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19.E: Mortality Risk Management - Individual Life Insurance and Group Life Insurance(Exercises)
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- George and Mary Keys are very excited over the news that they
are to be parents. Since their graduation from college three years
ago, they have purchased a new house and a new car. They owe
$130,000 on the house and $8,000 on the car. Their only life
insurance consists of $75,000 of term coverage on George and
$50,000 on Mary. This coverage is provided by their employers as an
employee benefit. Their personal balance sheet shows a net worth
(assets minus liabilities) of $80,000. George is rapidly moving up
within his company as special projects engineer. His current annual
salary is $60,000. In anticipation of the new arrival, George is
considering the purchase of additional life insurance. He feels
that he needs at least $500,000 in coverage, but his budget for
life insurance is somewhat limited. The couple has decided that
Mary will stay at home with the new baby and put her career on hold
for ten years or so while this baby and perhaps a later sibling or
two are young.
- As George’s agent, advise him as to the type(s) of life
insurance that seem(s) most appropriate for his situation.
- George indicates to you that his financial situation will
change in five years when he receives a one-time payment of
approximately $100,000 from his uncle’s estate. In what way would
this information affect the type of life insurance you recommend to
- Your wealthy Aunt Mabel, age sixty-four, recently talked to
you, her life insurance agent, regarding her desire to see that her
great-niece has the funds to attend college. Aunt Mabel is in very
good health and expects to live for many years to come. She does
not know if she should put aside money in certificates of deposit
at the bank, buy more insurance on herself, or choose some other
plan of action. She simply knows that her great-niece will need at
least $80,000 to pay for her college education in ten years. What
type of investment and/or insurance program would you recommend for
- Clancy knew he could not meet the physical requirements for
insurability, so he had his twin brother, Clarence, take the
physical examination in his place. A policy was issued, and three
years later, Clancy died. The insurance company claims manager
learned that Clancy’s twin took the examination in his place and
refused to pay the claim. Clancy’s beneficiary sued the company for
the proceeds, claiming that the two-year contestable period had
expired. Did the company have to pay? Why or why not?
- Phil Pratt has decided that the lowest-premium form of life
insurance is definitely the best buy. Consequently, he has
purchased a $250,000 yearly renewable term life insurance policy as
his only life insurance. Explain why you agree or disagree with
- Will his decision have any possible adverse effects in later
- Are there any realistic alternatives available to him without
making premiums too high at a young age?
- Betty Bick, age forty, is considering the purchase of a
limited-payment participating life insurance policy that would be
paid up when she turns sixty. She plans to work until then and does
not wish to pay any premiums after she retires, but she definitely
wants whole life insurance protection. Betty earns $45,000 per year
as a branch manager for a commercial bank. As a single mother she
has been unable to accumulate much wealth. At this time, Betty has
two dependent children ages ten and fourteen.
- Explain to her any alternatives that would meet the criteria
she has established.
- Why do you think her choice is a good (or bad) one? What
additional information would you like to have before feeling
confident about your answer?
- Lane Golden has just purchased a universal life insurance policy
from Midwest Great Life. Initially, Lane pays a first-month premium
of $100. Her policy has (1) a front-end load of $2.00 per month;
(2) a surrender charge equal to 100 percent of the minimum
first-year premiums of $1,200 ($100 per month), decreasing 20
percent of the original surrender charge per year until it
disappears after five years; (3) a current monthly mortality rate
of $0.15 per $1,000 of protection (amount at risk); and (4) a
current monthly investment return of 0.667 percent. Her policy is a
type B, with a level $100,000 protection element.
- Construct a flow of funds statement, like the one in Figure
19.3.3, for the first month of Lane’s policy.
- Explain why her accumulation value and cash value will be equal
if she continues her policy for more than five years.
- Mary and Henry both have universal life insurance policies with
the same company. Mary wants to keep her death benefits level,
while Henry wants to increase his death benefits over time. How
will their insurer meet their different death benefit needs?
- The following insureds have accidental death benefit riders on
their life insurance policies. Discuss why you think this rider
will or will not pay the beneficiary in each of the following
- The insured dies from a fall through a dormitory window on the
tenth floor. The door to his room is locked from the inside, and
the window has no ledge. There is no suicide note. He had not
appeared despondent before his death.
- The insured dies in a high-speed single-car automobile accident
on a clear day and with no apparent mechanical malfunction in the
vehicle. He had been very depressed about his job and had undergone
therapy with a counselor, during which he had discussed suicide;
however, there is no note.
- The insured contracts pneumonia after she is hospitalized due
to injuries received from a fall from a ladder while rescuing a cat
from a tree. She has a history of pneumonia and other serious
respiratory problems. She dies of pneumonia thirty days after the