Finance Chapter 12

Nonparticipating policy life insurance that does not provide policy dividends
Participating policy life insurance that provides policy dividends
Term insurance life insurance protection for a specified period of time
Whole life policy an insurance plan in which the policyholder pays a specified premium each year for as long as he or she lives
Cash value the amount received after giving up a life insurance policy
Universal life a whole life policy that combines term insurance and investment elements
Beneficiary a person designated to receive something, such as life insurance proceeds, from the insured
Non-forfeiture clause a provision that allows the insured not to forfeit all accrued benefits
Incontestability clause A provision stating that the insurer cannot dispute the validity of a policy after a specified period
Suicide clause A provision stating that if the insured dies by suicide, during the first two years the policy is in force, the death benefit will equal the amount of the premium paid
Rider a document attached to a policy that modifies its coverage
Double indemnity a benefit in which the company pays twice the face value of the policy if the insured’s death results from an accident
Chartered life underwriter (CLU) a life insurance agent who has passed a series of college-level exams on insurance and related subjects
Underwriting the process that insurance companies used to determine the premiums that will be charged and whom they will insure
Interest-adjusted index a method of evaluating the cost of life insurance by taking into account the time value of money
Annuity a contract that provides a regular income typically for as long as the person lives
How much life insurance one should carry is an important question for anyone who owns or intends to buy life insurance. True
The easy method of determining life insurance is based on the rule of thumb that a “typical family” will need about 70 percent of wage-earner’s salary for seven years (= 4.9) which is generally rounded to five times your salary. True
Term insurance has an investment component that builds cash value. False
If you bought an annuity with after tax dollars, how would the annuity income be taxed? The interest portion of the annuity is taxed at your marginal rate
A two-earner couple may have: A moderate need for life insurance, especially if they have a mortgage
Suppose that yours is a typical family. Your annual income is $50,000. Use the easy method to determine your need for life insurance. Your insurance should be approximately: $250,000(50,000*5)
The DINK method of determining life insurance need is best suited for: Working spouses with no dependents
Using the “nonworking” spouse method, what should be the life insurance needs for a family whose youngest child is 10 years old? $80,000(18-10)= 8(8*10,000)
Which type of insurance is sometimes called temporary insurance? Term insurance
You are a dual income, no kids family. You and your spouse have the following debts (total): mortgage, $180,000; auto loan, $10,000; credit card balance, $2,000; and other debts of $6,000. Further, you estimate that your funeral will cost $4,000. Your spouse expects to continue to work after your death. Using the DINK method, what should be your need for life insurance? $103,000
With respect to federal tax law, life insurance proceeds paid to a beneficiary: Are excluded from taxable income, but included in the taxable estate (unless a life insurance trust has beenestablished)
Which life insurance provision ensures that you will not have to forfeit all accrued benefits? Non-forfeiture clause
You and your spouse make $28,000 per year, have an $100,000 mortgage, owe $10,000 on auto loans, owe $5,000 on student loans, and owe $3,000 on credit cards. You estimate funeral costs at $5,000. How much life insurance should of of you carry using the DINK method? $64,000(1/2 of mortgage, auto loans, student loans, credit cards + full funeral costs)
A couple has two children ages 4 and 7 and only one spouse has income. Using the “non-working” spouse method, they should have ________ of life insurance. $140,000(18-4)=14(14*10,000)
A couple currently spends $40,000 per year for all their living expenses. Only one spouse works while the other spouse stays at home with the children. Upon the death of the working spouse, they want a life insurance policy whereby the proceeds could be invested in a tax-free municipal bond fund that would yield enough tax-free cash each year to pay the entire $40,000 of expenses (i.e. the non-working spouse would not have to return to work, and there would be sufficient funds on his/her death to leave some inheritance to the kids). They assume that the yield on municipal bond funds will be 5%. How much insurance should they purchase? $800,000(?)
How much life insurance would you need using the easy method for a family with $40,000 in gross income? About $200,000(40,000*5)
Life insurance is usually sold not bought, because the life insurance industry has a vested interest in selling you high commission, high cost ____________ policies. Whole life
Which policies provide term insurance with a money market type investment feature? Universal life
What percentage of the first year premiums on a whole life insurance policy go to the agent’s commission? 80%
A parent is evaluating a $250,000 term life policy vs. a $250,000 whole life policy. Over the next 25 years, the term policy will cost $10 month, and build no cash values. The insurance agent informs the parent that the whole life policy will cost $100 per month, but will build guaranteed cash values of $75,000 at the end of 25 years. The parent assumes that he/she can invest the $90 per month difference in a mutual fund and earn 9% per year for the next 25 years. What is the future value of the mutual fund at the end of 25 years assuming end of the period deposits of $90 per month at a 9% interest rate; and how does it compare to the whole life cash value investment return (ignoring taxes)? The mutual fund will be worth $100,900.97, implying that the return on the whole life policy is less than 9%(End mode p/y=12 I=9 N=25*12 Solve for FV)(?)

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