6. 40,000 Male 35 Whole Life ,000 Male Payment Life ,000 Male Year Endowment ,000 Female 29 5-Year Term

Full text

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CHAPTER 19—SECTION I

Calculate the annual, semiannual, quarterly, and monthly premiums for the following

life insurance policies:

Face Value

Sex and Age

Annual Semiannual Quarterly Monthly of Policy of Insured Type of Policy Premium Premium Premium Premium 1. $ 5,000 Male—24 Whole Life 2. 10,000 Female—35 10-Year Term 3. 25,000 Male—19 20-Year Endowment 4. 75,000 Male—50 20-Payment Life 5. 100,000 Female—29 5-Year Term 6. 40,000 Male—35 Whole Life 7. 35,000 Male—30 20-Payment Life 8. 250,000 Female—45 20-Year Endowment 1,035.90 2,992.60 5,985.20 11,510.00 101.27 292.57 585.13 1,125.25 87.08 251.58 503.15 967.60 24.30 70.20 140.40 270.00 380.09 1,098.05 2,196.09 4,223.25 75.78 218.92 437.84 842.00 4.82 13.91 27.82 53.50 $ 7.16 $ 20.67 $ 41.34 $ 79.50 1. Face value $5,000 Male-24

Whole life annual premium

5 $15.90 3 5 5 $79.50 Semiannual premium 5 79.50 3 .52 5 $41.34 Quarterly premium 5 79.50 3 .26 5 $20.67 Monthly premium 5 79.50 3 .09 5 $7.16 Number of 1,000s 5 5,000 1,000 5 5

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CHAPTER 19—SECTION I

Calculate the value of the nonforfeiture options for the following life insurance policies:

Reduced Face Value Years in Cash Paid-Up Extended Term of Policy Force Type of Policy Value Insurance Years Days 9. $ 50,000 10 Whole Life 10. 250,000 7 20-Year Endowment 11. 35,000 15 Whole Life 12. 100,000 3 20-Payment Life 217 4 9,000.00 2,900.00 218 21 10,990.00 5,495.00 310 26 95,250.00 46,500.00 54 17 $ 9,300.00 $ 4,900.00 9.

Nonforfeiture options: Face value

$50,000

10 years in force, Whole life

Number of 1,000s

5

50

Option 1, Cash value

$ 98.00 per 1,000 5 98.00 3 50 5

Option 2, Reduced, Paid up

$ 186.00 per 1,000 5 186.00 3 50 5

Option 3, Extended terrm

17

years,

54

days

$9,300.00 ins. for life

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13. Herbert Love is 35 years old and is interested in purchasing a 20-year endowment insurance policy with a face value of $120,000.

a. Calculate the annual premium for this policy.

Face value 5 $120,000, 20-year endowment, M-35

Annual premium 5 43.67 3 120

5

b. Calculate the semiannual premium.

Semiannual premium 5 $5,240.40 3 .52

5

14. Jenny Chao, age 27, wants to purchase a 5-year term insurance policy with a face

value of $25,000. As her insurance agent, answer the following:

a. What is the annual premium for this policy?

Face value 5 $25,000, 5-year term, F-27

Number of 1,000s 5 25

Annual premium 5 $2.58 3 25

5

b. What is the monthly premium?

Monthly premium 5 64.50 3 .09

5

c. How much more will Jenny pay per year if she chooses monthly payments?

Total payments 5 5.81 3 12 5 69.72

69.72 2 64.50

If paid monthly $5.22 More will be paid

$5.81 $64.50 $2,725.01 $5,240.40 Number of 1,000s 5 120,000 1,000 5 120

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CHAPTER 19—SECTION I

15.

Libby Young purchased a $75,000, 20-payment life insurance policy when she was 20

years old. She is now 30 years old and wants to investigate her nonforfeiture op-

tions. As her insurance agent, calculate the value of Libby’s three options.

Face value

5

$75,000, 10 years in force, 20 payment, life

Option 3

5

extended term

16.

Michael McDonald is evaluating his life insurance needs. His family’s total living

expenses are $37,500 per year. Vickie, his wife, earns $14,900 per year in salary and

receives another $3,500 annually in disability benefits from an insurance settlement

for an accident. If the prevailing interest rate is 7

%, how much life insurance should

Michael purchase to cover his dependents’ income shortfall? Round to nearest $1,000.

Income shortfall

Prevailing interest rate

5

19,100

.075

5

$254,666.67

5

$255,000

Insurance needed

5

$37,500

5

$14,900

1

3,500

5

$18,400

5

$37,500

2

18,400

5

$19,100

Total living expenses

Total income

Income shortfall

1 2

30 years 206 Days

5

191.00

3

75

5

$14,325

Cash value

5

496.00

3

75

5

$37,200

Reduced paid-up insurance

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THE CONSULTATION

17. Stacy Spencer, a single mother, is 20 years old. She has called on you for an

insur-ance consultation. Her objective is to purchase life insurinsur-ance protection for the next 10 years while her children are growing up. Stacy tells you that she can afford about $250 per year for insurance premiums. You have suggested either a 10-year term policy or a whole life policy.

a. Rounded to the nearest thousand, how much insurance coverage can Stacy

pur-chase under each policy? Hint: Divide her annual premium allowance by the rate

per $1,000 for each policy.

