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assignment_6_ch11_and_12.docxAssignment 6, Chapters 11 and 12 NAME ____________________________
FIN 3610
1. a. Briefly explain two basic characteristics of ordinary life policies.
Not sure about the answer. Ordinary life insurance provides lifetime protection. The premiums are level and payable for life. The policy develops an investment or savings element called cash surrender values, which result from the overpayment of premiums during the early years.
b. What are two limitation of ordinary life insurance?
c. Describe two basic characteristics of variable life insurance.
Not sure about the answer. Variable life insurance is a policy in which the death benefit and cash surrender value vary according to the investment experience of a separate account maintained by the insurer. The entire reserve is held in a separate account and is invested in equities or other investments. The cash surrender values are not guaranteed.
d. Explain two basic characteristics of universal life policies.
e. Explain two limitations of universal life insurance.
2. Your friend has asked you to explain to her the difference between term and whole life insurance. Provide three statements to best describe the key features of each:
A. Term Life insurance
B. Whole Life insurance
3. Provide two examples of people who should be each of the following:
A. Term Life insurance
B. Whole Life insurance
4. What are the disadvantages of each of the following:
A. Term Life insurance
B. Whole Life insurance
5. Briefly explain the key features of following life insurance contractual provisions.
a. Suicide clause
The suicide clause states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance is not paid. There is only a refund of the premiums paid.
b. Grace period
The grace period allows the policyholder a period of 31 days to pay an overdue premium. Universal life and other flexible premium policies have a longer grace period, such as 61 days. The insurance remains in force during the grace period.
c. Reinstatement clause
The reinstatement clause allows the policyholder to reinstate a lapsed policy. Certain requirements must be fulfilled
6. All states have nonforfeiture laws that require the payment of a cash-surrender value when a cash-value policy is surrendered. Briefly explain the following nonforfeiture options that are found in a typical life insurance policy.
a. Cash-value option
If a cash value policy is purchased, the policyholder pays more than is actuarially necessary for the life insurance protection. Thus if the insurance is no longer needed, the policyholder should get something back. This payment to a withdrawing policyholder is known as a cash surrender value. The cash values during the early policy years are relatively small, but over a long period, the cash values can be sizable. The policy can be surrendered for its cash value, at which time all benefits under the policy cease.
b. Reduced paid-up insurance
Under the reduced paid-up option, the cash surrender value is applied as a net single premium to purchase a reduced paid-up policy. The reduced paid-up policy is the same as the original policy, but the face amount is reduced.
c. Extended term
Under the extended term insurance option, the net cash surrender value is used as a net single premium to extend the full face amount of the policy (less any indebtedness) into the future for a certain number of years and days. In effect, the cash value is used to purchase a paid-up term insurance policy equal to the original face amount (less any indebtedness) for a limited period.
7. Additional riders and benefits often can be added to a life insurance policy to provide greater protection to the insured. Describe each of the following riders and options:
a. Waiver-of-premium provision
Under this provision, if the insured becomes totally disabled from bodily injury or disease before some stated age, all premiums coming due during the period of disability are waived. A six-month waiting period must also be satisfied. Some policies have a shorter waiting period. The insured must also satisfy the definition of total disability stated in the policy, and he or she must furnish proof of disability satisfactory to the company. There is a retroactive refund of premiums paid by the insured during the first six months of disability if premiums are being waived under the contract. Some newer policies do not provide for the retroactive refund of premiums. The purpose of the waiver-of-premium provision is to relieve the insured of premium payments during the period of total disability.
b. Guaranteed purchase option
Under the guaranteed purchase option, the insured can purchase additional amounts of life insurance at specified times in the future without evidence of insurability. The purpose of the option is to guarantee the insured’s future insurability.
c. Double indemnity rider
The double indemnity rider doubles the face amount of insurance if death occurs as a result of an accident within 90 days of the accident. The purpose is to pay an additional benefit if death results from an accidental bodily injury. From an economic viewpoint, the double indemnity benefit cannot be justified because the human life value is not doubled if death occurs as a result of an accident, and most insureds will die as a result of disease.
d. Cost-of-living rider
A cost-of-living rider allows the policyholder the right to purchase one-year term insurance equal to the percentage increase in the Consumer Price Index with no evidence of insurability. The purpose is to protect the real purchasing power of the death proceeds.
e. Accelerated benefits rider
The accelerated benefits rider pays part or all of the life insurance death benefit to a terminally ill insured before death occurs. The purpose is to pay part of the benefits to a terminally ill insured while he or she is still alive to help pay for medical bills and other expenses.
