Question 1

Under the traditional net cost method,the net cost of life insurance for a given period (e.g.,20 years)is determined by which of the following formulas?

Accepted Answer

The traditional net cost method calculates the net cost of life insurance over a given period by subtracting the sum of the total dividends received during the period and the cash value at the end of the period from the total premiums paid for the period. This formula is represented by choice B.

Question 2

Why might the use of "grades" assigned by a life insurance company rating organization not be a reliable guide for consumers?
I.There may be variations in grades given by different rating organizations.
II.They ignore factors such as profitability and quality of investments.

Accepted Answer

A

Question 3

Consumer experts typically recommend which of the following rules for purchasing life insurance?
I.Avoid policies which pay dividends.
II.Purchase life insurance equal to ten times your annual salary.

Accepted Answer

D

Question 4

Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy.Then she subtracted the cash value after 20 years.Next,she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance.Finally,she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year.Lynn calculated the

Accepted Answer

The answer of Lynn calculated the future value of the...

Question 5

Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are)true?
I.Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored.
II.Its use is most appropriate in deciding between policies when the cost variation is very small.

Accepted Answer

The answer of Which of the following statements about the...

Question 6

Which of the following statements describes how the net payment cost index differs from the surrender cost index?

Accepted Answer

The answer of Which of the following statements describes how...

Question 7

Which of the following statements is (are)true regarding taxation of life insurance?
I.Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes.
II.The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased.

Accepted Answer

Statement I is true. Life insurance proceeds paid to a designated beneficiary are received tax-free. Statement II is false. The policyowner is not required to pay taxes on the cash value of their life insurance policy annually. However, if they surrender the policy or take a loan against the cash value, they may be subject to taxes on any gains or interest earned.

Question 8

Which of the following statements about the surrender cost index for measuring the cost of life insurance is true?

Accepted Answer

The answer of Which of the following statements about the...

Question 9

Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT

Accepted Answer

The correct answer is option C because it is not a recommended rule when buying life insurance. Ignoring all factors other than cost can lead to inadequate coverage or choosing an unreliable insurer. It is important to consider factors such as the reputation of the insurance company, the policy benefits, and the agent's knowledge and experience. Shopping around for a low-cost policy is also recommended to ensure that you are getting the best value for your money.

Question 10

Marshall is interested in determining the cost per thousand of his life insurance policy.Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?

Accepted Answer

The answer of Marshall is interested in determining the cost...

Question 11

Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are)true?
I.The traditional net cost method does not consider the time value of money.
II.The traditional net cost method can show that life insurance has a negative cost.

Accepted Answer

The traditional net cost method does not account for the time value of money, and it can indeed show a negative cost for life insurance, especially when dividends or cash value growth are considered.

Question 12

A factor that can be ignored when deterring the cost of life insurance is

Accepted Answer

Settlement options are related to how the death benefit is paid out to beneficiaries and do not directly affect the cost of the life insurance policy itself.

Question 13

The first step in "shopping for life insurance" is to

Accepted Answer

Before beginning to shop for life insurance, it is important to determine if you actually need it in the first place. If you do not have dependents or anyone who relies on your income, it may not be necessary to purchase life insurance.

Question 14

Which method of analyzing the cost of life insurance does not consider the cash value of the policy in the analysis?

Accepted Answer

The answer of Which method of analyzing the cost of...

Question 15

Which of the following statements about the Linton yield is (are)true?
I.It is based on the assumption that a cash-value policy can be viewed as a combination of insurance protection and a savings fund.
II.It is the average compound annual rate of return required to make the savings deposits in a life insurance policy equal to the policy's guaranteed cash value at the end of a specified period.

Accepted Answer

Statement I is true as the Linton yield assumes that a cash-value policy is a combination of insurance protection and a savings fund.

Statement II is also true as the Linton yield is the average compound annual rate of return required to make the savings deposits in a life insurance policy equal to the policy's guaranteed cash value at the end of a specified period. Therefore, both statements are true.

Question 16

David purchased a $100,000 participating whole life policy.The annual premium is $2,280.Projected dividends for the first 20 years are $15,624.The cash value after 20 years will be $35,260.If the premiums were invested at 5 percent for 20 years,the premiums would grow to $79,156.If the dividends were accumulated at 5 percent for 20 years,they would grow to be $24,400.The amount to which $1 deposited annually will accumulate in 20 years at 5 percent is $34.719.Based on this information,what is the net payment cost per thousand per year of David's policy over the 20-year period?

Accepted Answer

The answer of David purchased a $100,000 participating whole life...

Question 17

David purchased a $100,000 participating whole life policy.The annual premium is $2,280.Projected dividends for the first 20 years are $15,624.The cash value after 20 years will be $35,260.If the premiums were invested at 5 percent for 20 years,the premiums would grow to $79,156.If the dividends were accumulated at 5 percent for 20 years,they would grow to be $24,400.The amount to which $1 deposited annually will accumulate in 20 years at 5 percent is $34.719.Based on this information,what is the surrender cost per thousand per year of David's policy over the 20-year period?

Accepted Answer

The answer of David purchased a $100,000 participating whole life...

Question 18

Mary is interested in comparing life insurance policies.Rather than looking at the cost per thousand,she would like to compare the rate of return earned on the savings portion of the policy.Which of the following would be of the most interest to Mary?

Accepted Answer

The Linton Yield is a measure of the rate of return earned on the savings portion of a life insurance policy. It takes into account all of the costs and benefits of the policy, including premiums, mortality charges, and other fees, and provides a standardized way to compare different policies based on their returns. Therefore, it is the best choice for Mary's needs. The other options (surrender cost, traditional net cost, and net payment cost) are more focused on the costs of the policy, rather than its returns, and would not provide the information Mary is looking for.

Question 19

Which of the following statements about the yearly-rate-of-return method (also known as the Belth method)of calculating the yearly rate of return for a life insurance policy is (are)true?
I.The formula requires the use of benchmark prices per $1,000 of protection.
II.The main drawback of the formula is its complexity,necessitating the use of a computer to calculate the rate of return.

Accepted Answer

Statement I is true, as the Belth method uses benchmark prices per $1,000 of protection to calculate the rate of return. However, Statement II is false, as the main drawback of the formula is not its complexity but rather its reliance on certain assumptions about the policyholder's behavior and the performance of the underlying investments. While a computer may be helpful in performing the necessary calculations, it is not strictly necessary.

Question 20

David purchased a $100,000 participating whole life policy.The annual premium is $2,280.Projected dividends for the first 20 years are $15,624.The cash value after 20 years will be $35,260.If the premiums were invested at 5 percent for 20 years,the premiums would grow to $79,156.If the dividends were accumulated at 5 percent for 20 years,they would grow to be $24,400.The amount to which $1 deposited annually will accumulate in 20 years at 5 percent is $34.719.Based on this information,what is the traditional net cost per thousand per year of David's policy over the 20-year period?

Accepted Answer

The traditional net cost method calculates the net cost per thousand by subtracting dividends from total premiums and dividing by the number of thousands of coverage and years. Here, it is ($2,280 * 20 - $15,624) / (100 * 20) = $2.64.

Quiz 13: Buying Life Insurance

Under the traditional net cost method,the net cost of life insurance for a given period (e.g.,20 years) is determined by which of the following formulas?

Why might the use of "grades" assigned by a life insurance company rating organization not be a reliable guide for consumers? I.There may be variations in grades given by different rating organizations. II.They ignore factors such as profitability and quality of investments.

Consumer experts typically recommend which of the following rules for purchasing life insurance? I.Avoid policies which pay dividends. II.Purchase life insurance equal to ten times your annual salary.