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33 Cards in this Set
- Front
- Back
premature death
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the death of a family head with outstanding unfulfilled financial obligations
*such as dependents to support, children to educate, mortgage to pay off |
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costs of premature death
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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) |
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different types of families
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single-person
single-parent family two income earners with children traditional family blended family sandwiched family |
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approaches used to estimate the amount of life insurance to own
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1-human life value approach
2-the needs approach 3-the capital retention approach |
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human life value approach
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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
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calculating human life value approach
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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 |
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needs approach
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the amount needed depends on the financial needs that must be met if the family head should die
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family needs to consider
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-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) |
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estate clearance fund
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cash needed for burial expenses, uninsured medical bills, and taxes
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readjustment period
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a 1-2 year period in which the family adjusts to its new living standard
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dependency period
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the period until the youngest child reaches age 18
*follows the readjustment period |
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blackout period
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the period from the time that Social Security survivor benefits terminate to the time the benefits are resumed
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calculating the needs approach
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total amount needed
-total amount of existing insurance and financial assets =amount of new insurance that should be purchased |
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capital retention approach
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preserves the capital needed to provide income to the family(income-producing assets are preserved for the heirs)
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calculating the capital retention approach
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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 |
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types of life insurance
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1-term insurance
2-cash value life insurance 3-variations of both types |
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term life
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provide temporary protection
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convertible
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the policy can be exchanged for a cash-value policy without evidence of insurability
-through the attained-age method or the original-age method |
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attained-age method
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the premium charged for the new policy is based on the insured's attained age at the time of conversion
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original-age method
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the premium charged for the new policy is based on the insured's original age when the term insurance was first purchased
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yearly-renewable term insurance
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issued for a one-year period
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term to age 65 policy
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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 |
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decreasing term insurance policy
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the face value gradually declines each year
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reentry term insurance policy
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renewal premiums are based on select lower mortality rates if the insured can periodically demonstrate acceptable evidence of insurability
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return of premiums term
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the premiums are refunded if the policyowner outlives the term of the policy
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when is term life insurance appropriate?
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-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 |
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limitations of term life insurance
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-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 |
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types of whole life insurance
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ordinary life, limited-payment life, endowment insurance, variable life, universal life, variable universal life, current assumption whole life, intermediate-premium whole life
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whole life insurance
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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 |
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ordinary life insurance
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a level-premium policy that provides lifetime protection
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legal reserve
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the excess premiums paid during the early years are used to supplement the inadequate premiums paid during the later years of the policy
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net amount at risk
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the difference between the legal reserve and the face amount of coverage
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cash surrender values
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a policyholder overpays for insurance protection during the early years, resulting in a legal reserve and the accumulation of cash values
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