Financial Planning Exam 1 UPDATED ACTUAL QUESTIONS AND CORRECT
ANSWERS
Reasons for Life insurance -Replace income you would have earned after youre gone
-take care of debts that your family could be left with
-pay for childs education
-business succession
-provide liquidity to an illiquid estate or pay estate taxes your heirs might face
Term Life insurance covers you for a specific period of time - generally one to 30
years - and pays a death benefit only if you die in that term.
-typically smaller then other type of life insurance
types of term insurance renewable, level, decreasing
renewable Allows you to renew your policy at the end of the term without submitting
medical information. Your premium may go up after you renew, however.
level Fixed premium & death benefit for the term of the policy
decreasing The premium & death benefit decreases over the policy term
permanent life insurance -lasts a lifetime known as cash value insurance or whole insurance
- often include a cash savings element. Because of the
cash element and the fact that it lasts a lifetime, premiums are higher
than term insurance.
whole insurance The most common type. Offers a death benefit with a cash value portion.
The death benefit remains unchanged over the policy and the savings account
grows based on dividends from the insurance company. Some whole policies let
you pay premiums for a shorter period, such as 20 years, or until age 65. But
premiums will be higher since the payments are made over a shorter time.
universal/adjustable insurance you may be able to increase the death
benefit well after you have purchased the policy if you pass a medical exam. The
cash value portion of this policy earns interest.
variable insurance Offers a death benefit and a cash value portion that is invested in stocks,
bonds and mutual funds. Your policy may grow quickly if the investments do well,
but both the cash value and the death benefit may decrease if the investments do
not perform well. Some variable life policies have a minimum level below which
the death benefit will not decrease.
variable-universal Combines the investment aspect of a variable policy with the
ability to adjust premiums and death benefit of a universal policy.
, Life insurance pricing The price of insurance = the PV of the Payout x the probability of the event
occurring
annuities Insurance companies provide tax deferred growth of investments through
annuities.
Individuals contribute money all at once or over a number of years. "Accumulation
Phase"
2 choices of annuities 1. Begin taking withdrawals similar to a checking account. As you withdrawal, you
lower the total
balance. At some point you may deplete the account. Each withdrawal is taxable
as ordinary
income however a portion of the payment is return of principal.
2. Annuitize or "Annuitization Phase". The investor makes an irrevocable transaction
and trades
their savings for a monthly (or quarterly, annual) income payment which will last as
long as they live.
The investor transfers the risk of outliving their savings.
Mortality risk If the investor lives a long healthy life, they will be better off with an annuity.
However,
if the investor pass away before reaching normal life expectancy, they would have
been better off
NOT annuitizing.
Investment risk Investors can chose a fixed annuity or variable annuity.
With variable annuities the future payouts will change. In bull markets variable
annuities will see
increases in monthly payments. And in bear markets, variable annuities will see
decreases in
income payments.
Premium the recurring charge to have an insurance policy in place
Deductible the amount of expenses that must be paid out of pocket before an
insurer will cover any expenses
Copay or Coinsurance : the amount of expenses, beyond the deductible, which
are shared between the individual and the insurer
Homeowners insurance Homeowners insurance protects both your home and your personal possessions.
It also provides liability coverage should someone be injured on your property.
ANSWERS
Reasons for Life insurance -Replace income you would have earned after youre gone
-take care of debts that your family could be left with
-pay for childs education
-business succession
-provide liquidity to an illiquid estate or pay estate taxes your heirs might face
Term Life insurance covers you for a specific period of time - generally one to 30
years - and pays a death benefit only if you die in that term.
-typically smaller then other type of life insurance
types of term insurance renewable, level, decreasing
renewable Allows you to renew your policy at the end of the term without submitting
medical information. Your premium may go up after you renew, however.
level Fixed premium & death benefit for the term of the policy
decreasing The premium & death benefit decreases over the policy term
permanent life insurance -lasts a lifetime known as cash value insurance or whole insurance
- often include a cash savings element. Because of the
cash element and the fact that it lasts a lifetime, premiums are higher
than term insurance.
whole insurance The most common type. Offers a death benefit with a cash value portion.
The death benefit remains unchanged over the policy and the savings account
grows based on dividends from the insurance company. Some whole policies let
you pay premiums for a shorter period, such as 20 years, or until age 65. But
premiums will be higher since the payments are made over a shorter time.
universal/adjustable insurance you may be able to increase the death
benefit well after you have purchased the policy if you pass a medical exam. The
cash value portion of this policy earns interest.
variable insurance Offers a death benefit and a cash value portion that is invested in stocks,
bonds and mutual funds. Your policy may grow quickly if the investments do well,
but both the cash value and the death benefit may decrease if the investments do
not perform well. Some variable life policies have a minimum level below which
the death benefit will not decrease.
variable-universal Combines the investment aspect of a variable policy with the
ability to adjust premiums and death benefit of a universal policy.
, Life insurance pricing The price of insurance = the PV of the Payout x the probability of the event
occurring
annuities Insurance companies provide tax deferred growth of investments through
annuities.
Individuals contribute money all at once or over a number of years. "Accumulation
Phase"
2 choices of annuities 1. Begin taking withdrawals similar to a checking account. As you withdrawal, you
lower the total
balance. At some point you may deplete the account. Each withdrawal is taxable
as ordinary
income however a portion of the payment is return of principal.
2. Annuitize or "Annuitization Phase". The investor makes an irrevocable transaction
and trades
their savings for a monthly (or quarterly, annual) income payment which will last as
long as they live.
The investor transfers the risk of outliving their savings.
Mortality risk If the investor lives a long healthy life, they will be better off with an annuity.
However,
if the investor pass away before reaching normal life expectancy, they would have
been better off
NOT annuitizing.
Investment risk Investors can chose a fixed annuity or variable annuity.
With variable annuities the future payouts will change. In bull markets variable
annuities will see
increases in monthly payments. And in bear markets, variable annuities will see
decreases in
income payments.
Premium the recurring charge to have an insurance policy in place
Deductible the amount of expenses that must be paid out of pocket before an
insurer will cover any expenses
Copay or Coinsurance : the amount of expenses, beyond the deductible, which
are shared between the individual and the insurer
Homeowners insurance Homeowners insurance protects both your home and your personal possessions.
It also provides liability coverage should someone be injured on your property.
