FIN 3305 Exam 3 Flashcards
Definition of Risk
Uncertainty regarding the possibility of a loss
What is the risk in mortality risk?
The risk that an individual die earlier than expected. Can lead to a loss of income, or other consequences that come as a result of death.
What is life insurance protecting against?
Life insurance protects against the financial uncertainty and risks associated with untimely death. Such as: executor funds, income needs of financially dependent survivors, and business related exposures.
Executor Funds
Burial expenses, estate settlement costs, etc.
Business-Related Exposures protected by life insurance
- Loss of income due to incomplete work or loss of customer relationships
- Replacement of key employee
- Funds to buy ownership interest from heirs of owner
Are males or females more likely to die a premature death?
Males
What is a Mortality Table? Why are using large population sizes important? What do mortality tables measure?
- Table of calculations showing expected number of deaths of persons by age by a certain point
- Use of large populations increases confidence in calculation (law of large numbers)
- Mortality tables measure the frequency of the risk
How do you calculate the severity of mortality risk? (amount of insurable need)
Needs:
- Executor funds
- Income needs of financially-dependent survivors
- Business-related exposures
Human Life Value:
- Replace income in present value terms
- Consider expected salary increases
- Subtract living expenses and taxes
Level Premium Plan
- Pay a greater premium during earlier years of life, compared to a yearly renewable term policy
- The excess cash paid in those early period and its investment earnings are available to help pay claims as they occur.
- The accumulation of funds, combined with a decreasing amount of true insurance protection makes it possible for the premium to remain level, even though the probability of death rises as the insured gets older.
Whole Life Insurance
Permanent life insurance with guaranteed premiums, cash value, death benefit, and paid-up coverage
Universal Life Insurance
Flexible premium, permanent life insurance plan
Term Life Insurance
- Life insurance that is in effect for a limited time, which builds no. cash value
- Has a premium that ultimately increases with age or a face amount that reduces with age.
Give a more detailed description of Term Life Insurance
- Insurance protection for a set number of years at which time it terminates with no value
- Usually renewable at end of term, but with premium increase
- Often convertible to a permanent policy for a limited time after issue
- Common forms are 10, 15, or 30 year term and term to age 65
What are the two different types of term coverage associated with term life insurance?
“Level Term” or “Decreasing Term”
Describe “Level Term” Coverage
“Level term” as a constant face amount
(ex. $1,000,000 to beneficiary if the insured dies during the policy period
Describe “Decreasing Term” Coverage
“Decreasing term” has a face amount that decreases over time
(can be useful for policies intended for a specific purpose, like paying off a mortgage)
When is term life insurance coverage the least expensive? What is term life insurance used for?
- Least expensive coverage at younger ages
- Often used for temporary insurance needs (term of debt, until children are grown)
- Can also be used as a supplement to other permanent coverage
Give a more detailed description of Whole Life insurance
- A permanent insurance policy intended to provide insurance protection for one’s entire life
- Features a guaranteed death benefit
- Features level premiums for the premium payment period
- Features guaranteed cash values
What are the 3 kinds of whole life premiums?
- Straight Life or Ordinary Life
- Limited-Pay Life
- Single-Premium Life
Straight Life or Ordinary Life Premiums
Insured pays premiums (usually annually) indefinitely
Limited-Pay Life Premiums
Insured pays premiums for a specified period of time (ex. 20 years), and is not required to pay after that. Coverage remains in place for the rest of the insured’s life
Single-Premium Life
Insured pays one lump sum at the onset of the contact and is not required to pay more. Coverage remains in place for the rest of the insured’s life
What happens if an insured terminates their whole-life policy before death?
They receive the cash value
Which types of life insurance typically has the highest premiums?
Whole life insurance typically has the highest premium of all types of insurance because of guaranteed benefits