10-year term policy rate 5 $4.20 Whole life policy rate 5 $12.09

She can purchase a $60,000 10-year term policy. She can purchase a $21,000 whole life policy.

Number of 1,000s 5 250

12.09 5 20.6 5 21

Number of 1,000s 5 250

4.20 5 59.5 5 60

b. If she should die in the next 10 years, how much more will her children receive

under the term insurance?

Term face value 5 $60,000

Whole life face value 5

$39,000

Under term policy, more would be paid.

c. If she should live beyond the 10th year, what are her nonforfeiture options with

the whole life policy?

Nonforfeiture options of whole life policy in force 10 years

$98.0 3 21 5 $2,058 Cash value

$186.00 3 21 5 $3,906 Reduced paid-up insurance

17 years, 54 days Extended term insurance

Option 1 5

Option 2 5

Option 3 5

$39,000

2$21,000

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C

HAPTER 19—SECTION II

Calculate the building, contents, and total property insurance premiums for the fol-

lowing policies:

Area

Structural

Building

Building

Contents

Contents

Total

Rating

Class

Value

Premium

Value

Premium

Premium

1.

4B

$ 88,000

$21,000

2.

2C

124,000

35,000

3.

1A

215,000

29,000

4.

5D

518,000

90,000

5.

3C

309,000

57,000

2,571.00

438.90

2,132.10

8,487.20

1,287.00

7,200.20

521.10

69.60

451.50

711.70

178.50

533.20

$

843.10

$

174.30

$

668.80

1.

Building value $88,000, Contents value $21,000

Area 4, Class B

Building

.76

3

880

5

Annual premium

Contents

.83

3

210

5

Annual premium

Total annual premium

5

668.80

1

174.30

5

$843.10

$174.30

$668.80

Contents, number of 100s

21,000

100

5

210

Building, number of 100s

88,000

100

5

880

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C

HAPTER 19—SECTION II

Annual

Canceled

Canceled

Short-Term

Premium

After

By

Premium

Refund

6.

$

450

3 months

insurance company

7.

560

20 days

insured

8.

1,280

9 months

insured

9.

322

5 months

insurance company

10.

630

5 days

insured

579.60

50.40

187.83

134.17

192.00

1,088.00

470.40

89.60

$

337.50

$

112.50

Calculate the short-term premium and refund for each of the following policies:

6.

Annual premium $450 after 3 months by

insurance company

Refund due

5

$450.00

2

112.50

5

7.

Annual premium $560 after 20 days by insured

Short-rate premium

5

$560

3

16%

5

$

89.60

Refund due

5

$560.00

2

89.60

5

$470.40

$337.50

Premium

5

$450.00

3

3

12

5

$112.50

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C

HAPTER 19—SECTION II

Calculate the amount to be paid by the insurance company for each of the following

claims:

Replacement

Amount of Loss

Value of

Face Value

Coinsurance

Amount

Insurance Company

Building

of Policy

Clause (%)

of Loss

Will Pay

11.

$200,000

$160,000

80

$

75,000

12.

350,000

300,000

90

125,000

13.

70,000

50,000

70

37,000

14.

125,000

75,000

80

50,000

15.

500,000

300,000

80

200,000

150,000.00

37,500.00

37,000.00

119,047.62

$

75,000.00

11.

Replacement cost

5

$200,000

Face value

5

$160,000

Coinsurance

5

80%

Loss

5

$75,000

Insurance required

5

200,000

3

80%

5

$160,000

Amount of loss paid

5

160,000

160,000

3

75,000

5

$75,000

(9)

16. You are the insurance agent for Far East Furniture Manufacturing, Inc. The owner, Michael Chang, would like you to give him a quote on the total annual premium for property insurance on a new production facility in the amount of $1,640,000 and equipment and contents valued at $955,000. The building is structural classification B and area rating 4.

Building premium 5 16,400 3 .76 5 $12,464

Contents premium 5 9,550 3 .83 5 $7,926.50

Total annual premium 5 12,464.00 1 7,926.50

5

17. A property insurance policy has an annual premium of $1,350. What is the

short-rate refund if the policy is canceled by the insured after 9 months?

Annual premium 5 $1,350.00, canceled by insured

Short-rate premium 5 1,350.00 3 85%

5 $1,147.50

Short-rate refund 5 1,350.00 2 1,147.50

5

18. Drake Enterprises has a property insurance policy with an annual premium of

$1,320. In recent months, Drake has filed four different claims against the policy: a fire, two burglaries, and a vandalism incident. The insurance company has elected to cancel the policy, which has been in effect for 310 days. What is the regular refund due to Drake?

