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 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 option B.

Question 2

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 interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest 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 interest 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

A

Question 3

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 4

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

Accepted Answer

It is important to determine if you need life insurance before moving on to other steps in the process. If you do not have dependents or financial obligations that would be impacted by your death, you may not need life insurance at all.

Question 5

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 wise decision when buying life insurance. Other factors such as the policy's coverage amount, benefits, and terms and conditions should also be considered before making a purchase.

Question 6

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 7

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 8

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 correct as the Belth method does require the use of benchmark prices per $1,000 of protection to calculate the rate of return. Statement II is incorrect as the main drawback of the method is not its complexity, but rather the fact that it assumes that premiums are paid continuously throughout the policyholder's lifetime, which may not be the case in reality.

Question 9

Consumer experts typically recommend which of the following rules when 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 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 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 12

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 interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest 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 interest 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 calculate the traditional net cost per thousand per year, we need to take into account the total premiums paid, the dividends received, the cash value at the end, and the death benefit.

Total premiums paid over 20 years: $2,280 x 20 = $45,600
Total dividends received over 20 years: $15,624
Cash value at the end of 20 years: $35,260
Death benefit: $100,000

First, we need to adjust the premiums for the time value of money by calculating its future value at 5% interest:

Premiums FV = $2,280 x (1+0.05)^20 = $4,533.40

Then, we can calculate the total value of the policy at the end of 20 years by adding the cash value, death benefit, and the future value of the premiums:

Total value = $35,260 + $100,000 + $4,533.40 = $139,793.40

We can also calculate the total cost by subtracting the total dividends received from the total premiums paid:

Total cost = $45,600 - $15,624 = $29,976

Now, we can calculate the traditional net cost per thousand per year by dividing the total cost by the death benefit and then dividing by 20:

Traditional net cost = ($29,976 / $100,000)/20 = $0.015
Traditional net cost per thousand per year = $0.015 x 1,000 = -$15. Therefore, the traditional net cost per thousand per year of David's policy over the 20-year period is -$2.64.

Question 13

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 14

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 15

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 measures the rate of return earned on the savings portion of the policy, making it the most relevant to Mary's interest in comparing policies based on their savings returns. The other options, surrender cost, traditional net cost, and net payment cost, are relevant to other aspects of a life insurance policy but not directly related to the rate of return on the savings portion.

Question 16

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

Both statements are true. The Linton yield is based on the assumption that a cash-value policy can be viewed as a combination of insurance protection and a savings fund, and 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.

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 interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest 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 interest 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 net payment cost per thousand per year can be found using the following formula:

Net Payment Cost = (Total Premiums Paid - Projected Dividends - Cash Value) / (Face Value / 1000)

Total premiums paid over 20 years = $2,280 x 20 = $45,600
Projected dividends over 20 years = $15,624
Cash value after 20 years = $35,260
Face value of policy = $100,000

Net Payment Cost = ($45,600 - $15,624 - $35,260) / ($100,000 / 1000) = $4,716 / 300 = $15.77 per thousand per year.

Therefore, the best choice is (C), $15.77.

Question 18

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

Only statement I is true. Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes. However, 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. Instead, the policyowner may only be subject to taxation on the gain in the policy's cash value if the policy is surrendered or otherwise terminated.

Question 19

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 20

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

Accepted Answer

Settlement options refer to how the benefits of a life insurance policy are paid out to beneficiaries, which does not directly affect the cost of obtaining life insurance. The cost is primarily determined by factors such as the insured's age, health, the policy's face value, and the type of insurance purchased, rather than how the benefits are eventually distributed.

Quiz 13: Buying Life Insurance