Deck 4: Life Insurance: Structure, Concepts, and Planning Strategies

Question 1

What are the key features of survivorship life insurance?

Answer 1

The main objective of survivorship life insurance is to simultaneously insure two lives at a premium cost that is significantly lower than what would be possible if each life was separately insured. The amount of savings depends on a variety of factors, including the ages of the insured and their risk status. In fact, as compared to a survivorship life, in certain instances the premium on single lives can be higher by as much as 100-125 percent.
Another advantage is that a survivorship policy can cover individuals who are substandard risks at a reasonable cost, including those who may be uninsurable on their own.

Question 2

Describe the essential features of cash value insurance.

Answer 2

The following are the essential features of cash value insurance:
1. Death Protection
Cash value insurance provides income protection for the family upon the insured breadwinner's premature death.
2. Performance
This insurance keeps the coverage in force until the insured dies or stops paying the premium and cancels the policy. Also, the level of premium paid by the insured remains fixed regardless of a decline in the life expectancy as the insured grows older.
3. Cash Value
These policies accumulate a savings element called cash value. When all premiums required by the contract have been paid, this cash value is generally made available to the insured by the insurance company either in the form of a lump sum or in installments.
4. Flexibility
Cash value insurance accumulates a cash value against which a loan may be made. The loan can be used for a variety of purposes, including payment of insurance premium and meeting other financial obligations. Cash values can also be used for extended term insurance or reduced paid-up insurance.
5. Equal-payment Plan
Cash value insurance permits the payment of level premium which helps in developing advanced budget and cash flow planning strategies.
6. Dividend Option
The participating (called par) cash value insurance policies initially charge a higher premium rate but hope to return the overpayment of premiums in the form of dividends. The policyholder can elect to use the dividends in five ways: (a) receive dividends in cash; (b) invest dividends with the insurance company at a specified interest rate; (c) purchase additional paid-up insurance; (d) reduce future premiums; or (e) buy additional one-year term insurance.
7. Emergency Fund
The cash value may be tapped for a financial emergency when the traditional emergency fund runs out.

Question 3

What riders might you suggest for a permanent policy if your client is concerned about future health problems, including possible disability issues?

Answer 3

Three riders that would address the client's concerns are: the guaranteed insurability option, the disability waiver of premium, and the disability income rider.
The guaranteed insurability option enables the insured to purchase additional insurance at specific times or intervals without the evidence of insurability. The amount of additional insurance is specified in the contract. This option is valuable in that it offers excellent flexibility for future planning.
A disability waiver of premium rider suspends premium payments when the insured becomes totally disabled. In such a situation, the policy would continue as though premium payments were being made, and cash value would continue to accumulate. The rider would define disability, which could change over time. For example, one rider might state that during the first five years, the insured would be considered totally disabled if he or she could not be employed. This definition, however, might change after five years to something more lenient, such as "any job for which the person is reasonably trained." As stated, disability waivers typically end at a certain age (such as the age of 65).
With a disability income rider, the insured would receive a certain amount of monthly cash flow during the disability period.

Question 4

It is asserted that there are only two kinds of life insurance: term and cash value. Do you agree or disagree with this assertion? Give reasons for your answer.

Question 5

Explain the types of term insurance.

Question 6

Outline the main purposes of buying life insurance.

Question 7

What is the main objective for purchasing a survivorship life policy?

Question 8

Describe some of the conditions under which it is advisable to switch policies. Are there disadvantages to policy switches?

Question 9

Comment on the following statement: "Life insurance is a method of transferring risk."

Question 10

Comment on the following statement: "The best thing about life insurance is that it is completely tax-free."

Question 11

Describe briefly the capital needs method of determining the life insurance needs.

Question 12

Explain the salient features of a single-premium whole life (SPWL) policy.

Question 13

What are the advantages and disadvantages of term life insurance?

Question 14

What are insurance company rating agencies and what role do they play?

Question 15

Describe a blended insurance policy.

Question 16

Based on the human value approach, what death benefit amount would you suggest to your client given the following facts: 20 years until retirement, projected average annual income of $125,000, average projected work-related expenses, taxes and self-maintenance of $36,000, and a discount rate of 5 percent?

Question 17

Describe the key life insurance settlement options available to a policyholder.

Question 18

Distinguish between whole life and limited payment life insurance.

Question 19

What is a secondary objective of buying permanent life insurance?

Question 20

Compare and contrast variable life and variable universal life.

Question 21

You have just concluded a capital needs analysis which shows that Robert Bork needs to purchase a new $400,000 policy. However, when Robert heard that the policy would cost him $2,800 a year, he argued that since he could pay no more than $700 a year, he would prefer to purchase no more than $100,000 of new life insurance. Is it appropriate for you to accept Robert's decision without further discussion?

