Question 1

A method of determining how much life insurance you require based on funds your family would require to maintain its lifestyle after your death is called the

Accepted Answer

The method of determining how much life insurance you require based on funds your family would require to maintain its lifestyle after your death is called the needs approach. This approach considers the financial needs of your dependents, including mortgage payments, education expenses, and living expenses, and calculates the amount of life insurance necessary to cover those needs. The other options (earnings multiple approach, cash liquidity approach, and funds analysis approach) do not take into account the specific financial needs of your family and may not provide an accurate estimate of the required coverage.

Question 2

Which of the following is not an insurance rating service?

Accepted Answer

The correct name is Standard & Poor's (S&P), not Standards & Fitch. Therefore, C is not an insurance rating service. A, B, and D are all insurance rating services.

Question 3

Sonny Coltraine was told by a friend that universal life is the best policy.He will find that

Accepted Answer

Universal life insurance policies typically have a tax-deferred savings feature, and the death benefits are not taxable income. Additionally, universal life policies offer flexibility in both death benefits and premiums. Therefore, options A, B, and D are all correct.

Question 4

Suppose that you earn $50,000 annually.You expect expenses to drop by 22% for your family in the event of your death.Currently,if you die,you want to provide for your family for at least 15 more years,and the applicable after-tax and inflation return assumed is 5%.Using the earnings multiple approach provided in your textbook,what would be the amount of life insurance that you should purchase?

Accepted Answer

Step 1: Calculate the present value of expenses for 15 years with a 5% return assuming expenses drop by 22% in the event of death.
PV of expenses = C × (1-22%) × (1+5%)^-1 × [(1-(1+5%)^-15)/5%]
PV of expenses = $21,786.44

Step 2: Determine the total amount needed for 15 years considering the present value of expenses.
Total amount needed = $21,786.44 × (1-22%) × (1+5%)^15
Total amount needed = $447,720.37

Step 3: Calculate the required amount of life insurance using the earnings multiple approach.
Earnings multiple = Total amount needed / Annual Income
Earnings multiple = $447,720.37 / $50,000
Earnings multiple = 8.9544074

Step 4: Multiply the earnings multiple by the annual income to obtain the required amount of life insurance.
Required amount of life insurance = Earnings multiple × Annual Income
Required amount of life insurance = 8.9544074 × $50,000
Required amount of life insurance = $404,820.37

Therefore, the required amount of life insurance is $404,820. The best choice is B.

Question 5

Jenny and Joey have seven children and are expecting another.Joey is the primary income provider for his family,and the couple recognizes that the growing family is in need of life insurance.To begin the agent search process,Jenny and Joey make a list of prospects from reputable companies.Both Jenny and Joey prefer to speak to an agent with a life insurance certification.What life insurance agent designation do you recommend?

Accepted Answer

CLU stands for Chartered Life Underwriter, which is one of the most respected designations in the life insurance industry. This designation signifies that the agent has completed rigorous coursework and training in life insurance products, estate planning, and taxation. Therefore, Jenny and Joey can trust that a CLU-designated agent has the knowledge and expertise to provide them with the best life insurance options for their growing family.

Question 6

Suppose that your husband was killed in a bank robbery.Which of the following is not one of the typical settlement options that would be available?

Accepted Answer

Conversion of spousal insurance is not a typical settlement option for a payout from a policy or account due to death. Settlement options usually include installment payments, interest-only payments, lump-sum payments, and life annuities, which are ways the beneficiary can choose to receive the death benefit. Conversion of spousal insurance refers to changing a spousal policy into individual coverage, not a method of payout.

Question 7

Luke is 30 years old and earns an annual salary of $55,000.His wife wants to take out a life insurance policy on him until he turns 67.Using the earnings multiple approach,how large should the face value of his insurance policy be-assuming his wife can earn an annual rate of return of 8.5% on his life insurance pay off?

Accepted Answer

The earnings multiple approach is to determine the amount of insurance needed by multiplying the earner's annual salary by a certain multiplier. Since Luke is 30 years old and wants coverage until age 67, he needs coverage for 37 years. Using the rule of 70, we know that at an 8.5% annual rate of return, the investment will double in approximately 8 years. So, we need to multiply Luke's annual salary by the factor that will give us the present value of future earnings that would double four times over the period of 37 years.

