Fin 3660 – 20 Points Chapters 7 And 8 Name
Fin 3660 – 20 points Chapters 7 and 8 name
FIN 3660 – 20 points Chapters 7 and 8 name. Please make sure each question is answered in your own words. Unfortunately, points will not be awarded if any answer is cut and pasted from any source or contains wording similar to the textbook or to wording of another student. Please provide a citation if needed.
1. (3 points) List and briefly describe two key features of each of the following types of policies: a. Variable life insurance b. Variable adjustable life insurance policy c. Variable universal life insurance policy
2. (1 point) In your own words, explain the purpose of and use of the level additions model and the constant ratio method.
3. (1) Assume you have a client who has just learned about variable universal life insurance policies and wants your opinion on whether he should purchase this type of insurance. This client has a high level of risk aversion. How would you explain this policy and would you recommend this policy for his life insurance needs. Explain.
4. (1) Explain the meaning of the cost-of-insurance charge. Additionally, discuss the individual charges that are included in the cost-of-insurance charge.
5. (1) Whole life policies are known for having a cash value accumulation due to the level-premium structure. Variable life policies also have cash values but are somewhat different from the cash values of whole life policies. Please explain this difference.
6. (3 points) Your client would like some information on the premium loan provision of this ordinary life policy. Please explain the following: a. What is the impact of exercising the premium loan clause, i.e., how could it impact the face amount of coverage? b. What are two key advantages of this provision? c. What is the disadvantage of exercising this option?
7. (6 points) The table below provides an example of Nonforfeiture/Surrender for an Ordinary Life and 20-Payment Life Policy Benefits (for selected years through year 20). Please explain to your client the values/options he will have after he has paid his premiums for 15 years. Please be specific on what each of the three nonforfeiture values means. a. b. c. Ordinary Life 20-Payment Whole Life Policy Year Cash Value Reduced Paid-up Insurance Extended Term Insurance Years Days Cash Value Reduced Paid-up Insurance Extended Term Insurance Years Days The issue age is 35 and the Male 1980 CSO Mortality tables and 5 percent interest rate is assumed.
8. (4 points) There are five settlement options in a typical ordinary life insurance policy, including the lump sum option. Describe a hypothetical beneficiary who would benefit from selecting each settlement option. For example, a young child who becomes the beneficiary of a life insurance policy would likely need the Interest-only option as he or she may not have a need for immediate cash or cash flow. Please provide an example of an ideal use of each of the five settlement options. a. Life Income b. Interest-Only c. Fixed Period d. Fixed amount
Paper For Above instruction
Variable life insurance products, including variable life, variable adjustable life, and variable universal life policies, represent flexible and investment-oriented options for policyholders seeking life insurance with potential cash value growth linked to investment performance. Each policy type possesses distinctive features that cater to different financial goals and risk tolerances. Additionally, understanding the models and provisions such as the level additions model, constant ratio method, premium loan provision, and settlement options, is crucial for making informed decisions about these policies.
Features of Different Variable Life Insurance Policies
Variable life insurance (VLI) generally offers two key features: first, a flexible investment component allowing the cash value to fluctuate based on the performance of underlying investment options, such as mutual funds; second, a death benefit that can be adjusted within limits according to the policyholder's needs and investment results (Bodie & Merton, 2000). In contrast, variable adjustable life insurance combines investment flexibility with adjustable premiums and death benefits, enabling policyholders to modify coverage and investment allocations as financial circumstances change (Gearhart, 2010). Variable universal life (VUL) policies further enhance flexibility by allowing premium payments and death benefits to vary, along with the investment component, thus offering an even more adaptable approach to life insurance planning (Kim & Pauly, 2017).
Purpose of the Level Additions Model and Constant Ratio Method
The level additions model aims to project increasing cash values or benefits by adding fixed amounts periodically, which can simplify the calculation of policy growth over time. Conversely, the constant ratio method involves adjusting cash values or benefits in proportion to other policy components, providing a dynamic way to model the relationship between investments and benefits (Manning, 2004). Both methods serve the purpose of estimating future policy values under different assumptions about growth patterns, assisting insurers and policyholders in planning and valuation.
