Business Finance
Central Pennsylvania College Rate of Return on Saving Component Discussion

Central Pennsylvania College

Question Description

I’m stuck on a Business question and need an explanation.

Discussion:

We have covered several learning objectives this week. Using your own words, select one of these learning outcomes and explain why you think it’s important. (the materials that we learned are in the powerpoint.)

Discussion 80-100 words. Also, reply to two classmates’ discussions around 50 words EACH

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Case Application:

see the case application in the file document, and answer questions about case.

there is lecture powerpoint Chapter 13 to help you!


Require:

1 discussion (80-100 words)

2 respond (50 words each)

Case Application

There are 3 powerpoint to help you the discussion and the case application!

All the materials are in the File, so please see the file that I upload.

I already set up the format, you just answer the thing under each part.

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Chapter Discussion We have covered several learning objectives this week. Using your own words, select one of these learning outcomes and explain why you think it’s important. Also, reply to two of your classmates’ discussions. My Discussion (80-100 words): Classmate 1 Discussion: One of the topics that I thought was important was to understand how life insurance premiums are calculated. It is important because you can know what to expect from a pricing perspective of life insurance. They look at everything, like what activities you do, do you smoke, drink, do you have past medical problems. All these and a lot more are some attributes that a life insurance company might look at to determine the pricing. If someone understands how they price their coverage's then they can better protect themselves from higher prices by practicing safer habits. It is also important to understand because you can decide if the price they gave you is a fair price or not and you can better protect yourself from companies over pricing you. Reply (50 words): Classmate 2 Discussion: Chapter 12 and 13 are focus on the life insurance. When we are determining the cost of life insurance, we should consider the annual premiums, cash values, dividends, and time value of money. The interestadjusted cost method is more accurate than traditional net cost method because it considers the time value of money. The surrender cost index measures the cost of life insurance if you surrender the policy at the end of the period and takes compound interest into account. The net payment cost index measures the relative cost of a policy of death occurs at the end of some specified time and assumes you will not surrender the policy. It is important that people should know how the life insurance will go after you buy the insurance. Reply (50 words): Chapter 13 case application: A participating ordinary life policy in the amount of $10,000 is sold to an individual, age 35. The following cost data are given: Annual premium Total dividends for 20 years Cash value at end of 20 years Accumulated value of the annual premiums at 5 percent for 20 years Accumulated value of the dividends at 5 percent for 20 years Amount to which $1 deposited annually at the beginning of each year will accumulate in 20 years at 5 percent $230 $1,613 $3,620 $7,985 $2,352 $34.719 a.Based on this information, compute the annual net cost per $1,000 of life insurance at the end of 20 years using the traditional net cost method. b. Compute the annual surrender cost index per $1,000 of life insurance at the end of 20 years. c. Compute the annual net payment cost index per $1,000 of life insurance at the end of 20 years. Principles of Risk Management and Insurance Thirteenth Edition Chapter 12 Life Insurance Contractual Provisions Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Agenda • Life Insurance Contractual Provisions • Dividend Options • Nonforfeiture Options • Settlement Options • Additional Life Insurance Benefits Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (1 of 13) • Under the ownership clause, the policyholder possesses all contractual rights in the policy while the insured is living – Rights include naming beneficiaries and surrendering the policy for its cash value – The policyholder can designate a new owner by filing an appropriate form Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (2 of 13) • The entire-contract clause states that the life insurance policy and attached application constitute the entire contract between the parties – Prevents the insurer from making amendments without the policyholder’s knowledge Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (3 of 13) • The incontestable clause states that the insurer cannot contest the policy after it has been in force two years during the insured’s lifetime – Protects