Review Questions

1. Explain the basic defect in the traditional net cost method for determining the cost of life insurance.

2.

A. Why is the interest-adjusted cost method a more accurate measure of the cost of life insurance?

B. Briefly describe the surrender cost index as a method for determining the cost of life insurance.

C. Briefly describe the net payment cost index as a method for determining the cost of life insurance

3. Why is the rate of return on the saving component in most cash-value policies negative during the early years of the policy?

4. Briefly explain the Linton yield as a method for determining the rate of return on the saving component of a cash-value policy.

5. Briefly explain the yearly rate-of-return method that policyholders can use to determine the rate of return on the saving component of a cash-value policy.

6. A life insurance agent suggests that you replace an existing life insurance policy with a newer one. Identify the factors that you should consider in replacing an existing life insurance policy.

7. Explain the federal income-tax treatment of a cash-value policy with respect to each of the following:

A. Payment of premiums

B. Annual dividends

C. Annual increase in the cash value

D. Payment of death proceeds to a stated beneficiary

8. Explain the federal estate-tax treatment of life insurance death proceeds.

9. Describe the suggestions that consumers should follow when life insurance is purchased.

10. The states require life insurers to disclose certain policy information to applicants for life insurance. Describe the types of information that appear on a typical disclosure statement.