Chapter 11

Question 1

can be defined as (1) the death of a family head with outstanding unfulfilled financial obligations or (2) the death of a person that creates negative business consequences.

Answer 1

premature death

Question 2

costs associated with premature deaths:

• family’s share of deceased breadwinner’s future earnings is lost forever
• death results in additional expenses such as funeral costs, uninsured medical bills, higher childcare expenses, estate settlement costs, and other final expenses.
• because of insufficient income, some families will experience a substantial ____ in their standard of living.
• survivors face certain _____ costs such as intense grief, loss of a parental role model, and counseling and guidance for the children.

Answer 2

reduction, noneconomic

Question 3

the purchase of life insurance is economically justified if the insured has earned income, and others are dependent on those earnings for part or all of their ____ ____.

Answer 3

financial support.

Question 4

____ ____; other than needing a modest amount of life insurance for funeral expenses and uninsured medical bills, this group does not need large amounts of life insurance.

Answer 4

single people

Question 5

___ ___ families; premature death of the ___ ___ can cause great economic insecurity for the surviving children, the need for large amounts of life insurance on the family head is great.

Answer 5

single parent

Question 6

____________: both income earners need substantial amounts of life insurance.

Answer 6

two-income earners with children

Question 7

___ ___; the working parent in the labor force needs substantial amounts of life insurance.

Answer 7

traditional families

Question 8

___ ___; the need for life insurance on both family heads is great.

Answer 8

blended families

Question 9

___ ___; one in which a son or daughter with children provides financial support to one or both parents. a working spouse in this needs a substantial amount of life insurance.

Answer 9

sandwiched families

Question 10

can be defined as the present value of the family’s share of the deceased breadwinner’s future earnings.

Answer 10

human life value

Question 11

analyzes various needs that must be met if the family head should die, and then determines the amount of money needed to meet these needs

Answer 11

needs approach

Question 12

the most important needs for most families are the following:

• estate clearance fund
• income during the ___ period
• income during the ___ period
• life income to surviving spouse
• special needs
• retirement needs

Answer 12

readjustment, dependency

Question 13

provides the cash needed immediately for burial expenses, uninsured medical bills, installment debts, estate administration expenses, inheritance and income taxes.

Answer 13

estate clearance fund

Question 14

A one to two year period following the breadwinners death.

Answer 14

Readjustment period

Question 15

Follows the readjustment period, it is the period until the youngest child reaches 18

Answer 15

Dependency period

Question 16

Families should also consider certain special needs which include the following:

• mortgage redemption fund
• education fund
• ____ fund
• mentally, emotionally, or physically challenged family members.

Answer 16

Emergency fund

Question 17

Major advantages to the needs approach: reasonably accurate, considers other assets and sources of income, considers needs other than ____ _____

Answer 17

Premature death

Question 18

Major disadvantages of the needs approach: some unrealistic ____, needs may change, no consideration of _____ in the simplest form.

Answer 18

Assumptions, inflation

Question 19

Although 60% of households owned some insurance, less than 30% owned __________

Answer 19

Individual life insurance policies

Question 20

Reasons why people are under insured:

1. Consumers believe life insurance is ___ _____
2. Consumers have difficulty making ____ _____ about the purchase of life insurance.
3. Many consumers simply ______

Answer 20

Too expensive, correct decisions, procrastinate

Question 21

Refers to what the insured policyholder gives up when life insurance is purchased.

Answer 21

Opportunity cost

Question 22

Provides temporary protection, renewable policy, major type of life insurance.

Answer 22

Term insurance

Question 23

Pays the face amount if the insured dies within a stated period or before reaching a stated age.

Answer 23

Temporary protection

Question 24

Policy coverage may be extended for additional time periods without evidence of insurability.

Answer 24

Renewable

Question 25

A permanent policy can be obtained without evidence of insurability.

Answer 25

Convertible

Question 26

Two methods for conveying a term policy. First is simpler of the two, premium charged is based on the insureds attained age at the time of the conversion and the policy is like a newly issued cash value policy in every respect.

Answer 26

Attained age method

Question 27

Premium charged is based on the insureds original age when the term insurance was first purchased.

