest. The ___ is calculated in a similar way but assumes that the policy is kept in force.

cost indexes surrender cost index net payment cost index

Once you've estimated the lifetime financial needs of dependents, the next step is to list all ___ resources that will be available for meeting those needs

current

if you're recently married and expect to have children, a universal life policy will allow you to increase the ___ as your family grows.

death benefit

whole life insurance may be a wise purchase if a person wishes to combine a given amount of ___ for the entire life of the insured (or until the policy is terminated) with a(n) ___ that provides a ___ tax-sheltered rate of return

death protection savings plan moderate

A term insurance policy that maintains a level premium throughout all periods of coverage while the amount of protection decreases.

decreasing term life insurance policy

the most important benefit of life insurance is providing financial protection for your ___ after your death.

dependents

Many group life policies now offer coverage for ___ as well as group members. They also generally provide that individual members who leave the group may ___ the coverage by converting their protection to individually issued ___ life policies.

dependents continue whole

life insurance benefits include: Financial protection for ___ protection from ___ ___benefits vehicle for ___

dependents creditors tax savings

Although policy loans ___ have to be repaid, any balance plus interest on the loan remaining at the insured's death is ___ from the proceeds of the policy.

don't subtracted

3 steps of needs analysis: 1- Estimate the total ___ resources needed if the individual were to die. 2- Determine all ___ resources that would be available after death, including existing ___ and ___ death benefits. 3- Subtract ___ resources from the amount ___ to determine how much ___ life insurance is required.

economic financial, life insurance, pension plan available, needed, additional

If neither primary nor contingent beneficiaries are living at the death of the insured, then the death benefits pass to the ___ of the insured and are distributed by the probate court according to the insured's ___ or, if this doesn't exist, according to ___.

estate will state law

The insured uses the accumulated cash value to buy a term life policy for the same face value as the lapsed policy. usually goes into effect automatically if the policyholder quits paying premiums and gives no instructions to the insurer

extended term insurance

Because people now live longer, the rates for level premium term have ___ sharply and are well ___ those on annual renewable term from year 1 on, so they're a(n) ___ value and ___ popular.

fallen below better more

the savings rates on whole life policies are normally ___ and ___ to be more than a certain rate

fixed guaranteed

settlement option in which the beneficiary receives policy proceeds in regular payments of a predetermined amount until the proceeds run out.

fixed amount

settlement option in which the face amount of the policy, along with interest earned, is paid to the beneficiary over a specific amount of time

fixed period

Two principal advantages of universal life policies:

flexibility savings feature

Employers often provide group life insurance as a(n) ___ for their employees. However, just about any type of group (e.g., a labor union, a professional association, an alumni organization) can secure a group life policy as long as the insurance is only ___ to the reason for the group's existence.

fringe benefit incidental

The ___ permits the policyholder to retain full death protection for a short period (usually 31 days) after missing a premium payment date.

grace period

Life insurance that provides a master policy for a group; each eligible member receives a certificate of insurance

group life insurance

It is important to note that conversion normally doesn't require evidence of ___ as long as it occurs within a specified period. after conversion the individual pays all ___

insurability premiums

settlement option in whcih the insurance company keeps policy proceeds for a specified time; the beneficiary receives interest payments, usually at some guaranteed rate

interest only

Variable life: The policyholder decides how to ___ the money in the savings (cash-value) component. The investment accounts are set up just like ___, and most firms that offer variable life policies let you choose from a full menu of different funds

invest mutual funds

the amount of death benefits payable in variable life insurance policies is, for the most part, related to the policies' ___

investment returns

variable adv: disadv:

investment vehicle, insured decides how cash value is invested high risk

variable life puts more emphasis on ___ than any other life insurance product. If you want the benefits of higher investment returns, then you must also be willing to assume the risks of reduced insurance ___

investments coverage

Option A provides a(n) ___ death benefit. As the cash value increases, the amount of pure insurance protection ___

level decreases

Settlement option in which the insurer guarantees to pay the beneficiary a certain payment for the rest of his or her life, based on the beneficiary's sex, age when benefits start, life expectancy, policy face value, and interest rate assumptions.

