Question

In: Accounting

Solomon is the sole income provider for the family as his wife is a full-time housewife....

Solomon is the sole income provider for the family as his wife is a full-time housewife. . Saving money for the house and his children's education fees is challenging. Solomon understands that he must have risk management, savings, and investment plans to secure his family’s financial well-being.

Solomon understands that a life insurance plan will help him to achieve the above objectives. You as Solomon best friend and a professional insurance agent, you need to convince him about the need in a sizeable life insurance policy to replace his income in the event of his death and probably be able to help him to save some money for a house in the future. You are required to recommend a life insurance policy to him based on the following questions:

Recommend the insurance policies that best meet the need to accumulate money for the down payment on a house? Justify your answer.
Propose an insurance policy that best meets the needs to accumulate education funds for solomon children. Justify your answer.

Identify the insurance policies that would best meet the need for protection of solomon family if he dies prematurely? Justify your answer.

Assume that, if solomon tries to meet all his financial needs by purchasing cash-value life insurance, predict the possible obstacles that he may face.

Assume that solomon decided to obtain a 5-year term policy in the amount of USD150,000 without cash value due to financial difficulties. Identify the basic characteristic of a typical term insurance policy that would help solomon to accumulate a fund for retirement.

Solutions

Expert Solution

a) Insurance for home loan

solomon must take insurance for home loan because of following reasons:

i) Taking a home loan is a long-term commitment. Home loans can extend up to 25 to 30 years or more. We all know life doesn’t come with any guarantee cards. Just imagine a situation the one who pays the EMI on a monthly or quarterly basis expires under unforeseen circumstances. Hence, the burden of paying the loan falls on the dependent family members. In case the loan is not repaid and the installments are not paid regularly, a situation may occur that the house or the collateral's will be seized.

ii) How do you avail Home Loan Insurance?

Home loan insurance can usually be availed while procuring the home loan. It is available with the financial institution from which you are availing the loan and is often bundled with the home loan.

iii) Payment of Premium

Most home loan protection schemes come with a one-time premium payment option. Buyers also have the option to club the premium amount with the total loan amount.

iii) Payment of Premium

Most home loan protection schemes come with a one-time premium payment option. Buyers also have the option to club the premium amount with the total loan amount.

b) Child education insurance

Solomon must opt. for child education policy because it helps in securing your child's educational needs. Just by depositing annual premium amounts to insurance company.

c) Term life insurance

Solomon must opt for term life insurance for his family if he dies prematurely because of following reasons:

Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during a specified term.
These policies have no value other than the guaranteed death benefit and feature no savings component as found in a whole life insurance product.
Term life premiums are based on a person’s age, health, and life expectancy.

d) If solomon tries to meet all his financial needs by purchasing cash-value life insurance, then he might face the following obstacles:

High administrative fees and service fees for managing investment accounts
High premiums when compared to term life insurance
The interest rates earned on the cash value are usually less than other investment vehicles.
If you take out a loan against the policy's cash value and don't pay it back before you die, the death benefit is reduced accordingly.

e) Characterstics of term life insurance by which solomon can take decion regarding term life insurance are:

1) Term Life Insurance is the most Cost-Effective plan

2) Pay the Policy Premium Only Till Retirement

3) Flexibility to Receive Payout as Monthly Income in Addition to Lumpsum Amount

4) Choose Riders to Make Your Term Plan more Comprehensive

5) You can Enhance/Increase the Insurance Cover at Major Life-Stages

ekkarill92 answered 1 year ago

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