Question 1

Which of the following is a cost/expense that an estate clearance fund is designed to pay?

Accepted Answer

An estate clearance fund is specifically designed to pay for the expenses related to the clearance of an estate, which includes funeral and burial expenses. Retiring a mortgage, education costs or providing income to the surviving spouse are not typically covered by an estate clearance fund.

Question 2

Which of the following types of families is likely to have the least need for a large amount of life insurance?

Accepted Answer

A single person family only needs life insurance to cover any final expenses or to leave a legacy to loved ones. They do not have dependents who rely on their income or financial support, so they do not need a large amount of life insurance.

Question 3

What is the length of the readjustment period which is considered when the needs approach is used to determine the amount of life insurance to own?

Accepted Answer

The readjustment period considered when using the needs approach to determine life insurance needs is typically 1 to 2 years. This allows for the family to adjust to the loss of income and to make necessary changes in their lifestyle and financial situation. The other options provided (A, C, and D) are not accurate descriptions of the readjustment period in this approach.

Question 4

The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the

Accepted Answer

The period during which a surviving spouse is ineligible for Social Security benefits is commonly referred to as the "blackout period." This period typically lasts from the time the surviving spouse reaches age 60 until they are eligible to receive survivor benefits at age 62. During this time, the surviving spouse may be eligible for other types of benefits, such as retirement benefits or disability benefits, but not survivor benefits.

Question 5

Richard is using the capital retention approach to determine how much life insurance to purchase.Richard would like to provide $35,000 per year to his family,forever,if he dies.The assets that he has today will provide $25,000 in annual income without the liquidation of these assets.If life insurance proceeds can be invested to earn a 5 percent annual return,how much life insurance should Richard purchase to fund the additional income needed to meet the $35,000 annual income goal?

Accepted Answer

The answer of Richard is using the capital retention approach...

Question 6

Julian,age 45,would like to determine how much life insurance to purchase using the human life value approach.He assumes his average annual earnings over the next 20 years will be $40,000.Of this amount,$20,000 is available annually for the support of his family.Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount)rate.The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46.What is Julian's human life value?

Accepted Answer

To calculate Julian's human life value using the human life value approach, we first need to determine his total earnings over the next 20 years, which is $40,000 * 20 = $800,000. We then subtract the amount he needs for his own support, which is $20,000 * 20 = $400,000. This leaves us with an income of $20,000 per year that Julian generates specifically for the support of his family. We then calculate the present value of this income stream by multiplying $20,000 by the present value factor of $12.46, which gives us a human life value of $249,200 (rounded to the nearest hundred dollars). Therefore, the best choice is B.

Question 7

Which of the following statements about the capital retention approach for determining life insurance needs is (are)true?
I.It assumes that life insurance proceeds will be liquidated to provide income to survivors.
II.It requires the preparation of a personal balance sheet.

Accepted Answer

The capital retention approach assumes that life insurance proceeds are retained and invested to generate income, not liquidated. It does require a personal balance sheet to determine the amount of capital needed.

Question 8

The human life value is defined as the

Accepted Answer

The human life value is the present value of a deceased breadwinner's future earnings that would have contributed to the family's financial wellbeing. It takes into account factors like the individual's age, gender, occupation, and future earning potential to determine the present value. Option C is the most accurate definition of the human life value.

Question 9

Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are)true?
I.It involves an analysis of various family needs which must be met if a family breadwinner dies.
II.Its use is appropriate only if a person currently has no life insurance protection.

Accepted Answer

The needs approach does involve an analysis of various family needs, such as income replacement, debt repayment, and funding future expenses like education or retirement. However, it can be used even if a person currently has some life insurance coverage, as it may be necessary to adjust the coverage amount based on changing needs over time.

Question 10

To calculate a human life value,it is necessary to deduct certain costs from a person's average annual earnings.These costs include

Accepted Answer

Income taxes are a necessary cost to deduct from a person's average annual earnings in order to calculate their human life value. Funeral costs, investment income, and pension benefits after retirement are not necessary costs to consider.

Question 11

Bill is attempting to determine how much life insurance to purchase.He has two dependent children and his wife does not work outside of the home.An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning.One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again.This period is called the

Accepted Answer

The period after Social Security benefits to a widow terminate until they resume again is called the blackout period.

