8-21 Explain the basic settlement options available for the payment of life insurance
proceeds upon a person’s death.
• Lump sum: This is the most common settlement option, chosen by more than 95 percent of
• Interest only: The insurance company keeps policy proceeds for a specified time; the
beneficiary receives interest payments, usually at some guaranteed rate. This option can be useful
• Fixed period: The face amount of the policy, along with interest earned, is paid to the
• Fixed amount: The beneficiary receives policy proceeds in regular payments of a fixed
• Life income: The insurer guarantees to pay the beneficiary a certain payment for the rest of his
or her life, based on the beneficiary’s sex, age when benefits start, life expectancy, policy face
value, and interest rate assumptions. This option appeals to beneficiaries who don’t want to
8-22 What do nonforfeiture options accomplish? Differentiate between paid-up insurance
and extended term insurance.
A nonforfeiture option gives a cash value life insurance policyholder some benefits even when a
Extended term insurance: The insured uses the accumulated cash value to buy a term life
With paid-up insurance, you have insurance for life. With extended term insurance, you have
8-23 Explain the following clauses often found in life insurance policies: (a) multiple indemnity
clause, (b) disability clause, and (c) suicide clause. Give some examples of common exclusions.
a. Multiple indemnity clause: Multiple indemnity clauses increase the face amount of the
b. Disability clause: A disability clause may contain a waiver-of-premium benefit alone or
c. Suicide clause: Nearly all life insurance policies have a suicide clause that voids the contract
Exclusions: Although all private insurance policies exclude some types of losses, life policies
8-24 Describe what is meant by a participating policy, and explain the role of policy dividends in
these policies.
In a participating policy, the policyholder is entitled to receive policy dividends reflecting the
8-25 Describe the key elements of an insurance policy illustration and explain what a
prospective client should focus on in evaluating an illustration.
A life insurance policy illustration is a hypothetical representation of a policy’s performance
that reflects the most important assumptions that the company relies on when presenting the
When you look at an insurance illustration, focus first on the basic assumptions that the company
used to compute it, including your age, sex, and underwriting health status. Check to make sure
Financial Planning Exercises
Planning Exercises
1. Estimating life insurance needs. Use Worksheet 8.1. Katie Holt is a 72-year-old widow who
has recently been diagnosed with Alzheimer’s disease. She has limited financial assets of
her own and has been living with her daughter Laurie for two years. Her only income is
$850 a month in Social Security survivor’s benefits. Laurie wants to make sure her mother
will be taken care of if Laurie should die. Laurie, 40, is single and earns $55,000 a year as a
human resources manager for a small manufacturing firm. She owns a condo with a
current market value of $100,000 and has a $70,000 mortgage. Other debts include a $5,000
auto loan and $500 in various credit card balances. Her 401(k) plan has a current balance
of $24,500, and she keeps $7,500 in a money market account for emergencies. After talking
with her mother’s doctor, Laurie believes that her mother will be able to continue living
independently for another two to three years. She estimates that her mother would need
about $2,000 a month to cover her living expenses and medical costs during this time. After
that, Laurie’s mother will probably need nursing home care. Laurie calls several local
nursing homes and finds that it will cost about $5,000 a month when her mother enters a
nursing home. Her mother’s doctor says it is difficult to estimate her mother’s life
expectancy but indicates that with proper care some Alzheimer’s patients can live 10 or
more years after diagnosis. Laurie also estimates that her personal final expenses would be
around $5,000, and she’d like to provide a $25,000 contingency fund that would be used to
pay a trusted friend to supervise her mother’s care if Laurie were no longer alive. Use
Worksheet 8.1 to calculate Laurie’s total life insurance requirements and recommend the
type of policy that she should buy.
Laurie is concerned that she should die and leave her mother not able to get the care she needs.
While it is difficult to estimate lives, Laurie believes that her mother will live no more than 13
additional years. At Laurie’s death, Katie [Mother] will only have her social security which does
Given Laurie’s middle age and the need for insurance of only an additional 13 years, Laurie
If Laurie does not die, she will have to find funds to cover her mother’s costs. Perhaps the
mother will qualify for Medicaid given her Alzheimer’s disease. With a salary of $55,000,
2. Deciding if life insurance is needed. Use Worksheet 8.1. Given your current personal
financial situation, do you feel you need life insurance coverage? Why or why not? Use
Worksheet 8.1 to confirm your answer and calculate how much additional insurance (if
any) you might need to purchase.
