FIN 101 Lecture Notes - Lecture 18: Term Life Insurance, Multi-Level Marketing, The Big Wedding

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16 Aug 2020

School

Ball State University

Department

Finance

Course

FIN 101

Professor

Olga S Mc Atee

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Document Summary

Term life insurance works best for young adults. Term life insurance gives life insurance protection for a certain amount of time. If you die during this period, your beneficiary is paid the amount you were insured for. Unlike other life insurance forms, you"re only paying for the cost of insuring your own life. Other forms of insure are more complicated and difficult. However, they can be used an investment options, even though they are expensive. The fees paid on other life insurance policy types can be a lot. Avoid them unless you completely understand the effects of this financially. Most experts say term insurance is the best value for your dollar. It"s easy to buy and easy to understand. If you purchase term insurance, make sure it"s renewable and not able to be cancelled. Some term insurance policies let you convert them later on to permanent policies. That is favorable for you only if the cost isn"t prohibitive.

Related Questions

Your best friend, John, who is a single parent is excited that you are taking this course as he has been thinking about the need for life insurance. Two years ago, John adopted a special needs child, who is 6 years old and enrolled in first grade in the local school district. Sam is mainstreamed but will need assistance all of his life. John makes $50,000 a year in the IT field at a local bank holding company, and wants to save for a home and retirement, and also make sure that he can provide funds to take care of Sam should he die prematurely. What Advice would you give John relative to the following products? 20 year renewable term insurance Life-paid-up-at-age 65 Ordinary Life Insurance Universal Life Insurance Touch upon the following areas Which of these policies would best meet the needs for protection of Sam should John suffer and early death and why? Which of these policies best meets the need of accumulating funds to take care of Sam should John die at a normal age? Which of these policies best meets the need of accumulating funds for a down payment on a house? Should an insurance policy be used for that purpose? What if any obstacles are there if John wants to use cash value life insurance to meet all of his financial needs? Does a single parent face more challenging risks than a traditional family when considering the risk of premature death? Can life insurance fill a larger role in the risk management plans of a single parent?

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Joe and Lisa White are a married couple. Joe is 63 and Lisa is 61. Joe is thinking about retiring in a few years, and the Whites have come to you for an insurance evaluation. Lisa plans to continue working even after Joe retires. The following provides a summary of the Whitesâ insurance planning situation.

Life Insurance

Joe owns a $500,000 universal life insurance policy. Joe is the insured and their son David, age 37, is the beneficiary. The policy has a cash value of $50,000 and a living benefits provision; all account earnings are used to offset premium expenses. Lisa owns a 20 year $350,000 level term life policy that she purchased five years ago. She pays approximately $1,000 per year in premium costs. Lisa is the insured and Joe is the beneficiary.

Property and casualty insurance

Joe and Lisa own a home as JTWROS. The home has a market and replacement value of $675,000. The house is insured with the standard HO-3 policy for $550,000. The policy requires that the Whites pay a $500 deductible per claim occurrence. Other provisions include the following:

10% coverage on detached structures

Coverage up to $250 for cash

Coverage up to $1,500 for collectibles, artwork, and similar assets

Personal property contents coverage equal to 20% of the insured dwelling

Living expenses coverage for six months

Coverage up to $100,000 for personal liability

A replacement cost coverage endorsement is in place

The Whitesâ two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a $1 million excess liability policy.

Health insurance

The Whites are covered under Lisaâs group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $5 million for the family, a $500 per person deductible, and an 80% coinsurance clause, with the family stop-loss limit of $2,500.

Using this information, please answer the following questions.

5. If the Whites sustain an $90,000 loss to their dwelling from a fire, how much will the insurance company pay (after the deductible) toward the dwelling loss claim? Justify your answer. Show all computations.

5A. $550,000

5B. $55,000

5C. $89,500

5D. $90,000

6. Lisa believes that her husband is a reckless driver. She worries about what would happen if he were ever in a serious car accident. If Joe is involved in a car accident and causes physical harm to another motorist in the amount of $300,000, how much will be paid from the personal automobile policy (PAP) and how much from the excess liability policy? Show your computations.

