1) A policyowner elects the extended term insurance option for a policy having a
ID: 2709442 • Letter: 1
Question
1) A policyowner elects the extended term insurance option for a policy having a $30,000 cash value, a $100,000 face amount, and indebtedness of $10,000. How much extended term insurance will be provided?
2) A policyowner elects the extended term insurance option for a policy having a $30,000 cash value, a $100,000 face amount, and indebtedness of $10,000. How much will be available to purchase the extended term coverage?
3) Joe is using the capital needs (non-liquidating) approach to determine how much life insurance to purchase. Joe would like to provide $65,000 per year to his family, forever, if he dies. The assets that he owns today will provide $20,000 in annual income without liquidation of these assets. If life insurance proceeds can be invested to earn a 5 percent annual return, how much life insurance should Richard purchase to fund the additional income needed to meet the $65,000 annual income goal?
4) A policyowner intends to surrender her policy with a reported $60,000 cash value. She took out a $10,000 policy loan 2 years ago that has an 8 percent fixed policy loan interest rate. None of the loan has been repaid, and there are no applicable surrender charges. How much will she receive as a result of surrendering the policy?
Explanation / Answer
(1) Extended Term Insurance is Calculated using the Net Cash Value left in the Whole Life Insurance Policy
Net Cash Value = Cash Value of the Policy – Debt Raised against the Policy – Administrative Charges in Conversion
Cash value =$30,000
face amout=$1,00,000
indebtedness=$10,000
EXTENDED TERM INSURANCE=$30,000-$10,000=$20,000
(2) IF THERE IS A POLICY LOAN OUTSTANDING AT THE TIME EXTENDED TERM OPTION IS EXERCISED THE LOAN COMPANY WILL FIRST DEDUCT THE LOAN OUTSTANDING AMOUNT FROM CASH SURRENDER VALUE OF POLICY.THE REDUCED CASH VALUE WILL THEN PROVIDE TERM COVERAGE FOR A SHORTENED PERIOD OF TIME AND FOR A FACE AMOUNT I.E LIKEWISE REDUCED BY THE AMOUNT OF OUTSTANDING LOAN
=$ 1,00,000-$10,000=$90,000
(3)ANNUAL INCOME GOAL=$65,000
INCOME FROM ASSET OWNED=$20,000
ANNUAL RETURN TO BE EARNED FROM INVESTING INSURANCE PROCEEDS=$65,000-$20,000=$45,000
ANNUAL RETURN FROM INVESTMENT=5%
LIFE INSURANCE TO BE PURCHASED BY RICHARD=$45,000/5%=$9,00,000
(4)CASH VALUE AT WHICH INTENDED TO BE SURRENDERED=$60,000
POLICY LOAN=$10,000
INTEREST CHARGE=$10,000*8%*2=$1,600
AMOUNT TO BE RECEIVED AS A RESULT OF SURRENDERING THE POLICY=60,000-10,000-1,600=$48,400
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