1. Explain to Jun the differences between
(a) A whole life policy,
(b) A variable life policy,
(c) A term life policy.
2. What are the major advantages and disadvantages of each type of policy?
3. In what way is a whole life policy superior to either a variable life or term life policy? In what way is a variable life policy superior? How about term life insurance?
4. Given the limited information in the case, which type of policy would you recommend for Ms. Hsieh? Defend and explain your recommendations.
Jun Hsieh, a 38-year-old widowed mother of three children (ages 12, 10, and 4), works as a product analyst for Panama Hats. Although she’s covered by a group life insurance policy at work, she feels, based on some rough calculations, that she needs additional protection. Phil Griffin, an insurance agent from Safety First Insurance, has been trying to persuade Jun to buy a $150,000, 25-year, limited payment whole life policy. However, Jun favors a variable life policy. To further complicate matters, Jun’s father feels that term life insurance is more suitable to the needs of her young family.
SOLUTION
1.
a. Three major types of whole life policies are available: continuous premium, limited payment, and single premium.
Under a continuous premium whole life policy—or straight life, as it’s more commonly called—individuals pay a level premium each year until they either die or exercise a nonforfeiture right.
With a limited payment whole life policy, you’re covered for your entire life, but the premium payment is based on a specified period—for example, so-called 20-pay life and 30-pay life require level premium payments for a period of 20 and 30 years, respectively. In all of these cases, on completion of the scheduled payments, the insurance remains in force, at its face value, for the rest of the insured’s life.
A single premium whole life policy is purchased with one cash premium payment at the inception of the contract, thus buying life insurance coverage for the rest of your life.
b. A variable life insurance policy goes further than whole and universal life policies in combining death benefits and savings. The policyholder decides how to invest the money in the savings (cash-value) component. The investment accounts are set up just like mutual funds, and most firms that offer variable life policies let you choose from a full menu of different funds, ranging from money market accounts and bond funds to international investments or aggressively managed stock funds.
c. term life insurance is insurance that provides only death benefits, for a specified period, and does not provide for the accumulation of cash value. It can be renewable up to an age limit. It can have level premiums for a term of several years.
2.
Whole life: Advantages include the ability to have insurance protection your entire life regardless of your insurability in later years, Ability to borrow against the cash value of the policy with repayment deferred until death, and Ability to purchase “paid-up at year 20” policies gives high protection for a time, with paid-up insurance at the end of the stated term. One disadvantage of whole life insurance is its cost. It provides less death protection per premium dollar than term insurance does.
Variable life: If you want the benefits of higher investment returns, then you must also be willing to assume the risks of reduced insurance coverage. So what does this mean for you? It means you should use extreme care when buying variable life insurance.
Term life: The advantages is that you get the most insurance for the premium dollar. The disadvantages include the raising premium as you grow older and the potential that you will not be able to renew if you should become uninsurable due to health.
3. Whole life gives a set amount of insurance that will not be cancelled as long as premiums are paid. It will build some cash value and you may be able to borrow that cash value. With variable life, the amount of insurance will variable based upon the returns from your choice of investment. With term, the premium rises with age and renewal is not guaranteed.
Variable life will be great if the investments was wise and have a high return—a risky state to be in.
Term gives the most insurance for your premium dollar.
4. In 25 years Ms. Hsieh will have no one depending on her for resources. The youngest child will be 29 and should be on their own. Ms. Hsieh will be 63 and approaching retirement. Her need for insurance covers a 20 year period. She needs to build a retirement fund for herself. Thus, I would recommend she purchase term insurance and also begin saving for retirement.