Match the terms associated with managing your use of life insurance with the descriptions of the terms. (Note: These are not necessarily complete definitions, but there is only one correct description for each term.) Description Term This refers to uncertainty regarding a potential economic loss. This is a life insurance policy designed to pay off a mortgage in the event of borrower's death. This type of life insurance is usually sold in conjunction with an installment loan. This is the statistical information used by an insurance company's underwriters to estimate the risk of loss faced by the company's population of insured policyholders This is a hypothetical representation of an insurance policy's performance that reflects the most important assumptions that the insurance company uses when presenting the policy to a prospective client. 2. How much life insurance do you need? Calculating needs - Parti Jalil and Aluna Ngumi are 37 years old and have one son, age 5. Jalil is the primary earner, making $87,000 per year. Aluna does not currently work. The Ngumis have decided to use the needs analysis method to calculate the value of a life insurance policy that would provide for Aluna and their son in the event of Jalil's death. Jalil and Aluna estimate that while their son is still living at home, monthly living expenses for Aluna and their child will be about $3,700 (in current dollars). After their son leaves for college in 13 years, Aluna will need a monthly income of $3,100 until she retires at age 65. The Ngumis estimate Aluna's living expenses after 65 will only be $2,700 a month. The life expectancy of a woman Aluna's age is 87 years, so the Ngumi family calculates that Aluna will spend about 22 years in retirement. Using this information, complete the first portion of the needs analysis worksheet to estimate their total living expenses. Life Insurance Needs Analysis Worksheet Life Insurance Needs Analysis Worksheet Name of insured Jalil and Aluna Ngumi Step 1: Financial resources needed i after death 1. Annual living expenses and other needs Date July 31, 2015 Period 1 Period 2 Period 3 Monthly living $3,700 expenses i b. Net yearly income needed (1a x 12) Number of years d. in time period Total living needs per time period (16 x 1c) 13 15 22 Total living expenses (add Line 1d for each period to check your total): $1,848,000 In addition to these monthly expenses, other future outlays must be accounted for. Before they had a child, Aluna worked as a financial consultant, but her knowledge and skills are now somewhat outdated. Therefore, they include $30,000 for Aluna to go back to school. Additionally, Jalil and Aluna want to create a college fund of $35,000 to fund their child's college education. They estimate that final expenses (funeral costs and estate taxes) will amount to $12,000. Finally, they have taken out a loan for a business venture of $32,200 and a credit card balance of $1,200. Because the Ngumis are renters, they have no outstanding mortgage. Using this information, complete the next portion of Step 1 to determine the total financial resources needed. 2. Special needs- a. Spouse's education fundi b. C. Child's college fund Other needs 3. Final expenses (funeral costs and estate taxes) $ $ $0 $ 4. Debt liquidation a. House mortgage S b. Other loans C. Total debt (4a+4b) $ $0 5. Other financial needs Total financial resources needed (add right-hand column plus the Total Living Expenses you calculated): determine the sie of the life insurance. The second half of the needs analysis worksheet is not shown on this page. To complete the worksheet and determine the value of the life insurance policy the Ngumis should purchase, they need to factor in additional information. True or False: Aluna's annual Social Security benefit should be accounted for in the remaining portion of the form. O True O False Bob and Cho Chen have completed Step 1 of their needs analysis worksheet and determined that they need $3,522,000 to maintain the projected lifestyle of Cho (age 38) and their two children (ages 8 and 10) in the event of Bob's (the primary earner's) death. The Chens also have certain financial resources available after Bob's death, however, so their life insurance needs are lower than this amount. If Bob dies, Cho will be eligible to receive Social Security survivors' benefits-approximately $3,800 a month ($45,600 a year) until the youngest child graduates from high school in 10 years. After the children leave home, Cho will be able to work full-time and earn an estimated $38,000 a year (after taxes) until she retires at age 65. After Cho turns 65, she'll receive approximately $3,200 a month ($38,400 a year) from her own Social Security and retirement benefits. The life expectancy for a woman within Cho's demographic is 87. The couple has also saved $60,000 in a mutual fund, and Bob's employer provides him a $100,000 life insurance policy. Using this information, complete Step 2 of the needs analysis worksheet to estimate their total financial resources available after death. (Note: If the value of a certain entry is zero, be sure to enter "0" to receive credit.) Life Insurance Needs Analysis Worksheet (Part 2) Step 2: Financial Resources Available After Death 1. Income Period 1 Period 2 Period 3 a. Annual Social Security survivors benefits $45,600 $0 $0 b. Surviving spouse's annual income $0 $ c. Other annual pensions and Social Security benefits $0 $0 $0 $38,400 d. Annual income (la + 1b + 1c) e. Number of years in time period f. Total period income (1d x le) g. Total income 2. Savings and investments $45,600 |s 10 $456,000 S 17 22 3. Other life insurance 