the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued – The insurer has two years to detect fraud – The insurer can contest a claim after the incontestable period in limited circumstances Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (4 of 13) • The suicide clause states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid • A life insurance policy contains a grace period during which the policyholder has a period of 31 days (or more) to pay an overdue premium – The purpose of the grace period is to prevent the policy from lapsing Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (5 of 13) • The reinstatement provision permits the owner to reinstate a lapsed policy • To reinstate a lapsed policy, the following requirements must be met: – Evidence of insurability is required – All overdue premiums plus interest are paid – Any policy loans are repaid or reinstated – The policy was not surrendered for its cash value Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (6 of 13) • The policy must be reinstated within a certain period • Although it may require a large outlay of cash, it may be cheaper to reinstate a lapsed policy than to purchase a new policy Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (7 of 13) • Under the misstatement of age or sex clause, if the insured’s age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correct age and sex Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (8 of 13) • The beneficiary is the party named in the policy to receive the policy proceeds • The primary beneficiary is the first entitled to receive the policy proceeds on the insured’s death • A contingent beneficiary is entitled to the proceeds if the primary beneficiary dies before the insured Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (9 of 13) • A revocable beneficiary means that the policyholder reserves the right to change the beneficiary designation without the beneficiary’s consent • An irrevocable beneficiary is one that cannot be changed without the beneficiary’s consent • A specific beneficiary is specifically identified • A class beneficiary is a member of a group, e.g., children of the insured Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (10 of 13) • A change-of-plan provision allows policyholders to exchange their present policies for different contracts • Life insurance contracts do not contain many exclusions – Suicide excluded for two years – Insurers might insert a war clause to exclude payment if the insured dies as a direct result of war – Some policies contain aviation exclusions • Premiums can be paid annually, semiannually, quarterly, or monthly Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (11 of 13) • A life insurance policy is freely assignable to another party – Under an absolute assignment, all ownership rights in the policy are transferred to a new owner – Under a collateral assignment, the policyholder temporarily assigns a life insurance policy to a creditor as collateral for a loan, but only certain rights are transferred to the creditor Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (12 of 13) • A policy loan provision allows the policyholder to borrow the cash value – The policyholder must pay interest on the loan to offset the loss of interest to the insurer – A policy could lapse if the policyholder does not repay a loan and the total indebtedness exceeds the available cash value – The major advantage of a policy loan is the relatively low rate of interest that is paid – The major disadvantage of a policy loan is that the policyholder is not legally required to repay the loan, and the policy might lapse if the indebtedness exceeds the available cash value Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Life Insurance Contractual Provisions (13 of 13) • Under the automatic premium loan provision, an overdue premium is automatically borrowed from the cash value after the grace period expires – The automatic premium loan prevents the policy from lapsing because of nonpayment of premiums – It may be overused and exhaust the cash value – Proceeds will be reduced if the premium loans are not repaid by the time of death Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Dividend Options (1 of 2) • If a policy pays dividends it is a participating policy – Otherwise it is a nonparticipating policy • Dividends come from three main sources: – The difference between expected and actual mortality experience – Excess interest earnings – The difference between expected and actual operating expenses Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Dividend Options (2 of 2) • Policyholders have several ways to take dividends: – Take the cash – Reduce the next premium coming due – Let the dividends accumulate at interest and withdraw later – Apply toward the purchase of paid-up whole life insurance under the paid-up additions option – Apply toward the purchase of term insurance – Convert the policy to a paid-up contract – Mature a