19.5 Review and Practice
George and Mary Keys are very excited over the news that they are to be parents. Since their graduation from college three years ago, they have purchased a new house and a new car. They owe $130,000 on the house and $8,000 on the car. Their only life insurance consists of $75,000 of term coverage on George and $50,000 on Mary. This coverage is provided by their employers as an employee benefit. Their personal balance sheet shows a net worth (assets minus liabilities) of $80,000. George is rapidly moving up within his company as special projects engineer. His current annual salary is $60,000. In anticipation of the new arrival, George is considering the purchase of additional life insurance. He feels that he needs at least $500,000 in coverage, but his budget for life insurance is somewhat limited. The couple has decided that Mary will stay at home with the new baby and put her career on hold for ten years or so while this baby and perhaps a later sibling or two are young.
- As George’s agent, advise him as to the type(s) of life insurance that seem(s) most appropriate for his situation.
- George indicates to you that his financial situation will change in five years when he receives a one-time payment of approximately $100,000 from his uncle’s estate. In what way would this information affect the type of life insurance you recommend to George?
- Your wealthy Aunt Mabel, age sixty-four, recently talked to you, her life insurance agent, regarding her desire to see that her great-niece has the funds to attend college. Aunt Mabel is in very good health and expects to live for many years to come. She does not know if she should put aside money in certificates of deposit at the bank, buy more insurance on herself, or choose some other plan of action. She simply knows that her great-niece will need at least $80,000 to pay for her college education in ten years. What type of investment and/or insurance program would you recommend for her? Why?
- Clancy knew he could not meet the physical requirements for insurability, so he had his twin brother, Clarence, take the physical examination in his place. A policy was issued, and three years later, Clancy died. The insurance company claims manager learned that Clancy’s twin took the examination in his place and refused to pay the claim. Clancy’s beneficiary sued the company for the proceeds, claiming that the two-year contestable period had expired. Did the company have to pay? Why or why not?
Phil Pratt has decided that the lowest-premium form of life insurance is definitely the best buy. Consequently, he has purchased a $250,000 yearly renewable term life insurance policy as his only life insurance. Explain why you agree or disagree with Phil’s philosophy.
- Will his decision have any possible adverse effects in later years?
- Are there any realistic alternatives available to him without making premiums too high at a young age?
Betty Bick, age forty, is considering the purchase of a limited-payment participating life insurance policy that would be paid up when she turns sixty. She plans to work until then and does not wish to pay any premiums after she retires, but she definitely wants whole life insurance protection. Betty earns $45,000 per year as a branch manager for a commercial bank. As a single mother she has been unable to accumulate much wealth. At this time, Betty has two dependent children ages ten and fourteen.
- Explain to her any alternatives that would meet the criteria she has established.
- Why do you think her choice is a good (or bad) one? What additional information would you like to have before feeling confident about your answer?
Lane Golden has just purchased a universal life insurance policy from Midwest Great Life. Initially, Lane pays a first-month premium of $100. Her policy has (1) a front-end load of $2.00 per month; (2) a surrender charge equal to 100 percent of the minimum first-year premiums of $1,200 ($100 per month), decreasing 20 percent of the original surrender charge per year until it disappears after five years; (3) a current monthly mortality rate of $0.15 per $1,000 of protection (amount at risk); and (4) a current monthly investment return of 0.667 percent. Her policy is a type B, with a level $100,000 protection element.
- Construct a flow of funds statement, like the one in Figure 19.6 "Two Universal Death Benefit Options", for the first month of Lane’s policy.
- Explain why her accumulation value and cash value will be equal if she continues her policy for more than five years.
- Mary and Henry both have universal life insurance policies with the same company. Mary wants to keep her death benefits level, while Henry wants to increase his death benefits over time. How will their insurer meet their different death benefit needs?
The following insureds have accidental death benefit riders on their life insurance policies. Discuss why you think this rider will or will not pay the beneficiary in each of the following situations.
- The insured dies from a fall through a dormitory window on the tenth floor. The door to his room is locked from the inside, and the window has no ledge. There is no suicide note. He had not appeared despondent before his death.
- The insured dies in a high-speed single-car automobile accident on a clear day and with no apparent mechanical malfunction in the vehicle. He had been very depressed about his job and had undergone therapy with a counselor, during which he had discussed suicide; however, there is no note.
- The insured contracts pneumonia after she is hospitalized due to injuries received from a fall from a ladder while rescuing a cat from a tree. She has a history of pneumonia and other serious respiratory problems. She dies of pneumonia thirty days after the fall.