4. Other resources Total financial resources available (19+2+3+4): $1,946,800 50 $2,106,600 Finally, to determine the value of life insurance Bob and Cho should purchase, complete Step 3 of the needs analysis method by subtracting the total financial resources available from the total financial resources needed. Step 3: Additional Life Insurance Needed. Total financial resources needed (from Step 1) Total financial resources available (from Step 2) Additional life insurance needed: $3,522,000 $2,106,800. $1,415,200 True or False: Alternatively, the Chens could have estimated their life insurance needs using the multiple-of-earnings method, a more complicated but more accurate method than the needs analysis. True O False Each type of life insurance has its own benefits and drawbacks, and policyholder preferences and circumstances make certain features more important to some individuals than to others. The following table shows statements about life insurance policies. Indicate which policies address the concern or desire expressed by each statement. Check all that apply. I want a large amount of coverage but can only pay a small amount in the near future. I want to use my life insurance as a savings vehicle as well. If I decide to cancel my policy while I'm still alive, I want access to the cash value. I want flexibility in the amount I pay in premiums in each month, Term life insurance O Whole life insurance Universal life insurance D Universal life insurance combines elements from term life insurance and whole life insurance. Term policies provide a death benefit savings component, whole life policies provide a death benefit, savings component, and universal policies savings component. To understand how universal premiums are allocated, consider the following provide a death benefit example. Alex is a 37-year-old lawyer who has taken out a universal life insurance policy to protect his two children (ages 8 and 8) in the event of death. Each year, Alex chooses how much would like to contribute to the policy, as shown by the first row of the table below. The insurance company subtracts from this an administrative fee along with the cost of the death benefit (the portion of the policy) then puts the remainder into rate of return. Based on the given the cash value (or ) portion of the policy. This money earns interest at a information, calculate the amount that is added to the cash value portion of the policy in each of the first three years. Year 1 Year 2 Year 3 Premium (annual contribution) $2,587 $2,062 $1,645 Administrative fee $95 $95 $95 Cost of death benefit $130 $130 $130 Amount added to cash value life The cost of the death benefit portion of universal policies is only fixed for certain periods and rises with age, as is the case with insurance policies. Suppose that in the 14th year of his policy, his cost of death benefit has risen substantially. At the same time, he is helping to pay his mother's medical expenses after a major surgery and currently.cannot afford to pay his life insurance premium. True or False: Under the terms of a standard universal policy, if Alex stops paying his premiums, then his policy will be cancelled and the value of the cash portion will be paid out to him immediately. O True False Shopping for Life Insurance Ana has determined that a $200,000 whole life insurance policy would best suit her needs, she consulted with one insurance broker, Hans Honestman, who quoted him a monthly rate of $300. she remembers learning in her personal finance course that it is similar policies from different insurance agencies, so she plans to to compare Before doing anything else, she decides to consult her aunt Megan, a banker in a trust department, about the features of her life insurance policy. She tells Ana that she has a 10 year, $100,000, level term life policy. Which of the following are appropriate next steps for Ana? Check all that apply. Compare quotes for $200,000 whole policies online. Find out whether Hans Honestman has a professional designation, such as Chartered Financial Consultant (ChFC). Assume that a licensed broker will serve a client's best interests. Ask Megan if she can recommend a good agent, since bankers tend to be good sources. The following is an excerpt from a hypothetical conversation between an insurance agent and a client who is in the final stages of purchasing a $200,000 whole life insurance policy. Fill in the blanks to provide the correct information regarding key features of life insurance policies. AGENT: We need to discuss a few things before finalizing your policy. First, the beneficiary clause. Who would you like to name as your primary beneficiary, that is, the person who will receive the entire death benefit CLIENT: That would be my wife, Susan.. ? AGENT: Okay, and if she does not outlive you, all benefits will go to your secondary beneficiaries. Who will those be? CLIENT: My children. AGENT: Excellent. Now, how would you like your benefits to be distributed? We offer lump sum, interest-only, fixed-period, fixed-amount, and life-income payments. CLIENT: Well, I'd like my beneficiaries to receive regular payments until the policy runs out. AGENT: In that case, I recommend settlement option. CLIENT: Okay, good to know. And if I choose to terminate the policy before maturity, do I receive the cash value? CLIENT: Well, I'd like my beneficiaries to receive regular payments until the policy runs out. AGENT: In that case, I recommend settlement option. CLIENT: Okay, good to know. And if I choose to terminate the policy before maturity, do I receive the cash value? AGENT: CLIENT: Got it. Anything else? AGENT: You're all set