Exam 3

Question 1

What is the purpose of life insurance?

Answer 1

Cover for the risk of premature death, which can be defined as the death of a family head with outstanding unfulfilled obligations

Question 2

Impacts of Premature Death

Answer 2

• Cause serious financial problems for the surviving family members
• The deceased future earnings are lost forever
• Additional expenses are incurred, e.g, funeral expenses and estate settlement costs
• Some families will experience a reduction in their standard of living
• Noneconomic costs are incurred, e.g. grief

Question 3

Need for life insurance varies across these family types

Answer 3

• Single people
• Single-parent families
• Two-income earners with children
• Traditional families
• Blended families
• Sandwich families - support children and grandparents

Question 4

Amount of life insurance needed should consider the financial impact of the death of an individual. This could be:

Answer 4

• Lost earnings potential
• Dependents & Expenses (e.g childcare needs after death)
• Other available assets

Question 5

Amount of Insurance needed is determined by:

Answer 5

• Human life value approach
• Needs approach

Question 6

Human Life Value Approach

Answer 6

The present value of the family share of the insured’s future earnings

• Adjust for taxes and payroll deductions
• Discount from expected retirement date
• Weakness: Doesn’t consider other sources of income

Question 7

Needs Approach

Answer 7

• The financial need of the family that must be met are analyzed
• Existing assets and sources of income are deducted
• The difference is the amount of life insurance needed

Question 8

Two types of life insurance

Answer 8

• Term Insurance
• Cash Value Life Insurance

Question 9

Term Insurance

Answer 9

Provides temporary pure death benefit protection

Question 10

Cash-Value Life Insurance

Answer 10

Combines a death benefit with a savings component and builds cash value
- Whole Life
- Universal Life
- Variable Life
- Variable Universal Life