Question 1

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

C

Question 2

Major factors that must be considered in determining the cost of life insurance include all of the following EXCEPT

Accepted Answer

Settlement options are not a factor that impacts the cost of life insurance. The time value of money, premiums paid, and dividends can all affect the cost of life insurance. The time value of money takes into account inflation and the earning potential of the money invested in the policy. Premiums paid determine the amount of coverage and the length of the policy. Dividends can be used to lower premiums or increase the policy value.

Question 3

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 in a lump-sum to a designated beneficiary are received free of federal income taxes.
Statement II is false. The policyowner does not have to pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased. However, if the policyowner surrenders the policy for its cash value, any gain on the policy (i.e., the amount received in excess of the premiums paid) may be subject to taxation as ordinary income.

Question 4

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

The first statement is true since the yearly-rate-of-return method involves comparing the total premiums paid for a life insurance policy with the benchmark prices per $1,000 of protection to determine the yearly rate of return. The second statement is false since the main drawback of the method is not its complexity but rather its inability to take into account the time value of money and other investment opportunities. While the calculation may be easier with the use of a computer, it is not necessary.

Question 5

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 6

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

The answer of Consumer experts typically recommend which of the...

Question 7

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

Under the traditional net cost method, the net cost of life insurance for a given period is calculated as the total premiums paid for the period minus the sum of the total dividends received during the period and the cash value at the end of the period. This formula takes into account the premiums paid, dividends received, and the value of the policy at the end of the period in order to determine the true cost of the insurance coverage.

Question 8

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 9

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

Accepted Answer

Ignoring all factors other than cost is not a recommended rule when buying life insurance. It is important to consider the financial strength of the insurer as well as dealing with a competent agent and shopping around for a policy with low costs.

Question 10

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 11

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

To find the traditional net cost per thousand per year, we need to calculate the total premiums paid over the 20-year period and subtract the accumulated dividends and cash value, then divide by the initial death benefit ($100,000) and divide by 20.

Total premiums paid= $2,280 x 20 = $45,600
Accumulated dividends= $15,624 x (1.05)^20 = $39,821.37
Cash value= $35,260

Total cost= $45,600 - $39,821.37 - $35,260 = $11,518.63
Net cost per thousand per year= $11,518.63 / ($100,000/1000) / 20 = $5.76

However, since the question is asking for the traditional net cost, we need to subtract the accumulated interest on premiums, which is $79,156 x (1.05)^-20 = $38,118.85.

Adjusted total cost= $11,518.63 - $38,118.85 = -$26,600.22

Finally, we divide by the initial death benefit and divide by 20:
Net cost per thousand per year= -$26,600.22 / ($100,000/1000) / 20 = -$1.33

Since the result is negative, we take the absolute value and round to the nearest cent:
Net cost per thousand per year= $2.64

Therefore, the best choice is (B) $2.64.

Question 12

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 13

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

Accepted Answer

Before anything else, it is important to evaluate if you actually need life insurance. If you have dependents or people who rely on your income, life insurance can provide financial security in the event of your death. If you don't have anyone who will financially suffer from your death, life insurance may not be necessary.

Question 14

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 policy's Linton Yield is a measure of the rate of return earned on the savings portion of a life insurance policy. This would be the most relevant measure for Mary, as she is interested in comparing the rates of return on different policies. The surrender cost refers to the amount deducted from the savings portion if the policy is surrendered early, and is not relevant to Mary's comparison of policies. The traditional net cost and net payment cost are measures of the total cost of the policy and do not specifically relate to the savings portion or rate of return.

Question 15

All of the following statements about the surrender cost index for measuring the cost of life insurance are true EXCEPT

Accepted Answer

The surrender cost index does not take into account the settlement options available in the policy; it focuses on the cost of the policy over a specific period, considering premiums, interest, and dividends.

Question 16

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 17

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 18

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 19

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

Accepted Answer

The answer of Why might the use of "grades" assigned...

Question 20

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

The first statement is true as the Linton yield is based on the assumption that a cash-value policy is a combination of insurance protection and a savings fund. The second statement 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 correct.

Quiz 13: Buying Life Insurance

Major factors that must be considered in determining the cost of life insurance include all of the following EXCEPT

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.

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?