FIN 502 Chapter 10: Chapter 10.docx

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jademallard37

14 Mar 2012

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Learn how to deal with unsupportable risks. Learn how to use life insurance to finance the risk of loss of income due to the premature death of a family member. Learn how to use disability insurance to finance the risk of loss of income due to the disability of a family member. Means of financing the risk of the premature and untimely death of a family member. Loss of income due to the unanticipated death of a family member is an insupportable risk for most families (finance risk through insurance) A small premium is exchanged for the insurance company"s promise to pay a potentially large amount, which will ensure that income will be provided to financial dependents of the insured in the event that he dies. Insured: the person upon whose death the death benefit (or the face value) of the insurance policy will be paid.

Related Questions

Currently neither Ken nor Sandra has disability insurance coverage. Ken and Sandra would like more information from you about disability insurance. Which of the following statements is true in relation to disability insurance? Justify your answer.

A. Shorter elimination periods result in lower premium costs.

B. Benefits paid from employer-provided group disability plans are received income tax-free.

C. If a guaranteed renewable contract is used, the insurance company cannot increase premiums on individual policies but can raise premiums for all individuals covered by that policy.

D. Disability policies are nearly always designed to provide lifetime benefits.

silverhamster419

True or False

____1. Pure risks are those that, when they occur, create a loss.

____2. Insurance is a contract of indemnity, which means that a person is entitled to compensation only to the extent that an actual financial loss has been suffered.

____3. The principle of insurable interest states that a person is entitled to compensation only to the extent that financial loss has been suffered.

____4. When a person or firm is exposed to risk and decides to bear all or part of the financial burden if a loss occurs, this is known as risk retention or risk assumption.

____5. Exposures that are high in frequency yet low in potential severity are best handled by insurance.

____6. Financial planners recognize two fundamental needs for the monies generated by a life insurance policy: replacing income and preserving assets.

____7. Life insurance death proceeds are taxable as income to the recipient.

____8. The capital retention approach determines the amount of life insurance needed by first determining what level of annual income the insured wishes to provide for the family.

____9. Term life, because it is temporary pure death protection, tends to be quite expensive in the early years of the policy.

____10. Unlike whole life in which premiums increase with age, term life policies are based on a level premium throughout the duration of the payment period.

erinhornet650

WEALTH PROTECTION - TAX PLANNING

1. About 8 years ago, Darren bought a $150,000 5-year limited-pay whole life plan. The annual premium for his plan was $19,500 p.a. The Cash Value of his plan is $48,750.

2. Darren has put in place a Hospital Income Insurance Plan that is designed to pay him a daily cash benefit of $250 up to 180 days per hospitalization and for 1000 days per lifetime. The premium for the Hospital Income Insurance plan is $1,975 p.a.

Darren recently bought a Disability Income Insurance policy with a sum assured equal to 70% of his monthly salary, i.e. $5,250 which is 70% of ($5,000 +$2,500). The deferred period is 6 months in the event that he is disabled and the Disability Income Insurance policy covers him up to the age of 65 years. The annual premium for his plan is $10,800 p.a.'

4. Darren rents out one common room to Mr Leow for $850 per month. Mr Leow has gone overseas for 6 weeks and will return in early January 2017. Mr Leow said that he would pay the rent for December 2016 and January 2017 upon his return.

1)State the year of assessment Darren needs to declare the rent income?

2) What type of insurance policies can Darren claim against his Life Insurance Tax Relief?

ochreimpala461

FIN 502 Chapter 10: Chapter 10.docx

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