FIN 3660 – 20 points
Chapters 7 and 8 NAME _______________________________________
Please make sure each question is answered in your own words. Unfortunately, points will not be awarded if any answer is cut and pasted from any source or contains wording similar to the textbook or to wording of another student. Please provide a citation if needed.
- (3 points) List and briefly describe two key features of each of the following types of policies:
- Variable life insurance
- Variable adjustable life insurance policy
- Variable universal life insurance policy
- (1 point) In your own words, explain the purpose of and use of the level additions model and the constant ratio method.
- (1) Assume you have a client who has just learned about variable universal life insurance policies and wants your opinion on whether he should purchase this type of insurance. This client has a high level of risk aversion. How would you explain this policy and would you recommend this policy for his life insurance needs. Explain.
- (1) Explain the meaning of the cost-of-insurance charge. Additionally, discuss the individual charges that are included in the cost-of-insurance charge.
- (1) Whole life policies are known for having a cash value accumulation due to the level-premium structure. Variable life policies also have cash values but are somewhat different from the cash values of whole life policies. Please explain this difference.
- (3 points) Your client would like some information on the premium loan provision of this ordinary life policy. Please explain the following:
- What is the impact of exercising the premium loan clause, i.e., how could it impact the face amount of coverage?
- What are two key advantages of this provision?
- What is the disadvantage of exercising this option?
- (6 points) The table below provides an example of Nonforfeiture/Surrender for an Ordinary Life and 20-Payment Life Policy Benefits (for selected years through year 20). Please explain to your client the values/options he will have after he has paid his premiums for 15 years. Please be specific on what each of the three nonforfeiture values means.
|Ordinary Life||20-Payment Whole Life|
|Policy Year||Cash Value||Reduced Paid-up Insurance||Extended Term Insurance
|Cash Value||Reduced Paid-up Insurance||Extended Term Insurance
The issue age is 35 and the Male 1980 CSO Mortality tables and 5 percent interest rate is assumed.
- (4 points) There are five settlement options in a typical ordinary life insurance policy, including the lump sum option. Describe a hypothetical beneficiary who would benefit from selecting each settlement option. For example, a young child who becomes the beneficiary of a life insurance policy would likely need the Interest- only option as he or she may not have a need for immediate cash or cash flow. Please provide an example of an ideal use of each of the five settlement options.
- Life Income
- Fixed Period
- Fixed amount