Sharon, aged 30, is a single parent who earns $360,000 annually as an executive officer at a local university and plans to retire at 65.

Sharon is the sole support of her son, aged 3. The annual amount on home mortgage is $90,000. At the beginning of this year, she gives $80,000 to her parents, who helps to look after her son. She estimates that her self-maintenance costs are ten percent of her annual earnings.

She is planning for her financial goals and would like to start a saving program for her son’s education fund and start-up capital for a small business in the future. Sharon is also concerned about the financial well-being of her son and parents if she dies prematurely.

A friend has told her that the following four life insurance policies might be useful in her present situation. Sharon asks for your advice.

1. 5-year level term insurance that can be renewable till age 70

2. Whole life insurance paid up to age 65
3. Ordinary whole life insurance
4. Variable life insurance

(a) What is the meaning of premature death? State any ONE possible financial adjustment for Sharon’s parents if Sharon dies prematurely.

(b) Based on the human life value approach using a reasonable discount rate of 5 percent, what is the amount of insurance should Sharon purchase? Show your workings.  

(c) Explain any TWO limitations if Sharon uses human life value approach for determining the amount of life insurance to own.

(d) Select ONE of the above four life insurance policies that would best meet the need for largest protection of Sharon’s son till age 18 for a relatively small premium if she dies prematurely. Explain.

(e) Select ONE of the above four life insurance policies that would best meet the need for lifetime protection but allows her to withdraw money every year to pay for his son’s 4-years university tuition fees. Explain.

(f) Sharon recalled from her friend that she can add riders on a life insurance policy to include the right to purchase additional life insurance even if the insured was diagnosed with critical illness or withdraw money to pay for medical bills and financial obligations if insured may die within 12 months. Name and describe these TWO riders.

(g) Describe the settlement option of life income with guaranteed period.

(h) What does incontestable clause state? Describe its purposes in life insurance policy.