life income

The primary purpose of ___ is to protect your dependents from financial loss in the event of your untimely death.

life insurance

An interesting variation of the life income settlement option is the ___ option, whereby the company guarantees a specified number of payments that would pass to a secondary beneficiary if the original beneficiary dies before the period ends.

life-income-with-period-certain

With a(n) ___ whole life policy, you're covered for your entire life, but the premium payment is based on a specified period—for example, so-called 20-pay life and 30-pay life require level premium payments for a period of 20 and 30 years, respectively.

limited payment

however, if people have life insurance already in force that is sufficient to protect against income loss, then they can use ___ policies as part of their savings or retirement plans.

limited payment

___ are placed on the total amount of survivor's benefits that can be paid to a household, and if the surviving spouse returns to work, then the amount of benefits will be ___ if ___exceed certain limits

limits reduced earnings

it's not enough to look only at current insurance policy rates. You'll also need to ask how long the rates are ___ and to find out about ___—the maximum you can be charged when you renew

locked in guaranteed rates

One way to overcome the drawback of having to pay increased premiums at the end of each term is to purchase a(n) ___ term policy

longer

because of its potentially temporary nature and relatively low benefit amount (often equal to about 1 year's salary), group insurance should be used only to fulfill ___-priority insurance needs.

low

Term advantage: Disadvantage:

low initial premium provides only temporary coverage for set period

in interest only settlement options, the interest rates paid by insurers are typically ___ than those available with other savings vehicles.

lower

most common settlement option, chosen by more than 95 percent of policyholders. The entire death benefit is paid in a single amount, allowing beneficiaries to use or invest the proceeds soon after death occurs

lump sum

a whole life policy should not be used to obtain ___ on ___

maximum return investment

variable life insurance would be good for people with ___ need after death.

minimal

variable life insurance policies do not guarantee a(n) ___. Also, the amount of insurance coverage provided varies with the ___ (and ___) generated in the investment account

minimum return profits, losses

As with term insurance, the negative aspects of whole life often arise from ___ of the policy

misuse

To avoid buying to much or too little life insurance, you can use one of two methods to estimate how much insurance is necessary: the ___ method and the ___ method.

multiple-of-earnings needs analysis

A method of determining the amount of life insurance coverage needed by multiplying gross annual earnings by some selected number

multiple-of-earnings method

Policy loans should not be used to cover ___

needs

a(n) ___ option gives a cash value life insurance policyholder some benefits even when a policy is terminated before its maturity

nonforfeiture

A life insurance feature giving the whole life policyholder, upon policy cancellation, the portion of those assets that were set aside to provide payment for the future death claim.

nonforfeiture right

The policyholder receives a policy exactly like the terminated one, but with a lower face value. In effect, the policyholder uses the cash value to buy a new, single premium policy. This option is useful when a person's income and need for death protection decline but they still want some coverage.

paid-up insurance

whole adv: (2) disadv:

permanent coverage savings vehicle, cash value builds as premiums are paid cash value yield is low

universal adv: (2) disadv:

permanent coverage savings vehicle, cash value builds at current rates of interest high fees and charges

Many life insurance contracts contain a provision that permits the insured to switch from one ___ to another

policy form

An advance, secured by the cash value of a whole life insurance policy, made by an insurer to the policyholder.

policy loan

Universal life: As time goes by, interest earned on cash savings pays for ___ more and more

premium

All life insurance contracts have a provision specifying when ___ , which are normally paid in advance, are due

premiums

The ___ beneficiary receives the entire death benefit if he or she is surviving when the insured dies. If this beneficiary does not survive the insured, then the insurer will distribute the death benefits to the ___ beneficiary or beneficiaries.

primary contingent

Insurance companies charge premiums to make a(n) ___

profit

The extended term insurance coverage period is based on the amount of term ___ a single premium payment (equal to the total cash value) buys at the insured's present age.

protection

be sure the policies that you are comparing have similar ___ and ___. first decide how ___ and what ___ of policy you want, and then compare costs

provisions amounts much kind

So long as a whole life policy is under the reduced paid-up insurance option or the extended term insurance option, the policyholder may ___ the original policy by paying all back ___plus ___ at a stated rate and by providing evidence that he or she can pass a physical ___ and meet any other insurability requirements

reinstate premiums, interest rate examination

A term life policy provision allowing the insured to renew the policy at the end of its term without having to show evidence of insurability.