Question 12

Sarah is using the needs approach to determine how much life insurance to buy.Her cash needs are $30,000; her income needs are $140,000; and special needs are $100,000.Sarah has the following assets: $20,000 in bank accounts,$30,000 in retirement plans,and $40,000 in investment accounts.Sarah owns no individual life insurance.She is covered by a $50,000 group life insurance policy through her employer.Based on this information,how much additional life insurance should Sarah purchase?

Accepted Answer

Sarah's total cash, income, and special needs are $270,000 ($30,000 + $140,000 + $100,000). Her total assets are $90,000 ($20,000 + $30,000 + $40,000) and her current life insurance coverage is $50,000. Therefore, Sarah should purchase additional life insurance equal to the difference between her needs and assets, which is $130,000 ($270,000 - $90,000 - $50,000). So, the best choice is B.

Question 13

Which of the following pieces of information is needed to calculate a person's human life value?

Accepted Answer

The person's cost of self-maintenance is needed to calculate their human life value, which is an estimate of the financial value of their life. This includes factors such as their income, expenses, and future financial obligations. Factors such as marital status, Social Security benefits, and outstanding debts may impact their overall financial situation, but are not necessary to calculate their human life value.

Question 14

Jessica is an agent for LMN Life Insurance Company.She met with Brad,who was interested in purchasing life insurance.Jessica explained the various uses of life insurance,including income for Brad's wife during the 1- or 2-year period following Brad's death.This period is known as the

Accepted Answer

The period immediately following the death of a spouse, which is often characterized by a need for financial support to adjust to the loss of income, is known as the readjustment period. This term accurately describes the time during which Brad's wife would need income support to adjust to life without Brad's financial contribution.

Question 15

Tom and Nancy Boyle provide financial support for their two children.In addition,they provide financial support for Tom's aged father and Nancy's aged mother.The Boyle family can be described as a

Accepted Answer

The Boyle family is providing financial support for both their children and their aging parents, which puts them in the category of a sandwiched family. This term is used to describe families who are simultaneously responsible for caring for both their children and their aging parents.

Question 16

Under the needs approach,when is the dependency period of a surviving spouse assumed to end?

Accepted Answer

Under the needs approach, the dependency period of a surviving spouse is assumed to end when the youngest child reaches age 18. This is because it is believed that by this age, the children are able to provide for themselves, and the surviving spouse should be able to resume earning income to meet their own needs.

Question 17

When using the needs approach,several "special needs" should be considered.One special need is money to cover unexpected events,such as major car repairs,dental bills,or home repairs.Money set aside for this purpose is called a(n)

Accepted Answer

An emergency fund is money set aside to cover unexpected expenses such as car repairs, dental bills, or home repairs. The other options listed do not relate to this specific need for financial planning.

Question 18

When the capital retention approach is used to determine how much life insurance to purchase,all of the following are subtracted from total assets to calculate the capital available to produce income EXCEPT

Accepted Answer

When using the capital retention approach to determine life insurance needs, items that are not income producing or necessary for daily living expenses are subtracted from the total assets. This includes items such as cars and homes, but not investments in stocks and bonds which can produce income. Auto loans and credit card debt would also be subtracted to determine the net amount available for producing income. However, the amount needed to pay off the mortgage would be subtracted as it is a liability that would need to be paid off with the capital available.

Question 19

Disadvantages of the capital retention approach include which of the following?
I.Assets are often liquidated too quickly.
II.It underestimates the amount of life insurance needed.

Accepted Answer

The capital retention approach does not involve liquidating assets quickly, nor does it underestimate the amount of life insurance needed. It focuses on preserving capital to generate income.

Question 20

All of the following are defects which limit the usefulness of the human life value approach in determining the correct amount of life insurance to purchase EXCEPT

Accepted Answer

All of the listed choices except D are defects which limit the usefulness of the human life value approach. Ignoring earnings during the individual's productive lifetime would not limit the usefulness of the approach, as it is a key component in calculating the appropriate amount of life insurance needed.

Quiz 11: Life Insurance