Chapter 9 - Life, health, and disability insurance

Question 1

methods for estimating amount of life insurance

Answer 1

income replacement method: a typical family will need approx 70% of your salary for 7 years before they adj to the financial consequences of your death. gross income * 7 * 70%

family need method: more thorough than the first method b/c it also considers employer provided insurance, Social security benefits, and income and assets

Question 2

term life insurance

Answer 2

• Protection for a specified period of time
• If you don’t pay premiums, coverage stops
• Premiums increase as you get older
  o Renewability option: at the end of the term you can renew the policy without having a physical
  o Conversion option: allows you to change your policy from term to whole life without a physical
  o Term to 100: remains in effect until you are 100 years old
  o Decreasing term insurance: your premium stays the same, but the amount of coverage decreases as you age

Question 3

permanent life insurance

Answer 3

• Purchased to cover lifelong needs
  o Financial expenses, supplementing a survivor’s income, capital gains or providing for dependent children
• Have level premiums which remain the same over lifetime of policy
  o Higher premiums paid in early years held in reserve to offset increased costs in later years
• Reserves also referred to as cash value
  o Amount received after giving up life insurance policy
  o Used if unable to pay premium or borrowed against as loan
• Has the following variables:
• Whole life
  o Pays specified premiums as long as she lives
  o Pays stipulated sum to beneficiary upon death
  o Has a cash value which is paid out if policy given up
• Universal life policy
  o Combines term insurance and investment elements
  o Can pay variable premium amounts
  o Increased cash value reflects interest earned, guaranteed not to be less than specific amount
  o Uses current interest rates and can be changed to reflect prevailing rate changes
  o Death benefits flexible
  o Can change premium without changing coverage
• Variable life policy
  o Premiums guaranteed
  o Case value equals performance of investment fund or other index
  o Minimum death benefit guaranteed but can increase
  o Risk of poor investments
• Endowment life insurance
  o Coverage from beginning of contract to maturity
  o Guarantees payment of specified sum even if insured still alive

Question 4

disability insurance

Answer 4

own occupation - the inability to perform the duties of your normal occupation. full benefits paid even if you return to work in another capacity

regular occupation - the inability to perform the duties of your ordinary occupation. benefits reduced if you return to alternate occupation

any occupation - full benefits are paid only if you cannot perform the duties of any occupation for which your experience or education qualifies you

total disability - unable to work at all

residual or partial disability - benefits apply if you are able to work but at a reduced workload