Chapter 11: Life Insurance

Question 1

Premature Death

Answer 1

death of a family head with outstanding unfulfilled financial obligations

Impacts:
Can cause serious financial problems for surviving family members.
The deceased’s future earnings are lost forever.
Additional expenses are incurred, such as funeral expenses and estate settlement costs.
May experience a reduction in their standard of living.
Noneconomic costs are incurred, such as grief

Question 2

Justification for purchasing life insurance

Answer 2

financially justified if the insured has earned income and others are dependent on those earnings for financial support

Question 3

Families Where Life Insurance Need Varies

Answer 3

Examples of Family Types Mentioned:

Single people
Single-parent families
Two-income earners with children
Traditional families
Blended families
Sandwiched families

Question 4

Two approaches to estimate life insurance

Answer 4

Human life value
Needs

Question 5

Human life value approach

Answer 5

PV of the family’s share of deceased future earnings

How to Calculate (Steps):
1. Estimate the individual’s average annual earnings over his or her productive lifetime.
2. Deduct taxes, insurance premiums, and self-maintenance costs.
3. Using a reasonable discount rate, determine the present value of the family’s share of earnings.

Question 6

Needs approach

Answer 6

estimates the amount of life insurance needed based on the financial needs that must be met if the family head should die

Consider:
retirement, special needs (college or emergencies), life income of surviving spouse, income for dependency period, income for readjustment period, estate clearance fund

Question 7

2 General Types of Life Insurance

Answer 7

1. Term insurance: provide temporary protection
2. Cash-value life insurance: savings component and builds cash values

Question 8

Term insurance characterisitics

Answer 8

Protect ends at period unless renew
- may have age limit
- premium may increase

Most convertable - policy can be exchanged for a cash-value policy without evidence of insurability

Question 9

What are some reasons consumers might not purchase enough life insurance?

Answer 9

Consumers believe it is expensive,

Procrastinate

Difficulty making correct decisions about the purchase

Opportunity cost may be too high, reducing discretionary income.

Many families are in debt with little savings.

After high-priority expenses, many families have limited income for life insurance.