(2) Richard, age 35, is married and has two children, ages 2 and 5. He is consid
ID: 2759384 • Letter: #
Question
(2) Richard, age 35, is married and has two children, ages 2 and 5. He is considering the purchase of additional life insurance. He has the following financial goals and objectives: - Pay off the mortgage on his home, which has 25 years remaining - Accumulation of a sizeable retirement fund - Payment of monthly income to the family if he should die - Withdrawal of funds from the policy when the children reach college age For each of the following life insurance policies, indicate with an explanation which of the above financial goals, if any, could be met if the policy is purchased. Treat each policy separately. a. Decreasing term insurance b. Ordinary life insurance c. Universal life insurance d. Variable universal life insurance
Explanation / Answer
A. Decreasing term insurance-
Will allow Richard to purchase insurance over a set amount of time for a low and fixed monthly premium. Low cost policies such as these allow even low income families to provide for their futures, should anything happen to a member of a family.Decreasing term life insurance is also a good way to ensure that any large loans, in this case mortgage, are paid off should something happen to Richard.
Additionally, while the goal of these premiums is to ensure that loans and mortgages are paid off, the payout will still be given to the beneficiaries, not the bank. This means that family members will be able to use payouts as they see fit and will not be obligated to pay off any loans.
B. Ordinary Life Insurance-
Insurance on the life of the insured for a fixed amount at a definite premium that is paid each year in the same amount during the entire lifetime of the insured. This policy will meet his aim of accumulation of retirement fund since the premium is paid for a fixed time and then at the maturity the amount is paid back. Since Richard is only 35, he has can easily go for 20/25 year policy which will save him enough funds for retirement.Ordinary life insurance policies also offer guaranteed death benefits. So his family can be taken care of should he pass away during the term of the policy.
C. Universal Life Insurance-
In this the excess of premium payments above the current cost of insurance is credited to the cash value of the policy. An over-funded UL policy is either surrendered or borrowed against to pay off a home mortgage. This is called Mortgage Acceleration. Hence this could easily be used to pay off the mortgage on his home.
D. Variable Universal Life Insurance- This policy will offer among other benefits financial protection - as with all life insurance programs, VULs can be used to protect a family in the case of a premature death and most importantly for Education planning since the cash value of a VUL can be used to help fund children's education, as long as the policy is started very early. Also, putting money into a VUL can be used to help children qualify for federal financial aid, since the federal government does not consider the cash value when calculating EFC (Expected Family Contribution). Hence, Richard can use the funds from this policy when the children reach college.
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