To calculate this factor, we use the formula: 
Factor = 2^ (number of doubling periods / number of years)

Number of doubling periods = 37 / 8 ≈ 4.63 
Number of years = 37

Factor = 2^(4.63/37) ≈ 1.10

So, the face value of Luke's insurance policy should be:

Face value = Salary x Factor x Years 
Face value = $55,000 x 1.10 x 37 
Face value = $223,985

Therefore, the best choice is C.

Question 8

Your agent argues in favor of cash-value life insurance.You counteract with term to

Accepted Answer

Term life insurance is favored for its simplicity, affordability, and the ability to get a larger policy at a lower cost. It allows individuals to have significant coverage when it's most needed and potentially save and invest the difference in premiums compared to cash-value insurance, potentially leading to greater financial gain.

Question 9

Charles is the sole beneficiary of his late uncle's life insurance policy.The face value of the policy is $785,000.Charles has decided to accept annual annuity payments of $95,000.The interest rate on the policy is 5%.How many annual payments will Charles receive from this policy?

Accepted Answer

To determine how many annual payments Charles will receive from the policy, we need to use the present value of an annuity formula, which is:
PV = PMT x (1 - (1 + r)^(-n)) / r
where PV is the present value (which is the face value of the policy in this case), PMT is the annual payment, r is the interest rate, and n is the number of annual payments.

Plugging in the given values, we get:
785,000 = 95,000 x (1 - (1 + 0.05)^(-n)) / 0.05

Solving for n, we get:
n = -ln(1 - (785,000 x 0.05 / 95,000)) / ln(1 + 0.05)
n ≈ 10.92

Therefore, Charles will receive 10.92 annual payments from the policy, which is closest to answer C: 10.92 years worth of payments.

Question 10

Alice and Tommy have 3 dependent children.Alice earns $125,000 per year.They are taking out insurance on Alice for the next 30 years.Tommy expects to get a 9.25% rate of return on the life insurance payoff.Using the earnings multiple approach calculate how much life insurance they need to take out on Alice.

Accepted Answer

We can use the following formula to calculate the life insurance needed:

Life Insurance = (Earnings Multiple) x (Annual Income)

The earnings multiple can be calculated using the following formula:

Earnings Multiple = (1 - (1 + r)^-n) / r

where r is the expected rate of return and n is the number of years.

Plugging in the numbers, we get:

Earnings Multiple = (1 - (1 + 0.0925)^-30) / 0.0925
Earnings Multiple = 8.320

Then, we can calculate the life insurance needed:

Life Insurance = 8.320 x $125,000
Life Insurance = $1,040,000

Therefore, the best choice is B, $1,005,011, which is the closest option to the calculated life insurance needed.

Question 11

Joleene is a single parent with two children and earns $45,000 per year.She is purchasing term life insurance for 15 years until her youngest child is self supporting.Assuming her survivors can receive a 3% after-tax,inflation return on insurance proceeds,use the earnings multiple approach to calculate the face value of Joleene's policy.

Accepted Answer

First, we need to calculate Joleene's total need for life insurance. We can do this by multiplying her annual income by the number of years of support needed, which is 15 years. So, her total need is:

$45,000 x 15 = $675,000

Next, we need to adjust this amount for inflation, assuming a 3% after-tax return on the insurance proceeds. To do this, we can use the following formula:

Adjusted Need = Total Need x (1 + Inflation Rate)^Number of Years

Adjusted Need = $675,000 x (1 + 0.03)^15
Adjusted Need = $1,002,707

Finally, we need to divide this adjusted need by the earnings multiple to calculate the face value of Joleene's policy. The earnings multiple is typically between 10 and 20, depending on the individual's age, health, and other factors. In this case, we will use a multiple of 15. So, the face value of Joleene's policy is:

Face Value = Adjusted Need ÷ Earnings Multiple
Face Value = $1,002,707 ÷ 15
Face Value = $66,847

However, we need to adjust this amount for taxes. Assuming a tax rate of 30%, the after-tax face value of Joleene's policy is:

After-Tax Face Value = Face Value x (1 - Tax Rate)
After-Tax Face Value = $66,847 x (1 - 0.30)
After-Tax Face Value = $46,793

Therefore, the best choice is C) $397,548, as it is the closest answer to $46,793.

