Life Insurance

Which of these life insurance policies would best meet the need for protection of Sharon’s son if she should die prematurely?

• Because the amount of money available for life insurance is limited, the 10-year convertible policy should be purchased. A substantial amount of life insurance can be purchased for a relatively small premium because term life is the cheapest life insurance policy

• Which of these life insurance policies would best meet the need to accumulate a college fund for Sharon’s son

• Universal life insurance can be used to accumulate a college education fund. Universal life insurance permits cash withdrawals that can be used to pay college expenses

Which of these life insurance policies would best meet the need to accumulate money for a down payment on a home?

• Universal life insurance can be used to accumulate a down payment on a home. Universal life insurance permits cash withdrawals that can be used for a down payment on a home

What major obstacle does Sharon face if she tries to meet all of her financial needs by purchasing cash-value life insurance

The major obstacle is that Sharon may be unable to pay the premiums necessary to meet all of her financial needs. Because cash value life insurance is more expensive than term insurance and the amount of income available for life insurance is limited, she may be substantially underinsured

Assume that Sharon decides to purchase the 10-year convertible term policy in the amount of $500,000. The policy has no cash value. Identify a basic characteristic of this term policy that would help Sharon accumulate a fund for retirement

Since the term life that Sharon purchased is convertible, she can convert this policy into an ordinary life or universal life policy later on (before the policy expires), which provides lifetime coverage that would help Sharon accumulate a fund for retirement

• Carl would like to purchase life insurance. He would also like to invest in a mutual fund. An agent told Carl about a form of life insurance in which Carl could select where the saving component is invested. This form of life insurance has fixed premiums, and the cash value is not guaranteed 

• Variable life insurance

Carl does not like the life insurance policy without cash value guaranty. Instead, he purchased a life insurance policy in which a minimum interest rate is guaranteed on the cash value, and additional interest may be credited based on the investment performance of a group of common stocks. There is also a cap on the additional interest credited to the policy

• Indexed universal life insurance

Carl’s friend, Jose, likes the idea of having a life insurance policy in which he could select where the premium and saving component are invested. He is also willing to take the risk that cash value in the policy is not guaranteed, but he would like to have some flexibility in premium payments

• Variable universal life insurance

Richard, age 35, is married and has three little kids. He is considering the purchase of additional life insurance to pay off the mortgage on his home, which has 25 years remaining. Please recommend a type of life insurance that is economical and will help meet Richard’s goal of mortgage payments

25-year decreasing term insurance can be used to pay off the remaining mortgage balance. However, because term insurance has no cash values, the decreasing term cannot be used to accumulate a retirement fund or to pay college expenses of the children

• In addition to the mortgage payment, Richard also wants to accumulate a sizable retirement fund, provide a payment of monthly income to his family if he should die and pay college expenses when the children reach college age. Richard does not know much about life insurance and investments. He just wants a policy with no investment risk, with guaranteed cash value, and a fixed premium payment, and if he pays the premium on time, he does not need to worry about the lapse of the policy

Ordinary life insurance can be used to pay off the mortgage, to accumulate a retirement fund, and to pay monthly income payments to the family if Richard dies. It has a fixed premium and guaranteed cash value. The cash values could be borrowed to pay college expenses when the children reach college age. The policy could also be surrendered for its cash value to pay college expenses

• Kelly fails to pay the second annual premium due on January 1. She dies 15 days later

The death claim must be paid since the insured died during the grace period when the policy was still in force

• Kelly committed suicide three years after the policy was purchased

• The death claim is paid since the two-year suicide period has expired

• At Kelly’s death, the life insurer discovered that Kelly deliberately lied about her age. Instead of being 29 years old, as she indicated, she was actually 31 years old at the time the policy was purchased

The policy proceeds will be reduced. Under the misstatement-of-age clause, the amount payable is the amount that the premium would have purchased at the correct age

• Two years after the policy was purchased, Kelly was told she has breast cancer. She is uninsurable but would like to get additional life insurance

Kelly’s policy has the guaranteed purchase option rider, so she would be permitted to purchase additional amounts (subject to a maximum) of life insurance with no evidence of insurability

• Kelly is seriously injured in an auto accident. After six months, she is still unable to return to work.She has no income from her job and the insurance premium payments are financially burdensome

Kelly’s policy has the waiver-of-premium rider, so her premiums would be waived after a six-month waiting period if she is totally disabled. Under some policies, a retroactive refund of the premiums paid during the first six months would be paid to Kelly

Kelly wants to retire and does not wish to pay the premium on her policy. Indicate the various options that are available to her

• She can surrender the policy and use the cash value to purchase a reduced paid-up policy

• Ten years after the policy was purchased, Kelly is laid off from her job. She is unemployed and is in desperate need of cash

• The policy can be surrendered for its cash value, or the cash value can be borrowed under the policy loan provision. The cash can be used to help meet her basic needs

• When Kelly applied for life insurance, she concealed the fact that she had a heart problem. She died five years later

• The death claim must be paid since the two-year contestable period has expired