Question

John Mulvaney just reached an important milestone in his life - birth of his first child. After seven years as a DINK (dual income-no kids) family, he and his wife Sandy decided it was time add a new member. At that pont the couple had solid health insurance plans and policies protecting their home and automobiles. Life ansurance was another matter.
As a novice, John had no idea about the types of poli- cies that were available. He contacted his insurance agent, who represents a variety of insurance companies, and asked for a summary. The agent mentioned three potential forms of life insurance, each offered by a separate company that specialized in a specific type.
Company AS primary product, term life insurance, has the advantage of being the lowest annual cost option. John would be able to specify the policß death benefit amount, which typically would be enough to care for his spouse and child (and vice versa for Sandy) for an extended period of time. A term policy covers a stated period of time (often 10 years) and then expires. All premiums go to the insurance company. The low cost often means a higher death benefit can be purchased at a lower price, especially for a healthy younger person, When a term policy is renewed, the premium amount rises for the same amount of coverage because the person is now older and has a higher potential of dying. At the same time, the individual's level of income may have also risen, making the renewal price easier to manage.
Company BS best policy, whole life insurance, features much higher fixed annual premiums, but works in a different manner. A cash value accrues as payments are made, and the value of the policy (a type of regular savings) grows over time, often collecting interest on the cash value. The policy also specifies a death benefit. At the end of the policy's specified time (often 40 years Or more), the death benefit amount can continue to grow until the policy is redeemed. Many financial analysts argue that the higher costs and low rate of return (the interest rate paid on the case value) make whole life insurance a less viable investment. Others suggest it is a form Of "forced" savings that benefits the policy holder over time. The amount of coverage (death benefit) remains the same over the life of the policy. For more coverage, a second policy or a term policy would need to be purchased.
Company C specializes in universal life insurance, which is a flexible form of permanent life insurance. It features the low cost of term life insurance combined with a savings element which is invested to provide a cash value buildup. John and Sandy would be able to review and change their death benefit amounts, the savings element, and their premiums over time. Also, universal life insurance allovvs the policyholder to use the interest from his or her accumulated savings to help pay premiums.

John and Sandy had many things to consider as they made choices. First, they would need to decide On the amount of the death benefit for each Of them, considering their present incomes, expected future incomes (based on promotions and pay raises), and whether they would have a second child. They also needed to think about how much money they could currently afford to spend on policies. And finally, the reputations Of the three companies involved would deserve consideration. "l never realized this would be so complicated," John lamented. Sandy agreed.

Question:

How would the elements involved in an external search affect John and Sandy as they explore their purchase options? Discuss in terms of:

a. ability to search

b level of motivation

c. costs versus benefits

Answer 1

a. Ability to search: They can consider accounting information factor and investigate the financial statements of all the three insurance companies and compare their performances over the years. This investigation involves comparison of the performances of their policies in the past years, profit earned by them etc.

Also feedbacks from other customers will affect their ability to search. It will give them more confidence on choosing the best company and policy

b. Level of motivation: Their level of motivation will be affected by the advice given by the insurance agents, their friends and relatives. They will get different opinions and it will enable them to choose the most efficient and effective policy.

c. costs versus benefits: This will depend on their present income and predictions of future income ( in case of promotion or hike). Also, they will analyze which policy will give maximum benefit for the money invested. A cost-benefit analysis will enable them to think about all the benefits that each policy will give them and subtract the cost associated with each policy.