policy as an endowment Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Nonforfeiture Options • The payment to a withdrawing policyholder is known as a nonforfeiture value or cash surrender value – A policyholder has a right to the policy’s accumulated cash value; all states have standard nonforfeiture laws • Policyholders have three nonforfeiture options: – Cash value – Reduced paid-up insurance – Extended term insurance Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.1 Table of Guaranteed Values* $100,000 Ordinary Life Policy, Male, Age 37 (1 of 2) End of Policy Year Cash Value Alternatives to Cash Value Paid-up or Insurance Extended Insurance 1 ***** *** ** *** 1 2 ***** *** ** *** 2 3 $400.00 $2,400 1 18 3 4 1,400.00 7,900 3 114 4 5 2,400.00 12,900 5 62 5 6 3,500.00 17,900 6 328 6 7 4,500.00 22,000 8 55 7 8 5,600.00 26,200 9 109 8 9 6,800.00 30,400 10 121 9 10 8,000.00 34,300 11 50 10 11 9,300.00 38,100 11 321 11 12 11,000.00 43,200 12 325 12 13 12,900.00 48,500 13 323 13 14 14,800.00 53,300 14 239 14 Years Days End of Policy Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.1 Table of Guaranteed Values* $100,000 Ordinary Life Policy, Male, Age 37 (2 of 2) End of Policy Year Cash Value Alternatives to Cash Value Paid-up or Insurance Extended Insurance 15 16,700.00 57,700 15 91 15 16 18,700.00 61,900 15 287 16 17 20,700.00 65,800 16 73 17 18 22,700.00 65,300 16 187 18 19 24,800.00 72,800 16 291 19 20 26,900.00 75,900 16 358 20 Blank Blank Blank Blank Blank Blank Age 60 32,300.00 69,400 14 319 Age 60 Age 65 41,700.00 77,300 13 198 Age 65 Years Days End of Policy * This table assumes premiums have been paid to the end of the policy year shown. These values do not include any dividend accumulations, paid-up additions or policy loans. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Settlement Options (1 of 5) • The policyholder can choose among several options for paying the policy proceeds – Or, the beneficiary may be granted the choice • The most common options include: – Cash – Interest option – Fixed-period option – Fixed-amount option – Life income option Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Settlement Options (2 of 5) • Under the fixed-period option, the policy proceeds are paid to a beneficiary over some fixed period of time • Under the fixed-amount option, a fixed amount it periodically paid to the beneficiary Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.2 Income for Elected Period (Minimum Monthly Payment per $1000 of Proceeds) Blank Years Blank Years Blank Years Blank Years 1 $84.65 5 $18.12 9 $10.75 15 $7.10 2 43.05 6 15.35 10 9.83 20 5.75 3 29.19 7 13.38 11 9.09 25 4.96 4 22.27 8 11.90 12 8.46 30 4.45 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Settlement Options (3 of 5) • Under the life income option, installment payments are paid only while the beneficiary is alive and cease on the beneficiary’s death • Life income options include: – Life income with guaranteed period – Life income with guaranteed total amount – Joint-and-survivor income Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.3 Life Income with Guaranteed Period (Minimum Monthly Payment per $1000 of Proceeds) (1 of 3) Payee’s Adjusted Age Male Guaranteed Period 5 Years Male Guaranteed Period 10 Years Male Guaranteed Period 15 Years Male Guaranteed Period 20 Years Female Guaranteed Period 5 Years Female Guaranteed Period 10 Years Female Guaranteed Period 15 Years Female Guaranteed Period 20 Years 60 $5.14 $5.08 $4.98 $4.84 $4.68 $4.85 $4.61 $4.54 61 5.25 5.18 5.07 4.91 4.76 4.73 4.68 4.63 62 5.36 5.28 5.15 4.97 4.84 4.81 4.75 4.67 63 5.48 5.39 5.24 5.04 4.93 4.89 4.83 4.73 64 5.61 5.50 5.33 5.10 5.03 4.99 4.91 4.80 65 5.75 5.62 5.42 5.17 5.13 5.08 5.00 4.87 66 5.89 5.75 5.52 5.23 5.25 5.19 5.09 4.94 67 6.05 5.88 5.62 5.30 5.36 5.30 5.18 5.01 68 6.21 6.02 5.72 5.36 5.49 5.41 5.28 5.08 69 6.39 6.16 5.82 5.42 5.63 5.54 5.38 5.16 70 6.57 6.31 5.92 5.48 5.78 5.67 5.48 5.23 71 6.77 6.46 6.02 5.54 5.94 5.81 5.59 5.30 72 6.97 6.62 6.13 5.60 6.11 5.95 5.70 5.37 73 7.19 6.78 6.23 5.65 6.29 6.11 5.81 5.44 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.3 Life Income with Guaranteed Period (Minimum Monthly Payment per $1000 of Proceeds) (2 of 3) Payee’s Adjusted Age Male Guaranteed Period 5 Years Male Guaranteed Period 10 Years Male Guaranteed Period 15 Years Male Guaranteed Period 20 Years Female Guaranteed Period 5 Years Female Guaranteed Period 10 Years Female Guaranteed Period 15 Years Female Guaranteed Period 20 Years 74 7.42 6.95 6.33 5.69 6.49 6.27 5.93 5.50 75 7.66 7.12 6.42 5.74 6.70 6.44 6.04 5.48 76 7.91 7.29 6.52 5.78 6.92 6.61 6.15 5.62 77 8.18 7.46 6.60 5.81 7.16 6.80 6.27 5.67 78 8.47 7.84 6.69 5.84 7.42 6.98 6.37 5.72 79 8.77 7.82 6.77 5.87 7.69 7.18 6.48 5.76 80 9.08 8.00 6.84 5.90 7.98 7.37 6.58 5.80 81 9.41 8.17 6.91 5.92 8.29 7.57 6.67 5.84 82 9.74 8.34 6.97 5.94 8.62 7.77 6.75 5.87 83 10.10 8.51 7.03 5.95 8.96 7.97 6.83 5.89 84 10.46 