Question 22

Question 5. Which of the following can be treated as if it is only a death insurance?

A) Whole life
B) Term
C) Straight life
D) Endowment
E) Variable universal

Question 23

Question 2. Which of the following is not consistent with the three basic rules of risk management?

A) Transfer high probability/ low loss exposures
B) Transfer low probability/ high loss exposures
C) Transfer lows that could be devastating
D) Consider the cost of the policy versus the benefit of the coverage before making the decision of whether or not to retain, reduce, or transfer risk

Question 24

Question 1. Your client recently installed fire alarms throughout her home. This is an example of:

A) Risk avoidance
B) Risk identification
C) Risk transfer
D) Risk reduction

Question 25

Question 7. Assume you are 28 years old and wish to buy term insurance terminating at the age of 50. Which type of policy will charge you a constant premium until the age of 50?

A) Straight annual term
B) Ten-year renewable term
C) Five-year renewable term
D) Decreasing term
E) None of the above

Question 26

Question 3. A major objective of buying life insurance is:

A) To supplement retirement income
B) To reduce the financial burden of the insured
C) To protect the dependents in the case of premature death of the breadwinner
D) To maximize savings
E) None of the above

Question 27

Question 12. Which of the following in not true with regard to a straight whole life policy?

A) The face amount of the policy will never be greater than the cash value.
B) The savings pattern is actually the opposite of the protection pattern.
C) When the insured dies, the beneficiary will always receive both the face amount of the policy and any accumulated cash value.
D) A whole life policy may be thought of as a forced method of saving.
E) As a policy nears the end of its period, more of the premium is allocated toward cash value accumulation than increasing the protection element.

Question 28

Question 8. Which of the following is characteristic of level-term insurance?

A) Premium and protection level remained unchanged
B) Renewal until the age of 65
C) It requires a larger premium in its earlier years than the premium of an ordinary term policy
D) It has a cash accumulation value
E) None of the above

Question 29

Are group life insurance policies significantly different from individual policies?

Question 30

Contrast the net-cost method, interest-adjusted cost index, and the benchmark method used for comparing costs of insurance policies.

Question 31

Your client, Norman Suskind, is about to retire. His company has given him a choice between a lump-sum distribution and a single lifetime annuity. A guaranteed lifetime income (which Norman could not outlive) of $3,400 per month is very appealing to Norman. He has all but decided to accept this offer, and wants your opinion before signing on the dotted line. Are you willing to go along with the proposition?

Question 32

Question 9. A whole life policy differs from a term policy in that:

A) Premium on a whole life policy increases each year
B) No premiums are required when the insured turns 65 years
C) The rate on a whole life policy is always lower than that charged on a term policy
D) A whole life policy accumulates cash value, whereas a term policy does not
E) None of the above

Question 33

Question 10. A whole life insurance policy has an accumulated cash value of $35,000 and a face value of $80,000. Upon death of the insured the beneficiary would receive: Author Query: Please specify if $ means US$ throughout.

A) $35,000
B) $45,000
C) $80,000
D) $115,000
E) None of the above

Question 34

A potential client brings to you tear sheets from an old text in which the author argues that the best thing to do is to buy term insurance and invest the difference. The person wants to buy $200,000 of term insurance from you and would like to pay the minimum amount of premium. What would you advise him or her?

Question 35

List life insurance planning techniques that are available to businesses.

Question 36

What are the major benefits of a split-dollar insurance?

Question 37

Question 4. Essentially, there are two broad categories of life insurance. They are:

A) Cash value and term
B) Term and family protection
C) Permanent and cash value
D) Endowment and cash value
E) None of the above

Question 38

Question 11. Whole life insurance may be appropriate for people who:

A) Lack savings discipline
B) Have no family responsibilities
C) Are in a low tax bracket
D) Like to invest in growth investments
E) All of the above

Question 39

One of your clients, Roy Rogers, just came in for an annual review. You believe that the old insurance policy Roy has should be switched to a more economical and efficient policy. You present an alternative illustration to Roy, but he is extremely uncomfortable with your suggestion. Do you think it is wise to press this issue?

Question 40

Question 6. Which of the following policies has no savings element in it?