Question 12

Let's assume you are the beneficiary of your great Aunt's life insurance policy.Sadly she passed away yesterday.You elect to receive annual payments from this policy for the next 20 years.The settlement amount is $500,000 and the interest accruing on the policy is an annual 8%.What will be your annual life insurance annuity payments?

Accepted Answer

The answer of Let's assume you are the beneficiary of...

Question 13

You might consider another insurance agent if your agent uses the ________ method to analyze the costs of a policy.

Accepted Answer

The TNC (Total Needs Calculation) method is an outdated and often criticized method of analyzing the costs of a policy. It does not take into account individual needs or circumstances and can result in over-insurance or under-insurance. A good insurance agent would use a more personalized and comprehensive approach to determine the appropriate coverage for each client.

Question 14

Using the earnings multiple approach calculate how much life insurance Heather and Robert need to take out on Heather.She earns $80,000 and is 37 years old.They want coverage until she retires at age 67.Robert is sure he can get an annual rate of return on the policy settlement of 8%.They have no children.

Accepted Answer

The answer of Using the earnings multiple approach calculate how...

Question 15

Billy's occupation is a potentially dangerous one - he is a skydiving instructor.His agent pointed out that the monthly premiums will be high.Billy wants a lot of value for his money.He could take advantage of ________ life insurance at this time to save money.

Accepted Answer

Term life insurance provides coverage for a specific period of time, usually 10 to 30 years. It is the most affordable type of life insurance and is ideal for someone who wants a high amount of coverage for a lower premium. Since Billy is in a potentially dangerous occupation, he may not need coverage for his entire life, but rather for a specific period of time until he retires or changes careers. Therefore, term life insurance would be the best option for him to save money on premiums while still getting sufficient coverage.

Question 16

You want to get a good buy on your life insurance contract.You find a book that compares insurance costs by incorporating the time value of money into its calculations.This method allows you to select wisely using the

Accepted Answer

The interest-adjusted net cost method incorporates the time value of money and allows for a more accurate comparison of insurance costs over time. This method takes into account the potential earnings that could be made on the premiums if they were invested elsewhere instead of paying for the insurance. Therefore, it is the best choice for getting a good buy on your life insurance contract.

Question 17

Barry Blair wants to select a good life insurance agent.His dad has had several negative experiences with life insurance agents in the past.What should Barry consider when selecting an agent?

Accepted Answer

All of the above factors are important in selecting a good life insurance agent. A professional designation such as a Chartered Life Underwriter (CLU) or Certified Financial Planner (CFP) indicates the agent has specialized training and knowledge in the field. A full-time agent is more likely to be dedicated and focused on their clients. Experience and training are crucial to understanding the complexities of life insurance and providing the best advice for each individual situation. References can provide valuable insight into the agent's track record of client satisfaction.

Question 18

A.M.Best,Standard & Poor's,Moody's,and Weiss perform a vital service for the insurance industry.What do they do?

Accepted Answer

A.M.Best, Standard & Poor's, Moody's, and Weiss are insurance rating agencies that evaluate the financial strength and performance of insurance companies. They assign ratings or grades that reflect the company's ability to pay claims, manage risks, and meet financial obligations. These ratings are essential for consumers, businesses, and insurance professionals when selecting an insurance company to work with or invest in.

Question 19

Nancy and Leonard are married.They have two children who will be financially dependent for the next 20 years.They are taking out life insurance on Leonard,the bread winner and earns an annual salary of $80,000.Nancy is sure she is able to get a 9.5% rate of return on the policy settlement.Using the earnings multiple approach calculate how much life insurance they should take out on Leonard.

Accepted Answer

The answer of Nancy and Leonard are married.They have two...

Question 20

Brenda's husband Bob died last week.Her agent told her she could receive the death proceeds tax-free and a monthly check until her death.He is talking about the ________ settlement option.

Accepted Answer

The agent is referring to the life annuity settlement option, as it provides tax-free death proceeds and a monthly check until the beneficiary's death. The other options listed may not provide tax-free proceeds or may not provide monthly payments until the beneficiary's death.

Quiz 9: Life and Health Insurance