Buying Life Insurance

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Question 1
Free
Multiple Choice

A factor that can be ignored when determining the cost of life insurance is

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A

time value of money.

B

premiums paid.

C

settlement options.

D

dividends.

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Question 2
Free
Multiple Choice

Under the traditional net cost method, the net cost of life insurance for a given period (e.g., 20 years) is determined by which of the following formulas?

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A

the total premiums for the period less the policy reserve at the end of the period

B

the total premiums for the period less the sum of the total dividends received during the period and the cash value at the end of the period

C

the sum of the total premiums and dividends for the period less the cash value at the end of the period

D

the sum of the total dividends received during the period and the cash value at the beginning of the period less the total premiums paid for the period

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Question 3
Free
Multiple Choice

Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true?
I)The traditional net cost method does not consider the time value of money.
II)The traditional net cost method can show that life insurance has a negative cost.

Choose correct answer/s
A

I only

B

II only

C

both I and II

D

neither I nor II

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Question 4
Free
Multiple Choice

Which of the following statements about the surrender cost index for measuring the cost of life insurance is true?

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A

It is based on the assumption that the policy will be in force indefinitely.

B

It takes into account the settlement options available in the policy.

C

It does not consider the cash value in the policy.

D

It takes the amount and timing of each dividend into consideration.

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Question 5
Free
Multiple Choice

Which of the following statements describes how the net payment cost index differs from the surrender cost index?

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A

Dividends are ignored.

B

The cash value is ignored.

C

Premiums are not accumulated at a specified interest rate.

D

Dividends are not accumulated at a specified interest rate.

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Question 6
Multiple Choice

David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the traditional net cost per thousand per year of David's policy over the 20-year period?

Choose correct answer/s
A
-$1.52
B
-$2.64
C
$5.17
D
$9.75
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Question 7
Multiple Choice

David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the surrender cost per thousand per year of David's policy over the 20-year period?

Choose correct answer/s
A
$5.62
B
$13.75
C
$15.77
D
$27.38
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Question 8
Multiple Choice

David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the net payment cost per thousand per year of David's policy over the 20-year period?

Choose correct answer/s
A
$5.62
B
$13.75
C
$15.77
D
$27.38
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Question 9
Multiple Choice

Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true?
I)Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored.
II)Its use is most appropriate in deciding between policies when the cost variation is very small.

Choose correct answer/s
A
I only
B
II only
C
both I and II
D
neither I nor II
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Question 10
Multiple Choice

Which of the following statements about the Linton yield is (are) true?
I)It is based on the assumption that a cash-value policy can be viewed as a combination of insurance protection and a savings fund.
II)It is the average compound annual rate of return required to make the savings deposits in a life insurance policy equal to the policy's guaranteed cash value at the end of a specified period.

Choose correct answer/s
A
I only
B
II only
C
both I and II
D
neither I nor II
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Question 11
Multiple Choice

Which of the following statements about the yearly-rate-of-return method (also known as the Belth method) of calculating the yearly rate of return for a life insurance policy is (are) true?
I)The formula requires the use of benchmark prices per $1,000 of protection.
II)The main drawback of the formula is its complexity, necessitating the use of a computer to calculate the rate of return.

Choose correct answer/s
A
I only
B
II only
C
both I and II
D
neither I nor II
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Question 12
Multiple Choice

Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT

Choose correct answer/s
A
Consider the financial strength of the insurer.
B
Deal with a competent agent.
C
Ignore all factors other than cost.
D
Shop around for a low-cost policy.
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Question 13
Multiple Choice

Consumer experts typically recommend which of the following rules when purchasing life insurance?
I)Avoid policies which pay dividends.
II)Purchase life insurance equal to ten times your annual salary.

Choose correct answer/s
A
I only
B
II only
C
both I and II
D
neither I nor II
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Question 14
Multiple Choice

Why might the use of "grades" assigned by a life insurance company rating organization not be a reliable guide for consumers?
I)There may be variations in grades given by different rating organizations.
II)They ignore factors such as profitability and quality of investments.

Choose correct answer/s
A
I only
B
II only
C
both I and II
D
neither I nor II
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Question 15
Multiple Choice

Marshall is interested in determining the cost per thousand of his life insurance policy. Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?

Choose correct answer/s
A
the needs approach
B
the traditional net cost method
C
the human life value approach
D
the surrender cost index
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Question 16
Multiple Choice

Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy. Then she subtracted the cash value after 20 years. Next, she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance. Finally, she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year. Lynn calculated the

Choose correct answer/s
A
traditional net cost per thousand per year.
B
the Linton Yield.
C
the surrender cost per thousand per year.
D
the net payment cost per thousand per year.
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Question 17
Multiple Choice

Which method of analyzing the cost of life insurance does not consider the cash value of the policy in the analysis?

Choose correct answer/s
A
traditional net cost method
B
net payment cost index
C
the Linton Yield
D
the surrender cost index
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Question 18
Multiple Choice

Mary is interested in comparing life insurance policies. Rather than looking at the cost per thousand, she would like to compare the rate of return earned on the savings portion of the policy. Which of the following would be of the most interest to Mary?

Choose correct answer/s
A
the policy's Linton Yield
B
the policy's surrender cost
C
the policy's traditional net cost
D
the policy's net payment cost
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Question 19
Multiple Choice

Which of the following statements is (are) true regarding taxation of life insurance?
I)Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes.
II)The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased.

Choose correct answer/s
A
I only
B
II only
C
both I and II
D
neither I nor II
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Question 20
Multiple Choice

The first step in "shopping for life insurance" is to

Choose correct answer/s
A
estimate the amount of life insurance to purchase.
B
decide whether you want a policy which pays dividends.
C
determine if you need life insurance.
D
decide on the best type of life insurance for you.
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