renewability

He mentioned that in the recession many people shifted money from their___ into their ___ (essentially 0% interest). He used the rule of 72 to discuss the implications of $1000 today versus years from now. Can you use the rule of 72 and, say, an interest rate of 7% to discuss the 10, 20, and 30 year impact of using just $1,000 of your retirement savings?

retirement savings personal accounts It would take roughly 10 years to double ($2,000) 20 years to get to $4,000 and 30 years to get to $8,000.

uncertainty concerning a potential economic loss

risk

the multiple-of-earnings method should be used only to ___ life insurance needs.

roughly approximate

whole life insurance has a(n) ___ feature, called cash value, that results from the ___ on paid-in insurance premiums

savings investment earnings

Limited payment whole life and single premium whole life policies should be purchased only when the primary goal is ___ or additional tax-deferred ___and not protection against financial loss resulting from death.

savings investments

Limited payment whole life policies earn more in ___ because of ___ earnings. There's a(n) ___ amount of money for interest to grow on

savings interest larger

Universal life is a suitable choice if you're looking for a(n) ___ with greater potential ___ than a whole life policy offers

savings vehicle returns

For most families, money from ___, ___, and ___ make up the largest non-life insurance financial resources

savings, investments, and Social Security survivor's benefits

You can readily see how much more expensive whole life is than term life. The reason for the difference is that you pay extra for the ___ feature included with whole life.

savings/investment

Universal life: The death protection (or pure insurance) portion and the savings portion are identified ___ in its premium. This is referred to as ___

separately unbundling

When naming beneficiaries be ___

specific

Option B, provides a(n) ___amount of death benefit plus the ___. Therefore, the death benefit at any time ___with the rate of earnings on the savings plan and will increase along with the accumulated ___.

stated cash value varies cash value

single premium life insurance appeals to those looking for a(n) ___

tax-sheltered investment vehicle

Whole life insurance would be ideal for someone with a family history of heart disease, cancer, or similar conditions may increase your risk of developing health problems and make it hard to qualify for ___ insurance at a later date

term

Group life is nearly always ___ insurance, and the premium is based on the group's characteristics as a ___ rather than the characteristics of any specific ___

term whole individual

What is the rule of 72? formula?

the amount of time it will take money at a certain interest rate to double 72/i

universal life policies enjoy ___ favorable tax treatment as do other forms of whole life insurance: death benefits are ___ and, prior to the insured's death, amounts credited to the cash value (including investment earnings) accumulate on a(n) ___ basis.

the same tax free tax-deferred

After determining the amount of life insurance you need to cover your family's financial requirements and considering how various underwriting policies might affect you, your next step is to decide on the ___ of insurance policy

type

The process used by insurers to decide who can be insured and to determine applicable rates that will be charged for premiums.

underwriting

Permanent cash-value insurance that combines term insurance (death benefits) with a tax- sheltered savings/ investment account that pays interest, usually at competitive money market rates.

universal life insurance

Life insurance in which the benefits are a function of the returns being generated on the investments selected by the policyholder.

variable life insurance

Universal life: The rate of earnings ___ with market yields but is guaranteed to be ___than some minimum rate

varies more

State laws require that all permanent ___, ___, or ___ life policies (and ___ contracts covering an extended period) contain a nonforfeiture provision. What are the two types?

whole, universal, variable term paid-up insurance extended term insurance

Another frequently cited disadvantage of whole life is that its investment feature provides lower ___ than many otherwise comparable vehicles

yields

Universal life: Monthly premium= $100 Fees and charges = $30 You're told to pay $230 Why do you pay so much?

$100 goes into cash value

social security survivor's benefits: benefits are paid to unmarried children until age ___(or ___if they are still in high school) and to nonworking surviving spouses until their children reach age ___. The surviving spouse will also receive individual survivor's benefits upon turning ___.

18, 19 16 65

As with other areas of your personal financial plan, you should review and adjust life insurance programs (as necessary) at least every___ or after any ___ in the family

5 years major changes

Generally, term policies are renewable at the end of each term until the insured reaches age __ or __. However, the premium will still increase to reflect the greater chance of ___ at older ages.