6A. $300,000 PAP and $0 excess liability

6B. $0 PAP and $300,000 excess liability

6C. $150,000 PAP and $150,000 excess liability

6D. $50,000 PAP and $250,000 excess liability

6E. $250,000 PAP and $50,000 excess liability

Bob, Chad and Dylan had been dreaming of this day for the past six years; ever since they first met in an introductory economics course in college. For several years they had been pooling their money and buying Arizona Lottery tickets dreaming that one day they would win big. They realized that the lottery was considered by many to be a voluntary tax on the statistically challenged. But miraculously they now sat at their favorite local âwatering holeâ holding the winning ticket that meant they would split âThe Pickâ jackpot of $6 million. What a great feeling! Now they just needed to decide if they wanted to take their winnings as a lump sum now or to be paid over the next twenty in installments. Bob had been a political science major in college but things hadnât worked out as he anticipated when he was a student. He had entered the job market at what looked now to be the bottom of the economic downturn following the housing crisis in the U.S. Bob believes he did not start his job search soon enough and found suitable openings virtually nonexistent. He was currently working part-time at an organic farm and still living at home which cramped his style consider-ably. He has $150,000 in college related loans (7% interest rate) which he cannot service based on his annual taxable income of $15,000. His share of the jackpot would allow him to be debt free and change his life for the better without doubt. Chad had been more fortunate than Bob. He had applied himself in college and earned a master of accounting degree with an emphasis in taxation. After graduation he immediately went to work for one of the international accounting firms and was now earning a taxable income of $100,000 in spite of the economic issues facing his friend Bob and the country as a whole. He too had debt but not from student loans. Chad had purchased a very nice home in Anthem, Arizona for approximately 50% of what it had sold for three years earlier when built. He had a $250,000 mortgage on the home, at a 4% interest rate, which he saw little reason to pay off since he anticipated significant inflation in the near future. Of the three friends Dylan was by far the most successful. Dylan had majored in finance and had excelled. When he graduated, although he had several attractive offers in the financial services industry, he decided to go into the family business. The company which his father and uncle had started nearly 50 years ago had done amazingly well in the downturn and since he was the only child/nephew they were rewarding him handsomely. He had been reluctant to tell Bob but he was on track to receive to- tal compensation (including bonuses) that yielded a taxable income of $300,000 this year. Unlike his friend Bob, Dylan was frugal and had taken on zero debt. He was pleased with the trioâs good fortune but he didnât think the windfall would change his life all that much. A few days later when the euphoria of winning was subsiding the three friends met again at the same establishment. All four were obviously in good spirits and were looking forward to presenting their winning ticket to Arizona Lottery officials. Chad started the conversation by telling Bob and Dylan that he had taken the initiative of doing some basic research on how âThe Pickâ worked and what the payout options were. Bob, proud of his forethought, produced an article he had saved years earlier from the Arizona Daily Star with the headline âLump-sum Lotto Payout is Best, Experts Say.â Bob excitedly told his buddies that the experts were local CPAs and that clearly the lump-sum payout was âthe way to go.â Dylan said he wanted to hear what Chad had found out since he had gone to the effort of looking into the specifics. Chad (being a tax accountant) had prepared a summary of his research which follows: âA percentage of the proceeds from the sale of Lotto tickets are allocated to a prize pool. The size of the Jackpot that is prominently advertised, six million dollars in this instance, is actually only an estimate. The advertised amount is the sum of the estimated annuity1 payments, without consideration of the time value of money, which Lotto officials believe can be purchased from the prize pool. If the winner chooses the annuity payout multiple insurance companies submit bids. Officials award the bid to the insurance company that offers the largest annual payments in return for the prize pool amount. The insurance company with the best bid typically offers a rate that is near the long term U.S. Treasury Bonds rate (currently 3%). If the winner chooses the Lump Sum payout they simply receive the prize pool amount; the amount that would have been used to buy the annuity.â 1.The term annuity is actually a misnomer. Since the payments are made by the insurance company at the beginning of each of twenty periods it is an annuity due. After reading the summary Bob said he didnât see how this related to the decision that had to be made since he didnât see anything that changed the preferred option being that the lump-sum payout is best. Chad acknowledged that Bob was probably correct but he still wanted to ârun the numbersâ and suggested that Bob and Dylan should do the same. Chad reminded them that they needed to consider the tax consequences of the payout schema and then provided the following schedule of federal income tax rates and reminded them that the state tax rate was an additional 5%.Bob rolled his eyes but said he would get right on it. Dylan thanked Chad for the information and they agreed to meet again tomorrow to decide on the best course of action.

Questions 1. Prepare a personal analysis of the payout options for Bob, Chad and Dylan including their net income after taxes. Designate the preferred option for each individual and explain why.

FIN 101 Lecture Notes - Lecture 18: Term Life Insurance, Multi-Level Marketing, The Big Wedding

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