Chapter 4 Homework Assignment

FIN 604 OL1 Summer

7/15/18

Multiple choice:
1. A
2. B
3. C
4. C
5. B

Discussion questions:

1. list and explain the three life-cycle stages.

- The three Life Cycle stages are: Asset Accumulation, Conservation/Risk
Management, and Distribution/Giving. The asset accumulation phase of the life cycle
begins after a person completes his or her schooling and enter the workforce and typically
lasts until ages 45-55. The early period of this phase is characterized by high debt and
low savings. The conservation/risk management lasts from ages 45-50 until retirement,
earnings from employment have reached their peak, children enter and exit college, the
outstanding balance on the client’s mortgage shrinks substantially, and savings increase
to support retirement. The distribution/gifting phase begins near retirement and ends at
death, and it is characterized by spending and gifting.

2. list and explain the three methods used to determine clients’ life insurance needs.
- The three methods used to determine a client’s life insurance needs are: the human life
value approach, the needs approach, and the capitalized earnings approach. The
human-life value approach suggests that the death benefit of a client’s life insurance
should equals the economic value of his future earnings stream discounted to its present
value while considering his tax and consumption patterns. The steps in calculating a
human-life value include: Determine the person’s annual earnings; subtract personal
expenses and taxes that would have incurred; determine work-life expectancy, or the
number of years he or she would have continued to earn income, calculate the future
value of the lost earnings for the family, taking into consideration the expected growth
rate in earnings; Calculate the present value of the family’s share of earnings at inflation
rate to determine the human-life value. The needs approach is that the planner estimates
the cash needs that the family will require at and after the death of the insured. Some of
the financial needs includes: Payment of final expenses, medical care, and adjustment
period expense; Eliminating debt; Funding specific goals; Income needs of the surviving
spouse and the family; Retirement needs of the surviving spouse. In this approach, the
readjustment period, the dependency period, and the blackout period come into
consideration. The capitalized- earnings approach is a modification of the human-life
value approach. It has no need to determine the work-life expectancy and the investment
returns on the life insurance are presumed to be at the long-term investment rate. This
method divides the net earnings by an inflation adjusted discount rate, which takes into
consideration the expected rate of return and the expected rate of inflation.
3. list the benefit of term life insurance.
- Term life insurance rates are more affordable than whole life insurance because it offers
protection for a predetermined time, and a better value for young families. There have
many options when it comes to term life insurance.

4. list the options available with term life insurance.

- Annual renewable term (ART), Level-term insurance, Decreasing-term insurance.

5. list the benefits of whole life insurance.

- tax deferred growth of cash value, the earnings portion on the cash value is not taxed
each year. And the policy offers permanent protection until age 100.

6. list the options available with whole life insurance.

- Some whole life options are: ordinary (or straight) whole life, which requires the owner
to pay a specified premium; single premium policy, which requires one lump sum
payment.