3. Deciding if additional life insurance is needed and, if so, appropriate type. Use Worksheet
8.1. Rudy Steele, 43, is a recently divorced father of two children, ages 9 and 7. He
currently earns $95,000 a year as an operations manager for a utility company. The divorce
settlement requires him to pay $1,500 a month in child support and $400 a month in
alimony to his ex-wife, who currently earns $25,000 annually as a preschool teacher. Rudy
is now renting an apartment, and the divorce settlement left him with about $100,000 in
savings and retirement benefits. His employer provides a $75,000 life insurance policy.
Rudy’s ex-wife is currently the beneficiary listed on the policy. What advice would you give
to Rudy? What factors should he consider in deciding whether to buy additional life
insurance at this point in his life? If he does need additional life insurance, what type of
policy or policies should he buy? Use Worksheet 8.1 to help answer these questions for
Rudy.
Divorce is always a difficult situation, especially with children involved. Rudy has to decide the
level of support he wishes to give his children. I he wants to provide a college fund for his kids,
Assuming $200,000 college fund and funeral expenses of $10,000, Rudy needs insurance of
Given his age, I would suggest term insurance. Since the major expense will be at the end of the
4. Life insurance premiums and comparison of types. Using the premium schedules
provided in Exhibits 8.2, 8.3, and 8.5, how much in annual premiums would a 25-year-old
male have to pay for $100,000 of annual renewable term, level premium term, and whole
life insurance? (Assume a five-year term or period of coverage.) How much would a 25-
year-old woman have to pay for the same coverage? Consider a 40-year-old male (or
female): Using annual premiums, compare the cost of 10 years of coverage under annual
renewable and level premium term options and whole life insurance coverage. Relate the
advantages and disadvantages of each policy type to their price differences.
Policy is $100,000, for 10 years
Insured Annual renewable term Level premium term Whole life insurance
25-yr male $97 * 5 + $107 * 5 =
$1,020
$106* 10 = $1,060 $603 * 5 + $727 * 5
= $6,650
25-yr female $63 * 5 + $88 * 5 =
$755
$102* 10 = $1,020 $525 * 5 + $683 * 5
= $6,040
$1,725
I did not interpolate to estimate the yearly premium for the annual renewable term or the whole
The premiums demonstrate that, in general, rates for men are higher than for women of the same
age; that premiums increase with age; and that term insurance is far less expensive than whole
life. The annual renewable term is the lowest cost for the 25-yr olds and the level term for the 40-
5. Appropriateness of whole life insurance. Ramona and Pablo Valdez are a dual-career
couple who just had their first child. Pablo age 29, already has a group life insurance
policy, but Ramona’s employer does not offer life insurance. A financial planner is
recommending that the 25-year-old Ramona buy a $250,000 whole life policy with an
annual premium of $1,670 (the policy has an assumed rate of earnings of 5 percent a year).
Help Ramona evaluate this advice and decide on an appropriate course of action.
Issues are the need for insurance and then what type of insurance best meet that need. We do not
know the amount of Pablo’s insurance. Frequently employer provided group life insurance is
The second issue is what type of insurance. For younger couples, term insurance is normally
preferred versus whole life. Using the table is Exhibit 8.3, the premium for 20 year level
premium term life of $100,000 for a female is $116, thus, for $250,000 the premium would be
My advice to Ramona is to first determine the need for insurance. Once the amount is
Note the Financial Impact of Personal Choices, Matt and Jan Consider
“Buying Term and Investing the Rest” that is at the end of the chapter.
[Above in these materials.]
6. Appropriateness of variable life insurance. While at lunch with a group of coworkers,
one of your friends mentions that he plans to buy a variable life insurance policy because it
provides a good annual return and is a good way to build savings for his 5-year-old’s
college education. Another colleague says that she’s adding coverage through the group
plan’s additional insurance option. What advice would you give them?
A variable life insurance policy goes further than whole and universal life policies in combining
death benefits and savings. The policyholder decides how to invest the money in the savings
(cash-value) component. The investment accounts are set up just like mutual funds, and most
The friend is mixing investment and insurance. If the goal is to build an education fund, then the
funds need to be investment in stocks or mutual funds, securities that will build in value over the
If you want the benefits of higher investment returns, then you must also be willing to assume