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33 Cards in this Set

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premature death
the death of a family head with outstanding unfulfilled financial obligations

*such as dependents to support, children to educate, mortgage to pay off
costs of premature death
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)
different types of families
single-person
single-parent family
two income earners with children
traditional family
blended family
sandwiched family
approaches used to estimate the amount of life insurance to own
1-human life value approach

2-the needs approach

3-the capital retention approach
human life value approach
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
calculating human life value approach
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
needs approach
the amount needed depends on the financial needs that must be met if the family head should die
family needs to consider
-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)
estate clearance fund
cash needed for burial expenses, uninsured medical bills, and taxes
readjustment period
a 1-2 year period in which the family adjusts to its new living standard
dependency period
the period until the youngest child reaches age 18

*follows the readjustment period
blackout period
the period from the time that Social Security survivor benefits terminate to the time the benefits are resumed
calculating the needs approach
total amount needed
-total amount of existing insurance and financial assets
=amount of new insurance that should be purchased
capital retention approach
preserves the capital needed to provide income to the family(income-producing assets are preserved for the heirs)
calculating the capital retention approach
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
types of life insurance
1-term insurance

2-cash value life insurance

3-variations of both types
term life
provide temporary protection
convertible
the policy can be exchanged for a cash-value policy without evidence of insurability

-through the attained-age method or the original-age method
attained-age method
the premium charged for the new policy is based on the insured's attained age at the time of conversion
original-age method
the premium charged for the new policy is based on the insured's original age when the term insurance was first purchased
yearly-renewable term insurance
issued for a one-year period
term to age 65 policy
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
decreasing term insurance policy
the face value gradually declines each year
reentry term insurance policy
renewal premiums are based on select lower mortality rates if the insured can periodically demonstrate acceptable evidence of insurability
return of premiums term
the premiums are refunded if the policyowner outlives the term of the policy
when is term life insurance appropriate?
-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
limitations of term life insurance
-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
types of whole life insurance
ordinary life, limited-payment life, endowment insurance, variable life, universal life, variable universal life, current assumption whole life, intermediate-premium whole life
whole life insurance
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
ordinary life insurance
a level-premium policy that provides lifetime protection
legal reserve
the excess premiums paid during the early years are used to supplement the inadequate premiums paid during the later years of the policy
net amount at risk
the difference between the legal reserve and the face amount of coverage
cash surrender values
a policyholder overpays for insurance protection during the early years, resulting in a legal reserve and the accumulation of cash values