A) Whole life
B) Universal life
C) Variable universal life
D) 10-year renewable term
E) 20-year limited payment life

Question 41

Question 17. The dividend option clause in a life insurance policy gives the policyholder the right to do all the following except:

A) Apply dividends toward premiums payments
B) Purchase stock in the company at rates below that of the market
C) Leave the dividend with the company to earn interest
D) Purchase additional paid-up insurance
E) None of the above

Question 42

Question 13. Universal life insurance:

A) Is basically the same as whole-life
B) Pays interest rates lower than passbook savings
C) Is comprised of a renewable term policy and a cash accumulated fund
D) Pays only if there is "universal death"
E) Provides universal premium rates for all applicants

Question 43

Question 26. Which of the following represent valid reasons for business use of life insurance?

A) Fund a non-qualified retirement plan for top executives
B) Protect business loss due to the pre-mature death of a key marketing executive
C) Offer life insurance benefits as part of a key executive package in order to attract new hires
D) Create a business transition plan from one partner to the other partner
E) All of the above are valid reasons

Question 44

Question 27. In a split dollar plan a key issue relates to the actual ownership of the policy. What are the two common methods of implementing a split dollar plan?

A) The employer/employee split ownership method
B) The endorsement method and the collateral assignment method
C) Third party ownership and employee trust plan
D) IRS Code 503 plan and employee trust plan
E) Split Term Life Method

Question 45

Question 24. All of the following questions need to be answered before making the life insurance buying decision, except:

A) Duration of the need
B) Concern about the financial viability of the current insurer
C) Capacity of the policyholder to fund premiums
D) Cost of the premium compared to alternatives
E) All of these questions need to be answered

Question 46

Question 15. Your clients, a young married couple with two children, just purchased a new home and would like to ensure that the mortgage will be paid in the event either of their deaths. Your recommendation is for them to purchase?

A) First-to-die term life
B) Second-to-die term life
C) Family income policy
D) Mortgage whole life

Question 47

Question 20. The purchase of a "guaranteed insurability" endorsement:

A) Allows purchase of additional insurance without proof of insurability
B) Allows the purchase of additional insurance at all ages
C) Allows the purchase of unlimited supplemental insurance
D) Generally requires a physical exam before a policyholder is allowed to purchase additional insurance
E) Means none of the above

Question 48

Question 22. Your clients, Jack and Samantha are 28 and 26, respectively. Samantha just gave birth to the couple's first child, a daughter, three months ago. Neither has much investment experience and they are both conservative in respect to risk. They come to you for advice regarding a life insurance policy-one that would help provide financial resources should anything happens to either of them. Which of the following policies would be the least suitable given their situation?

A) 10-year renewable term policy
B) Whole life policy
C) Universal life policy
D) Variable life policy
E) First-to-die policy

Question 49

Question 14. Which of the following statements regarding the different types of life insurance is true?

A) Term life policies offer a guaranteed rate of return on cash values while variable life policies do not.
B) Variable life policies offer more investment options than universal life policies.
C) Whole life policies offer a fixed death benefit while universal life policies vary based on the investment account's performance.
D) Universal life policies offer less flexibility in making premium payments than do whole life policies.

Question 50

Question 18. Which of the following statements is true regarding a beneficiary of proceeds under a life insurance policy?

A) The owner of the policy cannot change the beneficiary designation of an irrevocable beneficiary without the beneficiary's written consent.
B) If the beneficiary is an irrevocable beneficiary and dies before the insured, his rights pass on to his heirs.
C) Divorce automatically results in a change of beneficiary.
D) All beneficiary designations are irrevocable.

Question 51

Question 25. Which of the following situations does not provide a valid reason for replacing the client's current life insurance policy?

A) Change in client circumstances and needs
B) Concern about the financial viability of the current insurer
C) Deteriorating health conditions of the insured
D) Better pricing with the replacement policy

Question 52

Question 21. At death, a beneficiary receives $10,000. The federal income taxable portion is:

A) $10,000
B) the total cash value
C) determined by her total income
D) zero
E) 28% of $10,000

Question 53

Question 16. Which of the following is an allowable means of distributing your life insurance benefits upon your death?

A) Fixed period option
B) Fixed income option
C) Life income option
D) Lump sum payment
E) All of the above represent allowable means

Question 54

Question 23. Karen is a young, single parent who realizes the need for life insurance. Unfortunately, she is struggling with budgeting because she is still in a low-paying job and supporting a young son. Which of the following policies would be the best choice given the duration of the need, the amount of the need and the cash flow situation?

A) Endowment life policy
B) Level premium whole life policy
C) Universal life policy
D) Variable life policy
E) 10-year renewable term policy

Question 55

Question 19. A "waiver-of-premium" clause:

A) Waives the suicide clause
B) Allows the person to purchase additional insurance at no extra cost
C) Pays premiums in the event of disability
D) Allows an insurance agent to pay your premiums
E) Means the insured will receive the cash value immediately