Chapter 11

Question 1

what is premature death?

Answer 1

the death of a family head outstanding unfulfilled financial obligations

Question 2

what are the costs of premature death?

Answer 2

• future earnings are lost forever
• additional expenses incurred
• possible reduction in standard of living for survivors

Question 3

how much life insurance is needed?

Answer 3

IT DEPENDS; on family size, income levels, existing financial assets and financial goals

Question 4

what are the approaches to estimate the amount needed?

Answer 4

• human life value approach
• needs approach

Question 5

what is the human life value approach?

Answer 5

present value of the family’s share of the deceased breadwinner’s future earnings

Question 6

what are the disadvantages of the human life value approach ?

Answer 6

• ignores assets and other sources of income (social security, retirement plans)
• earnings and expenses assumed to be constant (most people get a raise each year)
• based on income rather than need
• effects of inflation on earning and expenses are ignored

Question 7

what does the human life value approach do?

Answer 7

• estimate the individuals average annual earnings over his/ her productive life time
• deduct taxes and self maintenance costs
• using a discount rate, determine the present value of the family’s share of earnings for the number of years until retirement

Question 8

what are the disadvantages of the needs approach?

Answer 8

• difficult to estimate the cost of future needs
• assumptions can be construed in different ways causing a large range of values
• needs may be different

Question 9

what are reasons why someone will not purchase life insurance?

Answer 9

• too expensive
• difficulty in make the right decisions
• procrastination
• do not understand importance
• opportunity costs

Question 10

what are the general types of life insurance?

Answer 10

• term insurance
• whole life insurance

Question 11

what are the characteristics of term insurance ?

Answer 11

• death benefit only
• temporary protection
• premiums paid during the policy term are level
• most policies are renewable
• most policies are convertible

Question 12

what does renewable mean?

Answer 12

the policy can be renewed without evidence of insurability

Question 13

what does convertible mean?

Answer 13

term policy can be exchanged for a cash value policy without evidence of insurability

Question 14

when is term life insurance appropriate?

Answer 14

the amount of income that can be spent on life insurance premiums is limited
the need for protection is temporary
the insured wants to guarantee future insurability

Question 15

what are limitations to term insurance?

Answer 15

• premiums increase with age at an increasing rate and reach prohibitive levels
• inappropriate if you wish to save money for a specific need by accumulating cash value via life insurance

Question 16

what are the characteristics of whole life insurance?

Answer 16

• death benefit plus savings component (cash value)
• policy period is lifetime of insured (doesn’t expire)
• generic term
• stated amount is paid to a designated beneficiary when the insured dies, regardless of when death occurs

Question 17

what are the types of whole life insurance?

Answer 17

• ordinary life
• limited payment life

Question 18

what is ordinary life ?

Answer 18

level premium policy that accumulates cash values and provides lifetime protection to age 121

Question 19

what does the ordinary life policy accumulate?

Answer 19

cash surrender value, which is the amount paid to a policy holder who surrenders the policy early

Question 20

who has the right to borrow during an ordinary life policy?

Answer 20

the policyholder

Question 21

what is limited payment life policy?

Answer 21

very similar to ordinary life, insured has lifetime protection and premiums are level but they are only paid for 10, 20 , 30 years

Question 22

what are the advantages to whole life insurance?

Answer 22

• maintain coverage for your entire life
• accumulate savings

Question 23

what are the disadvantages to whole life insurance?

Answer 23

• do you need life insurance when you are 70?
• premiums are higher than term insurance

Question 24

what are the variations of whole life insurance?

Answer 24

• variable life
• universal life

Question 25

what type of variation of whole life insurance has a fixed premium policy and the death benefit and cash values according to investment experience ?

Answer 25

variable life

Question 26

what type of variation of whole life insurance has a flexible premium policy that provides lifetime protection?

Answer 26

universal life

Question 27

what are the advantages to universal life ?

Answer 27

• flexibility in payments
• cash withdrawals are permitted
• favorable tax benefits

Question 28

what are the disadvantages to universal life?

Answer 28

• more expensive
• policy can lapse because some policy holders do not have commitment to pay premiums
• insurer can increase expenses at any time
• advertises rates of return do not include deductions for expenses

Question 29

what is group life insurance?

Answer 29

coverage of many persons under one contract

Question 30

what are examples of group life insurance?

Answer 30

• life insurance through employer
• life insurance through group sponsor

Question 31

what are advantages of group life insurance ?

Answer 31

• may be less expensive
• tax benefits to employees
• employe may pay all or part of premium
• no evidence of insurability, no physical exam
• insurance you would not have otherwise

Question 32

what are disadvantages to group life insurance?

Answer 32

• inflexible for individuals
• must be employed or party of group be covered
• not always available, employer could discontinue benefit
• may provide sufficient limits