8.67 7.08 5.96 9.33 8.16 6.91 5.92 85 & over 10.84 8.82 7.13 5.97 9.33 8.34 6.97 5.94 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.3 Life Income with Guaranteed Period (Minimum Monthly Payment per $1000 of Proceeds) (3 of 3) Note: The Payee’s adjusted age reflects increases in longevity. To find the adjusted age, increases or decrease the adjusted age as that time as follows: 1987-91 1992-98 1999-2006 2007-13 2014-20 2021-28 2029+ +3 +2 +1 −1 −2 −3 0 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.4 Life Income with Guaranteed Total Amount (Minimum Monthly Payment per $1000 of Proceeds) (1 of 2) Payee’s Adjusted Age Female Payee’s Adjusted Age Male Male Female 60 $4.93 $4.57 73 $6.47 $5.87 61 5.02 4.64 74 6.84 6.01 62 5.11 4.71 75 6.81 6.17 63 5.20 4.79 76 7.00 6.34 64 5.30 4.87 77 7.19 6.51 65 5.40 4.96 78 7.40 6.70 66 5.52 5.05 79 7.62 6.90 67 5.63 5.14 80 7.85 7.11 68 5.75 5.25 81 8.09 7.33 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.4 Life Income with Guaranteed Total Amount (Minimum Monthly Payment per $1000 of Proceeds) (2 of 2) Payee’s Adjusted Age Female Payee’s Adjusted Age Male Male Female 69 5.88 5.36 82 8.35 7.57 70 6.02 5.47 83 8.65 7.81 71 6.16 5.60 84 8.89 8.07 72 6.31 5.73 85 & over 9.19 8.57 Note: The Payee’s adjusted age reflects increases in longevity. To find the adjusted age, increases or decrease the adjusted age as that time as follows: 1987–91 1992–98 1999–2006 +3 +2 +1 2007–13 0 2014–20 2021–28 2029+ −1 −2 −3 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Exhibit 12.5 Joint-And-Survivor Income Option 10-Year Guaranteed Period (Minimum Monthly Payment per $1000 of Proceeds) Male Payee’s Adjusted Age Female Payee’s Adjusted Age 60 Female Payee’s Adjusted Age 65 Female Payee’s Adjusted Age 70 Female Payee’s Adjusted Age 75 Female Payee’s Adjusted Age 80 60 $4.32 $4.50 $4.67 $4.82 $4.93 65 4.42 4.66 4.91 5.15 5.34 70 4.81 4.81 5.14 5.49 5.80 75 4.57 4.92 5.34 5.81 6.27 80 4.61 4.99 5.49 6.07 6.69 Note: The Payee’s adjusted age reflects increases in longevity. To find the adjusted age, increases or decrease the adjusted age as that time as follows: 1987–91 1992–98 1999–2006 +3 +2 +1 2007–13 0 2014–20 2021–28 2029+ −1 −2 −3 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Settlement Options (4 of 5) • Settlement options allow for periodic payments to the family, restoring their financial security • Disadvantages include: – Interest rates offered by insurers may be lower than rates offered elsewhere – The settlement agreement may be inflexible and restrictive – Life income options have limited usefulness at younger ages Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Settlement Options (5 of 5) • Life insurance policy proceeds can also be paid to a trustee, such as the trust department of a commercial bank • The use of a trust may be desirable if: – The amount of insurance is substantial – Flexibility and discretion in the amount and timing of payments are needed – The beneficiaries are minor children or mentally or physically challenged adults who cannot manage their own financial affairs Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved. Additional Life Insurance Benefits (1 of 5) • Other benefits can be added to a life insurance policy by adding a rider • Most riders require payment of an additional premium • Under a waiver-of-premium provision, if the insured becomes totally disabled, all premiums coming due during the period of disability are waived • A term insurance rider can be added to a cash-value policy to increase the total death benefit but still keep the policy affordable – These policies are called blended policies Copyright © 2017, 2014, 2011 Pearson Education, Inc. Al ...
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Final Answer

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Chapter Discussion
We have covered several learning objectives this week. Using your own words, select
one of these learning outcomes and explain why you think it’s important. Also, reply
to two of your classmates’ discussions.

My Discussion (80-100 words):
The Rate of Return on Saving Component is a very important topic for everyone and especially
those who are considering investing over a long-term period. This is important because it enables
an investor to compute the rate of return based on the risk involved and the time value of money
during the investment period. In computing the Rate of Return on Saving Component, the yearly
rate of return method is somewhat desirable because it factors in the assumed price of protection
component and the inflation during the investment period.

Classmate 1 Discussion: One of the topics that I thought was
important was to understand how life insurance premiums are calculated. It is
important because you can know what to expect from a pricing perspective of life
insurance. They look at everything, like what acti...

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