Chapter 12.

1 Concept Check

1. Distinguish between the dying-too-soon problem and the living-too-long problem

and the best ways to address each. The living-too-long problem includes outliving your
savings during retirement and the dying-to-soon problem includes dying before
adequately providing for the financial well-being of loved ones left behind. To address
the living-too-long problem you should invest in tax-sheltered retirement savings plans.
To address the dying-too-soon problem you should invest in life insurance.
2. List five types of needs that can be addressed through life insurance. Five types of
needs that can be addressed through life insurance include final-expense needs, income-
replacement needs, readjustment-period needs, debt-repayment needs, and college-
expenses needs.
3. Explain why the multiple-of-earnings approach is less accurate than a needs-based
approach to life insurance planning. The multiple-of-earning approach is less accurate
than a needs based approach to life insurance planning because the multiple-of-earning
approach estimates the amount of life insurance needed, while the needs-based approach
estimates life insurance needs considering all of the factors that might potentially affect
the level of need.
4. Identify periods in a typical person’s life cycle when the need for life insurance is
low and one when it is high. A period in a typical person's life cycle when the need for
life insurance is low is when you are young, unmarried, and childless. A time when the
need for life insurance is high is when you are older, married, and have dependents.
5. What two factors in the process of calculating life insurance needs are likely to be
the most expensive to replace? The two factors in the process of calculating life
insurance needs that are likely to be the most expensive to replace are the spouse income-
replacement need and final expense needs.

Chapter 12.2 Concept Check

1. Distinguish between term life insurance and cash-value life insurance. Term life
insurance pays benefits only if the insured person dies within the time period covered by
the policy and cash-value insurance pays benefits at death and includes a
savings/investment element that can provide a level of benefits to the policyholder prior
to the death of the insured person.
2. Explain why the premiums for term insurance are so much lower than those of
cash-value life insurance. Premiums for term insurance are so much lower than those of
cash-value life insurance because the premiums in a term insurance are constant.
3. Describe the benefit of buying guaranteed renewable term insurance. The benefit of
buying guaranteed renewable term insurance is it protects you against the possibility of
becoming uninsurable due to health status reasons.
 4. Explain why the amount of ‘‘insurance’’ declines over time under a cash-value life
insurance policy. The amount of insurance declines over time under a cash-value life
insurance policy because you have to pay a premium, which is usually as a constant. If
those premiums are not paid, then there is no money going towards your life insurance.
5. Distinguish between cash-value life insurance with a fixed return and with a
variable return. Cash-value life insurance with a fixed return pays higher rates
depending on the success made by the insurance company. Cash-value life insurance with
a variable return allows you to choose the investments made with your cash-value
accumulations and share gains or losses.

Chapter 12.3 Concept Check

1. Distinguish among the owner, the insured, the beneficiary, and the contingent
beneficiary of a life insurance policy. The owner of a life insurance policy is someone
who retains all rights and privileges granted by the policy. The insured is an individual
whose life is insured. The beneficiary is the person who is designated to receive
insurance proceeds. The contingent beneficiary of a life insurance is the person who will
become the beneficiary if the original beneficiary dies before the insured.
2. Distinguish between an incontestability clause and a suicide clause in a life
insurance policy. An incontestability clause places a time limit on the right of the
insurance company to deny a claim. A suicide clause in a life insurance policy allows in
insurance company to deny coverage if the insured commits suicide within the first two
years after the policy is issued.
3. What are nonforfeiture values and why are they important? Nonforfeiture values are
amounts stipulated in a life insurance policy that protect the cash value in the event that
the policyholder chooses at some point to not pay or fails to pay the premiums.
Nonforfeiture policies are important because they protect the money already in your life
insurance policy, if you choose not to pay or fail to pay your premiums.
4. Identify three of the five settlement options for the payment of the proceeds of a life
insurance policy. Three settlement options for the payment of the proceeds of a life
insurance policy include lump sum payments, installment payments for a fixed period,
and income payments for life.
5. Distinguish between an automatic premium loan and a waiver-of-premium option in
a life insurance policy. An automatic premium loan in a life insurance policy allows any
premium not paid by the end of the grace period to be paid automatically with a policy
loan if sufficient cash value or dividends have accumulated. A waiver-of-premium is a
clause in a life insurance policy that waives the policy holder’s obligation to pay any
further premiums should he or she become seriously ill or disabled.
6. Explain how guaranteed renewability for term life insurance and guaranteed
insurability for cash-value insurance protect insured people who develop serious
 health conditions. Guaranteed renewability for term life insurance protects insured
people who develop serious health conditions by permitting the cash-value policyholder
to buy additional stated amounts of cash-value life insurance at stated times in the future
without taking a health exam.

Chapter 12.4 Concept Check

1. What is meant by integrating your life insurance into your financial plan over the
life cycle? Integrating your life insurance into your financial plan over the life cycle
means you should consider where you are in your life and what expenses you may need
to pay that involve life insurance.
2. Give some examples of fair prices for life insurance and one example of why some
people must pay higher premiums than others. Some examples of fair prices for life
insurance include preferred applicants, standard applicants, and impaired applicants.
Some people must pay higher premiums because they are smokers. It is said that smokers
die 10 years earlier than nonsmokers.
3. List the benefits of buying terms and investing the rest. The benefits of buying term
and investing the rest include lower premium costs, higher future returns, and more
variety in investment options.
4. Give three signs of an unethical life insurance agent. Three signs of an unethical life
insurance agent include using the multiple earnings approach rather than needs approach,
saying they will give you a rebate, and encouraging you to replace an existing cash-value
policy with another.