Answer 27

Original age method

Question 28

``` Types of term insurance: Yearly renewable 5,10,15,20,25 or 30 year terms Decreasing term ____ term Return of ____ ____ insurance ```

Answer 28

Reentry, premium term

Question 29

Term insurance issued for a one year period, and the policy holder can renew successive one year periods to some stated age without evidence of insurability.

Answer 29

Yearly renewable term insurance

Question 30

Provides protection to age 65, at which time the policy expires.

Answer 30

Term to age 65 policy

Question 31

Form of insurance where the face amount gradually declines each year.

Answer 31

Decreasing term insurance

Question 32

Term insurance policy in which renewal premiums are based on select mortality rates if the insured can periodically demonstrate acceptable evidence of insurability.

Answer 32

Reentry term

Question 33

Product that returns the premiums st the end of the term period, provided the insurance is still in force.

Answer 33

Return of premium term insurance.

Question 34

Uses of term insurance: amount of income that can be spent on life insurance is _____, need for protection is temporary, term insurance can be used to guarantee _____ _____

Answer 34

Limited, future insurability

Question 35

Limitations of term insurance: premiums increase with age, not suitable for lifetime protection, no ___ _____

Answer 35

Saving component

Question 36

Generic name for a cash value policy that provides lifetime protection with level remounts. Also called ordinary life insurance if premiums are payable throughout the lifetime of the insured and limited payment life insurance if the premium is less than the insureds lifetime.

Answer 36

Whole life insurance

Question 37

Level premium policy that accumulates cash values and provides lifetime protection to age 121.

Answer 37

Ordinary life insurance

Question 38

The excess premiums paid during the early years are accumulated at compound interest and are then used to ____ the inadequate premiums paid during the later years of the policy.

Answer 38

Supplement

Question 39

Excess premiums reflected in a legal reserve, which is a liability item that must be offset by sufficient ___ _____

Answer 39

Financial assets

Question 40

___ ____ values are available if the policyholder wishes to surrender the policy or obtain a policy Loan.

Answer 40

Cash surrender

Question 41

Major advantages of ordinary life insurance are ___ ____ and a method for saving money Major disadvantages is that done people are ____ after the policy is purchased.

Answer 41

Lifetime protection, underinsured

Question 42

Premiums are payable only for a certain number of years and the policy becomes paid up; no additional premiums are required.

Answer 42

Limited payment life insurance

Question 43

Fixed premium policy in which the death benefit and cash values vary according to the investment experience of a separate account, which is smaller to a mutual fund maintained by the insurer.

Answer 43

Variable life insurance

Question 44

Common features in variable life insurance: Premiums are invested in ___ or other investments Cash values are not ____

Answer 44

Equities, guaranteed

Question 45

Can be defined as a flexible premium policy that provides protection under a contract that separates the protection and savings components.

Answer 45

Universal life insurance

Question 46

``` Universal life insurance characteristics: Unbundling of component parts 2 forms of universal life insurance Considerable _____ Cash withdrawals permitted Favorable ___ ____ treatment ```

Answer 46

Flexibility. Tax income

Question 47

Unbundling of component parts has an annual statement that shows premiums paid, death benefit, and value of the __ ___ account.

Answer 47

Cash value

Question 48

2 forms of universal life insurance: option A pays a level death benefit unless the amount at risk becomes too small at which time the death benefit will ____. Option B provides for a ____ death benefit.

Answer 48

Increase, fluctuating

Question 49

Part or all of cash value can be withdrawn, but under option B the death benefit is reduced by the

Answer 49

Amount of withdrawal.

Question 50

The death benefit paid to a named beneficiary is normally received

Answer 50

Income tax free.

Question 51

Limitations of universal life insurance: Misleading rates of return Possible consumer dissatisfaction if interest rates decline Right of the company to increase the ___ charge Lack of firm commitment to pay premiums

Answer 51

Mortality

Question 52

Important variation of whole life insurance. Often sold as investments or tax shelters.

Answer 52

Variable universal life insurance

Question 53

Characteristics of variable universal life: Cash values can be invested in a wide variety of ______ No minimum guaranteed rate of interest Policy had relatively high ___ ____ Policy has a substantial investment risk for the policyholder

Answer 53

Investments, expense charges

Question 54

Form of life insurance that insured two or more lives and pays the death benefit at the time of the death of the second or last insured.

Answer 54

Second to die life insurance

Question 55

Important type of insurance that provides life insurance to members of a group in an single master contract between the insurer and employer or other group sponsor.

Answer 55

Group life insurance.