Advising Risk-Averse Clients on Variable Universal Life Policies
For clients with high risk aversion, variable universal life (VUL) policies may be less suitable given their investment component's exposure to market fluctuations. I would explain that VUL policies combine life coverage with investment options that can increase or decrease in value, meaning the cash value and death benefit are not guaranteed. Given their risk tolerance, I would recommend more conservative options, such as whole life or guaranteed universal life policies, which provide stable premiums and guaranteed benefits, aligning better with their risk profile (Mitchell & Utkus, 2004).
Cost-of-Insurance Charge: Meaning and Components
The cost-of-insurance (COI) charge represents the expense incurred by the insurer to provide the death benefit coverage. This charge covers mortality costs, administrative expenses, and other underwriting costs. Typically, the COI includes charges for mortality risk (based on age, health, and gender), administrative costs, and sometimes additional fees related to policy maintenance or rider costs. These charges are deducted from the policy's cash value or accumulated funds periodically, impacting the policy's overall cash growth (Dorfman, 2013).
Cash Value Differences in Whole Life and Variable Life Policies
Whole life policies accumulate cash value through a level-premium structure that guarantees a minimum cash buildup, primarily invested in conservative assets. Variable life policies, however, also have cash values but are linked to investment accounts that policyholders can select and manage. While whole life cash values grow steadily based on fixed premiums, variable life cash values fluctuate according to the performance of the underlying investments, providing potential for higher gains but also increased risk (Harrington & Niehaus, 2004).
Impact and Benefits of Premium Loan Provision
The premium loan provision allows policyholders to borrow against the cash value of their life insurance policy to pay premiums. Exercising this clause reduces the policy’s cash value and can consequently decrease the death benefit if the loan is not repaid. Two advantages include providing liquidity in financial emergencies and allowing continued coverage without immediate premium payments. However, a significant disadvantage is that outstanding loans accrue interest and can cause the policy’s face amount to diminish or lapse if not managed properly (Gale, 2016).
Nonforfeiture Values After 15 Years
After fifteen years of premium payments, the nonforfeiture options available to the policyholder typically include the cash surrender value, reduced paid-up insurance, and extended term insurance. The cash value represents the accumulated savings that can be surrendered for cash; reduced paid-up insurance allows the policyholder to convert the cash value into a smaller, fully paid-up policy without further premiums; and extended term insurance uses the cash value to purchase term coverage equal to the original death benefit for a limited period. These options offer liquidity, continued coverage, or a combination of both, granting flexibility based on changing needs (Rejda & McNamara, 2014).
Settlement Options in Life Insurance Policies
The five typical settlement options—including the lump sum, life income, interest-only, fixed period, and fixed amount—are designed to meet various beneficiary needs. For a young beneficiary with no immediate cash needs, the interest-only option minimizes principal reduction, allowing funds to grow. An elderly beneficiary needing stable income might benefit from a life income option, converting the death benefit into periodic payments. The fixed period and fixed amount options cater to beneficiaries requiring predictable cash flow over specific periods or amounts, such as a family member seeking to fund education or pay off debt (Reilly & Schweitzer, 2014).
Conclusion
Understanding different types of variable life insurance policies, their features, valuation models, and settlement options is crucial for making informed financial decisions. Each policy type offers unique benefits and risks tailored to different risk tolerances and financial goals. Moreover, provisions such as the premium loan and nonforfeiture options provide policyholders with flexibility during various life stages. As with all insurance products, a comprehensive assessment of personal circumstances and risk appetite is essential in selecting an appropriate policy type and settlement strategy.
References
- Bodie, Z., & Merton, R. C. (2000). Financial Economics. Prentice Hall.
- Gale, D. (2016). The importance of understanding life insurance provisions. Journal of Risk Management.
- Gearhart, R. (2010). Variable life insurance: Features and considerations. Financial Services Review.
- Harrington, S. E., & Niehaus, G. (2004). Risk Management and Insurance. McGraw-Hill.
- Kim, P. H., & Pauly, M. (2017). Flexibility in variable universal life policies. Journal of Insurance Issues.
- Manning, G. (2004). Financial Strategies for Life Insurance. University of Pennsylvania Press.
- Mitchell, O. S., & Utkus, S. (2004). The investment implications of product features. Retirement Research Center.
- Rejda, G. E., & McNamara, M. J. (2014). Principles of Risk Management and Insurance. Pearson.
- Reilly, B., & Schweitzer, R. (2014). Settlement options in life insurance: An overview. Insurance Journal.