Lesson 2-Life health and disability

Question 1

Needs Approach

Answer 1

• Evaluates the income replacement and lump-sum needs of survivors in the event of an income producer’s untimely death.
• Most common needs include:
- Lump-sum cash needs
- Final expenses
- Debt repayment
- Education expense needs
- Emergency expense needs
- Income needs - Readjustment period needs
- Dependency period needs
- Spousal life income needs
• This includes the “blackout period,” which begins when Social Security survivor benefits cease (last child reaches age 16) and ends when the spouse begins receiving Social Security retirement benefits (age 60 at the earliest).
• Any future cash or income need should be discounted using the present value of that future cash flow.

Question 2

Human Life Value Approach

Answer 2

• Uses projected future earnings less self-maintenance costs as the basis for measuring the life insurance needs.
• Important items in calculating the Human Life Value include the individual’s current earnings, future growth rate of earnings, number of working years remaining, cost of self-maintenance, and the capitalization rate (discount rate).

Question 3

Term Life Insurance

Answer 3

• Pure insurance protection which pays a predetermined sum if the insured dies during a specified period of time. • Protection ceases at the end of the term unless renewed.
• Premium pattern may be level or increasing on an annual or set period basis.
• Face amount may be level or decreasing.
• There is no cash value, savings component or investment component.
• It is very inexpensive at young ages

Question 4

Term Life Insurance - Provisions

Answer 4

Renewable - Most term policies can be renewed without evidence of insurability.
Convertible - Most term policies have a provision to convert to a whole life policy without evidence of insurability for a particular period of time.
Waiver of Premium - If the insured becomes totally disabled, the premiums are waived during the period of disability.

Question 5

Term Life Insurance - Limitations

Answer 5

• Exponentially increasing premiums for older age entry or renewal.
• Term policies may not meet permanent insurance needs. Permanent insurance needs would be if the insured requires life insurance throughout her lifetime

Question 6

Annual Renewable Term (ART)

Answer 6

• ART premiums increase annually. Every year the policy becomes more expensive.
• There’s no cash value associated with ART.
• Death benefit is fixed at the face amount of the policy. • Advantages: - Pure death benefit protection that is inexpensive. - Insured receives a maximum death benefit for each dollar in premiums. - ART can be converted to a permanent policy without proving insurability.
• Disadvantages: - ART may become too costly at older ages. - There is no savings component. - Premiums increase each year.

Question 7

Level Term

Answer 7

• Premiums are level for a period of time such that the insured prepays some of the later, more expensive premiums earlier in the policy.
• There’s no cash value associated with a level term policy.
• Death benefit is fixed at the face amount of the policy.
• Advantages - Premiums remain level, which helps the insured budget a fixed amount each month. - Level term provides a pure death benefit protection that is inexpensive. - The insured receives a maximum death benefit for each dollar in premiums. - Can be converted to a permanent policy without proving insurability.
• Disadvantages - The insured overpays premiums initially. - There is no savings component.

Question 8

Decreasing Term

Answer 8

• Premiums are level for a decreasing term policy. • There’s no cash value associated with a decreasing term policy. • Death benefit decreases over the term of the policy.