Question

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.

Critical Thinking Questions

1. What are the major advantages and disadvantages of each type of policy?

a) whole life policy, b) a variable life policy, and c) a term life policy.

2. 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?

3. Given the limited information in the case, which type of policy would you recommend for Ms. Hsieh? Defend and explain your recommendations.

Answer 1

ANSWER :

Jun Hsieh is a 38-year-old widow with three young children. She currently has life insurance coverage through a group life insurance policy through her employer but is unsure if it is sufficient She should like to evaluate her needs for further coverage. A life insurance agent is recommending a 25-year limited payment whole life policy. while her father believes a term life policy is better. Person YG herself. however. thinks a variable life policy might be best.

1.
Person YG would like to fully understand the difference between a whole life policy. variable life policy. and a term life policy: a) Whole life policy: A permanent life insurance policy that offers ongoing coverage over a person's entire life. This type of insurance has a savings feature that provides a return on investment called cash value that results from the paid premiums. b) Variable life insurance policy: This type of insurance policy combines both death benefits and savings but also allows the policyholder to decide how to invest the cash-value. similar to a mutual fund.
c) Term insurance policy: This policy only provides death benefits during the designated policy period: there is no cash-value component.

2. The major advantages and disadvantages of a whole life policy are • Advantages: o Permanent. life-time coverage with level premiums o Cash•value (forced savings feature) that increases as premiums are paid o Tax deductions on accumulated earnings • Disadvantages: o Death protection benefits are generally lower than term policies o Earnings are not as large as with other investment vehicles o Fees include sales commissions and marketing expenses can be costly

The major advantages and disadvantages of a variable life policy are: • Advantages: o Cash-value (savings feature) that increases as prerriurns are paid o Ability to direct how cash-value is invested and to spread it over a variety of different investment accounts o Can move investments to different accounts as the market dictates o Various tax benefits such as tax-free earnings and death benefits • Disadvantages: o Higher investment risk that could result in the loss of the entire cash-value o Death benefit amount is not defined as it depends on investment earnings

The major advantages and disadvantages of a term life policy are • Advantages: o Most economical. low-cost initial premiums o Uncomplicated purchasing process • Disadvantages: o Temporary coverage for a set time period only o Premiums may increase when the policy is renewed

3.
Whole life is superior to term because it features a level premium over a long-period of time with a knovm death benefit amount. Whole life is superior to variable life because the cash-value (investment aspect) is less risky and guarantees a minimum level of earnings.

A term is superior to whole life and variable life because it emphasizes life insurance coverage over any other aspect with low initial premiums and an easy purchasing process

Variable life is superior to whole life because it gives the policyholder a choice in how the cash value is invested. with the ability to move investments around as the market dictates

4.
The best recommendation for Person YG is to purchase term life insurance. At this point in her life. she needs to maximize the amount of coverage she can get with the lowest out of pocket costs for premiums. In addition. because she is her children's only guardian, the policy provided by her employer is probably not enough coverage. The whole-life policy recommended by the insurance agent will probably come with high premiums which are not ideal. In addition. the variable life policy that she initially favored is not ideal either because it would not provide a known amount of death benefits for her children. A term life insurance policy with a renewability provision would be her best bet. such as a 20-year level-term policy that should provide coverage until her youngest child is out of college. At that point, she should reevaluate her life insurance needs.