65, 70 death

In all of cases, on completion of the scheduled limited payment whole life payments, the insurance remains in ___, at its face value, for the rest of the insured's life.

force

accurately estimating the ___ and ___ of insured losses that will occur is critical for insurance companies.

frequency magnitude

Because the death rate increases with each year of life, the premiums on annual renewable straight term policies for each successive period of coverage will ___.

increase

what does adverse selection do to premiums? the market?

increases premiums market fails

A contract between the insured and the insurer under which the insurer agrees to reimburse the insured for any losses suffered according to specified terms.

insurance policy

Convertibility is particularly useful if you need a(n) ___ amount of relatively ___-cost, ___-term protection immediately, but in the future, you expect to have ___ income that will allow you to purchase ___ insurance.

large low short greater permanent

Underwriters design rate-classification schedules so that people pay premiums that reflect their chance of ___. Through underwriting, insurance companies try to guard against ___

loss adverse selection

Any activity that lessens the severity of loss once it occurs.

loss control

Any activity that reduces the probability that a loss will occur.

loss prevention

The earlier in life the continuous premium coverage is purchased, the ___ the annual premium.

lower

someone in excellent health is usually considered "preferred" and pays the ___ premium

lowest

Term life being only temporary can be a problem if you develop underwriting factors in the future that make it difficult to ___ for insurance. Many term life policies overcome part of this drawback by offering a(n) ___ provision

qualify renewability

A guaranteed renewable provision allows you to renew the policy even if you have become ___ because of an accident or other illness during the original policy period.

uninsurable

Life insurance designed to offer ongoing insurance coverage over the course of an insured's entire life. Considered a(n) ___ insurance product

whole life insurance permanent

Life insurance doesn't protect ___, but it protects your ___ in the event of your untimely death

you loved ones

Who Should Buy Term Insurance? Most ___ families on limited ___

young budgets

Some insurance companies try to convince consumers to buy limited payment policies by stressing the "large" savings element that will develop and by emphasizing that the policyholder won't have to pay premiums for an entire lifetime. Why does this logic fail on two counts?

1- the primary purpose of whole life insurance is permanent protection against financial loss from death, not the accumulation of savings. 2-even if people buy continuous premium whole life (straight life) policies, they need to pay the premium only as long as they wish to keep the policies in force at their full face value

idea that only high risk individuals purchase insurance

adverse selection

A corresponding benefit of whole life (except SPLI) is that individuals who need insurance for an entire lifetime can ___ their premium payments over a relatively ___ period. This eliminates the affordability and uninsurability problems often encountered with term insurance in later years.

budget long

any cash withdrawals or loans taken against the single premium whole life policy cash value before you reach age 59 1/2 are not only taxed as ___, but also are subject to a(n) __ percent penalty for early withdrawal.

capital gains 10

The accumulated refundable value of an insurance policy; results from the investment earnings on paid-in insurance ___.

cash value, premiums

For most young families on limited budgets, the need for ___ protection greatly exceeds their need to ___. If you fall into this category, guaranteed ___and ___ term insurance should account for the largest portion of your insurance protection.

death save renewable, convertible

By terminating their whole life insurance contracts, policyholders forfeit their rights to ___ benefits. Likewise, the company must forfeit its ___ to the monies paid by these policyholders for a future death benefit that it is no longer required to pay.

death claim

Of the various whole life policies available, continuous premium (straight life) offers the greatest amount of permanent ___ and the least amount of ___ per premium dollar. This emphasis on death protection makes it the __ choice to fill a permanent life insurance need.

death protection savings wisest

The only reason that the premium on decreasing term is higher than the premium on straight term is that most major insurance companies don't offer ___ policies, so the ___ number of companies offering these policies operate in a less ___ market that allows them to charge ___ premiums.

decreasing term small competitive high

Those who need life insurance are primarily those with ____. Those who do not typically buy it are ___ individuals with no ___ and ___ individuals with enough financial resources to insure loved ones after death

dependents single, dependents older

underwriters consider the likelihood that the insured will ___ while the life insurance policy is in effect. This determines individuals' ___

die premiums

The most noteworthy advantage of whole life insurance is that premium payments contribute toward building a(n) ___, regardless of how long the insured lives.

