Ch 13 Flashcards
A factor that can be ignored when determining the cost of life insurance is
A) time value of money.
B) premiums paid.
C) settlement options.
D) dividends.
C
Under the traditional net cost method, the net cost of life insurance for a given period (e.g., 20 years) is determined by which of the following formulas?
A) the total premiums for the period less the policy reserve at the end of the period
B) the total premiums for the period less the sum of the total dividends received during the period and the cash value at the end of the period
C) the sum of the total premiums and dividends for the period less the cash value at the end of the period
D) the sum of the total dividends received during the period and the cash value at the beginning of the period less the total premiums paid for the period
B
Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true?
I. The traditional net cost method does not consider the time value of money.
II. The traditional net cost method can show that life insurance has a negative cost.
Both I and II
Which of the following statements about the surrender cost index for measuring the cost of life insurance is true?
A) It is based on the assumption that the policy will be in force indefinitely.
B) It takes into account the settlement options available in the policy.
C) It does not consider the cash value in the policy.
D) It takes the amount and timing of each dividend into consideration.
D
Which of the following statements describes how the net payment cost index differs from the surrender cost index?
A) Dividends are ignored.
B) The cash value is ignored.
C) Premiums are not accumulated at a specified interest rate.
D) Dividends are not accumulated at a specified interest rate.
B
Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true?
I. Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored.
II. Its use is most appropriate in deciding between policies when the cost variation is very small.
I only
Which of the following statements about the Linton yield is (are) true?
I. It is based on the assumption that a cash-value policy can be viewed as a combination of insurance protection and a savings fund.
II. It is the average compound annual rate of return required to make the savings deposits in a life insurance policy equal to the policy’s guaranteed cash value at the end of a specified period.
Both I and II
Which of the following statements about the yearly-rate-of-return method (also known as the Belth method) of calculating the yearly rate of return for a life insurance policy is (are) true?
I. The formula requires the use of benchmark prices per $1,000 of protection.
II. The main drawback of the formula is its complexity, necessitating the use of a computer to calculate the rate of return.
I only
Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT
A) Consider the financial strength of the insurer.
B) Deal with a competent agent.
C) Ignore all factors other than cost.
D) Shop around for a low-cost policy.
C
Consumer experts typically recommend which of the following rules when purchasing life insurance?
I. Avoid policies which pay dividends.
II. Purchase life insurance equal to ten times your annual salary.
Neither I nor II
Why might the use of “grades” assigned by a life insurance company rating organization not be a reliable guide for consumers?
I. There may be variations in grades given by different rating organizations.
II. They ignore factors such as profitability and quality of investments.
I only
Marshall is interested in determining the cost per thousand of his life insurance policy. Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?
A) the needs approach
B) the traditional net cost method
C) the human life value approach
D) the surrender cost index
D
Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy. Then she subtracted the cash value after 20 years. Next, she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance. Finally, she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year. Lynn calculated the
A) traditional net cost per thousand per year.
B) the Linton Yield.
C) the surrender cost per thousand per year.
D) the net payment cost per thousand per year.
C
Which method of analyzing the cost of life insurance does not consider the cash value of the policy in the analysis?
A) traditional net cost method
B) net payment cost index
C) the Linton Yield
D) the surrender cost index
B
Mary is interested in comparing life insurance policies. Rather than looking at the cost per thousand, she would like to compare the rate of return earned on the savings portion of the policy. Which of the following would be of the most interest to Mary?
A) the policy’s Linton Yield
B) the policy’s surrender cost
C) the policy’s traditional net cost
D) the policy’s net payment cost
A
Which of the following statements is (are) true regarding taxation of life insurance?
I. Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes.
II. The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased.
I only