Risk Managment-Exam 2

Front 1

premature death

Back 1

the death of a family head with outstanding unfulfilled financial obligations

*such as dependents to support, children to educate, mortgage to pay off

Front 2

costs of premature death

Back 2

1-the deceased's future earnings are lost forever
2- additional expenses are incurred (funeral expenses, uninsured medical bills, estate settlement costs)
3-some families will experience a reduction in their standard of living
4-noneconomic costs (grief, counseling)

Front 3

different types of families

Back 3

single-person
single-parent family
two income earners with children
traditional family
blended family
sandwiched family

Front 4

approaches used to estimate the amount of life insurance to own

Back 4

1-human life value approach

2-the needs approach

3-the capital retention approach

Front 5

human life value approach

Back 5

the amount needed depends on the insured's human life value, which is the present value of the family's share of the deceased breadwinner's future earnings

Front 6

calculating human life value approach

Back 6

step 1-estimate the individual's average annual earnings over his or her productive lifetime

step 2-deduct taxes, insurance premiums, and self-maintenance costs (remaining amount is used to support the family)

step 3-using a reasonable discount rate, determine the present value of the family's share of earnings for the number of years until retirement

Front 7

needs approach

Back 7

the amount needed depends on the financial needs that must be met if the family head should die

Front 8

family needs to consider

Back 8

-an estate clearance fund
-income needed for the readjustment period
-the dependency period
-life income to the surviving spouse, including income during and after the blackout period
-special needs(funds for college educations, emergencies)

Front 9

estate clearance fund

Back 9

cash needed for burial expenses, uninsured medical bills, and taxes

Front 10

readjustment period

Back 10

a 1-2 year period in which the family adjusts to its new living standard

Front 11

dependency period

Back 11

the period until the youngest child reaches age 18

*follows the readjustment period

Front 12

blackout period

Back 12

the period from the time that Social Security survivor benefits terminate to the time the benefits are resumed

Front 13

calculating the needs approach

Back 13

total amount needed
-total amount of existing insurance and financial assets
=amount of new insurance that should be purchased

Front 14

capital retention approach

Back 14

preserves the capital needed to provide income to the family(income-producing assets are preserved for the heirs)

Front 15

calculating the capital retention approach

Back 15

step 1-prepare a personal balance sheet

step 2-determine the amount of income-producing capital

step 3-determine the amount of additional capital needed to meet the family needs

Front 16

types of life insurance

Back 16

1-term insurance

2-cash value life insurance

3-variations of both types

Front 17

term life

Back 17

provide temporary protection

Front 18

convertible

Back 18

the policy can be exchanged for a cash-value policy without evidence of insurability

-through the attained-age method or the original-age method

Front 19

attained-age method

Back 19

the premium charged for the new policy is based on the insured's attained age at the time of conversion

Front 20

original-age method

Back 20

the premium charged for the new policy is based on the insured's original age when the term insurance was first purchased

Front 21

yearly-renewable term insurance

Back 21

issued for a one-year period

Front 22

term to age 65 policy

Back 22

provides protection to age 65, at which time the policy expires

-can be converted to a permanent plan but decision to convert must be exercised before age 65

Front 23

decreasing term insurance policy

Back 23

the face value gradually declines each year

Front 24

reentry term insurance policy

Back 24

renewal premiums are based on select lower mortality rates if the insured can periodically demonstrate acceptable evidence of insurability

Front 25

return of premiums term

Back 25

the premiums are refunded if the policyowner outlives the term of the policy

Front 26

when is term life insurance appropriate?

Back 26

-the amount of income that can be spent on life insurance is limited
-the need for protection is temporary
-the insured wants to guarantee future insurability

Front 27

limitations of term life insurance

Back 27

-term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels
-term insurance in inappropriate if you wish to save money for a specific need

Front 28

types of whole life insurance

Back 28

ordinary life, limited-payment life, endowment insurance, variable life, universal life, variable universal life, current assumption whole life, intermediate-premium whole life

Front 29

whole life insurance

Back 29

a cash value policy that provides lifetime protection

-a stated amount is paid to a designated beneficiary when the insured dies, regardless of whether the death occurs

Front 30

ordinary life insurance

Back 30

a level-premium policy that provides lifetime protection

Front 31

legal reserve

Back 31

the excess premiums paid during the early years are used to supplement the inadequate premiums paid during the later years of the policy

Front 32

net amount at risk

Back 32

the difference between the legal reserve and the face amount of coverage

Front 33

cash surrender values

Back 33

a policyholder overpays for insurance protection during the early years, resulting in a legal reserve and the accumulation of cash values