estate

A life insurance policy can be structured so that death benefits are paid directly to a named beneficiary rather than being considered as part of your ___. This means that even if you have outstanding bills and debts at the time of your death, ___ cannot claim the cash benefits from your life insurance policy, which provides further financial protection for your ___.

estate creditors dependents

Whole life: The ___ value of the policy is paid on death; alternatively, the insured can ___ against it or ___ cash value when the need for insurance protection has expired

face value borrow withdraw

Losses for the entire group of policyholders are ___ predictable than for any one of the insured individuals.

more

Because ___ continuous premium whole life insurance can be purchased with the same number of dollars as limited payment whole life, people who need whole life insurance are probably better off using ___ insurance to get the most for their life insurance dollars

more straight life

Renewable and convertible term policies provide the ___ life insurance coverage for the ___ cost, thereby preserving financial resources for meeting immediate and future ___ and ___goals.

most least consumption, savings

Needs analysis: 1-estimate financial ___ after death 2-estimate financial ___ available after death 3-take the ___ of the two If the result is ___, you don't need life insurance. If it's ___, the value is your coverage estimate

need resources difference negative positive

A method of determining the amount of life insurance coverage needed by considering a person's financial obligations and available financial resources in addition to life insurance

needs analysis method

Needs analysis is broken up into ___. Circumstances will ___ over life cycle

periods change

driving within the speed limit to lessen the chance of being in a car accident is an example of loss ____. wearing a safety belt or buying a car with air bags is an example of loss ___.

prevention control

Some types of life insurance policies can serve as a savings vehicle, particularly for those who are looking for safety of ___

principal

whole life provides not only insurance coverage, but also a modest ___ on your investment

return

The choice to accept and bear the risk of loss.

risk assumption

avoiding an act that would create a risk

risk avoidance

Insurance policy: From your perspective, you are transferring your ___ to the insurance company. You pay a relatively small certain amount (the insurance ___) in exchange for the insurance company's promise that they'll ___ you if you suffer a loss covered by the insurance policy.

risk of loss premium reimburse

The problem with underwriting is that the insured don't tell insurance company they're ___. Underwriters must do extensive ___

risky research

Some people like whole life policies because the periodic payments force them to ___ regularly and because favorable ___ treatment is given to accumulated earnings. This is because your earnings build up on a(n) ___ basis, which means that the underlying cash value of the policy increases at a much ___ rate than it otherwise would.

save tax tax-sheltered faster

term life is the ___ type of life insurance policy

simplest

a(n) ___ whole life policy is purchased with one cash premium payment at the inception of the contract, thus buying life insurance coverage for the rest of your life

single premium

Risk assumption can be an effective way to handle many types of potentially ___ exposures to loss when insurance would be too expensive

small

Benefits under Social Security intended to provide basic, minimum support to families faced with the loss of a principal wage earner.

social security survivor's benefits

Life insurance proceeds paid to your heirs, as a rule, aren't subject to ___ or ___ taxes. Furthermore, if certain requirements are met, policy proceeds can pass to named beneficiaries free of any ___ taxes

state or federal income estate

Regardless of the procedure you use, remember that life insurance needs are not ___. The amount and type of life insurance you need today will probably ___ from the amount and type suitable for you 10 or 20 years from now.

static differ

For a given person, the annual premium for a specified initial amount of coverage, say $250,000, would be lowest for ___term , higher for ___term, and highest for ___ term

straight decreasing annual renewable

A term insurance policy written for a given number of years, with coverage remaining unchanged throughout the effective period

straight term

The most common types of term insurance are ___(___) and ___. Which is more popular?

straight term (level term) decreasing term straight term

The main disadvantage of term life is that term insurance offers only ___ coverage. Once the policy term expires, you must ___ the policy.

temporary renew

Insurance that provides only death benefits, for a specified period, and does not provide for the accumulation of cash value.

term life insurance

three major types of life insurance policies that account for 90 percent to 95 percent of life insurance sales:

term life, whole life, and universal life.