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George and Mary Keys are very excited over the news that they are to be parents. Since their graduation from college three years ago, they have purchased a new house and a new car. They owe $130,000 on the house and $8,000 on the car. Their only life insurance consists of $75,000 of term coverage on George and $50,000 on Mary. This coverage is provided by their employers as an employee benefit. Their personal balance sheet shows a net worth (assets minus liabilities) of $80,000. George is rapidly moving up within his company as special projects engineer. His current annual salary is $60,000. In anticipation of the new arrival, George is considering the purchase of additional life insurance. He feels that he needs at least $500,000 in coverage, but his budget for life insurance is somewhat limited. The couple has decided that Mary will stay at home with the new baby and put her career on hold for ten years or so while this baby and perhaps a later sibling or two are young.
Phil Pratt has decided that the lowest-premium form of life insurance is definitely the best buy. Consequently, he has purchased a $250,000 yearly renewable term life insurance policy as his only life insurance. Explain why you agree or disagree with Phil’s philosophy.
Betty Bick, age forty, is considering the purchase of a limited-payment participating life insurance policy that would be paid up when she turns sixty. She plans to work until then and does not wish to pay any premiums after she retires, but she definitely wants whole life insurance protection. Betty earns $45,000 per year as a branch manager for a commercial bank. As a single mother she has been unable to accumulate much wealth. At this time, Betty has two dependent children ages ten and fourteen.
Lane Golden has just purchased a universal life insurance policy from Midwest Great Life. Initially, Lane pays a first-month premium of $100. Her policy has (1) a front-end load of $2.00 per month; (2) a surrender charge equal to 100 percent of the minimum first-year premiums of $1,200 ($100 per month), decreasing 20 percent of the original surrender charge per year until it disappears after five years; (3) a current monthly mortality rate of $0.15 per $1,000 of protection (amount at risk); and (4) a current monthly investment return of 0.667 percent. Her policy is a type B, with a level $100,000 protection element.
The following insureds have accidental death benefit riders on their life insurance policies. Discuss why you think this rider will or will not pay the beneficiary in each of the following situations.