Annual premium 5 $1,320, 310 days in force, canceled by insurance company

1,320.00 2 1,121.10 5 $198.90 Regular refund 5 1,320 3 310 365 5 1,121.10 $ 202.50 $20,390.50 Contents, number of 100s5 $955,000 100 5 9,550 Building, number of 100s 5 $1,640,000 100 5 16,400

(10)

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C

HAPTER 19—SECTION II

19.

Presto Electronics had multiple carrier fire insurance coverage in the amount of

$500,000, as follows:

Assuming that all coinsurance clause stipulations have been met, how much would

each carrier be responsible for in the event of a $95,000 fire?

Aetna: $57,000

State Farm: $23,750

Liberty Mutual: $14,250

Aetna—$300,000 policy

State Farm—$125,000 policy

Liberty Mutual—$

75,000

policy

$500,000 total coverage

Aetna:

300,000

500,000

5

60%

.6

3

95,000

5

$57,000

State Farm:

125,000

500,000

5

25%

.25

3

95,000

5

$23,750

Liberty Mutual:

95,000

500,000

5

15%

.15

3

95,000

5

$14,250

(11)

BUSINESS INTERRUPTION INSURANCE

20. As the owner of a successful business, you have just purchased an additional type of

property insurance coverage known as business interruption insurance. This insurance

protects the profits that a company would have earned had there been no problem. Business interruption insurance covers damages caused by all types of perils such as fires, tornadoes, hurricanes, lightning, or any other disaster except floods and earthquakes.

This insurance pays for “economic” losses incurred when business operations suddenly cease. These include loss of income due to the interruption and additional expenses incurred such as leases; relocation to temporary facilities; overtime to keep up with production demands; recompiling of business, financial and legal records; and even the salaries of key employees.

Your coverage provides insurance reimbursement for 80% of any losses. Your company pays the other 20%. The annual premium is 2% of the income and extra expenses that you insure.

a. If you have purchased coverage amounting to $20,000 per month, what is the

amount of your annual premium?

20,000 3 12 5 $240,000 annual coverage

240,000 3 .02 5

b. If a tornado put your company out of business for months, what would be the

amount of the insurance reimbursement for your economic loss?

20,000 3 5.5 5 $110,000 total amount of loss

110,000 3 .8 5 $88,000 insurance reimbursement

512

$4,800 annual premium

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CHAPTER 19—SECTION III

As an insurance agent, calculate the annual premium for the following clients:

Driver Bodily Property Model Vehicle Comprehensive Collision Rating Annual Name Territory Class Injury Damage Class Age Deductible Deductible Factor Premium 1. Rosen 2 4 50/100 25 J 3 $100 $250 None 2. Maples 1 2 10/20 10 R 1 Full Coverage 500 1.5 3. Lopez 3 1 25/50 5 U 5 Full Coverage 250 3.0 4. Zahn 2 3 100/300 25 C 4 $100 250 None 5. Nadler 4 2 50/100 100 H 2 Full Coverage 500 1.7 6. Maui 1 4 15/30 50 M 3 $100 250 2.5 7. Hale 2 1 10/20 10 Q 6 $100 250 3.9 8. Coll 3 3 100/300 100 Z 1 Full Coverage 500 None 444.00 1,146.60 822.50 625.60 330.00 1,125.00 456.00 $ 343.00

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CHAPTER 19—SECTION III

9.

Shaun Taylor wants to purchase an automobile insurance policy with bodily injury and

property damage coverage in the amounts of 50/100/50. In addition, he wants collision

coverage with $250 deductible and comprehensive with no deductible. Shaun is in driver

classification 4 and lives in territory 3. His vehicle, a Mercedes 190S, is in model class B

and is 1 year old. Shaun has had two accidents and one ticket in the past 12 months

and is therefore considered to be a high risk. Consequently, the insurance company

has assigned a rating factor of 4.0 to his policy. As his automobile insurance agent,

calculate the total annual premium for Shaun’s policy.

Bodily injury

$106.00

Rating factor

4.0

3

353.00

Property damage

85.00

Total annual premium

5

Collision

95.00

Comprehensive

353.00

10.

Howard Marshall’s Corvette was hit by a palm tree during a hurricane. The damage

was estimated at $1,544. If Howard carried $250 deductible collision and $100 deductible

comprehensive, how much of the damages does the insurance company have to pay?

Total damage

$1,544.00

Less comprehensive deductible

Insurance company responsibility

5

$1,444.00

2

100.00

67.00

$1,412.00

(14)

11. Len Hawkins has motor vehicle liability insurance in the amount of 50/100/50 and also carries $250 deductible collision coverage and full-coverage comprehensive. Recently, he was at fault in an accident in which his camper hit a bus. Five individuals were injured on the bus and were awarded the following settlements by the courts: Hart, $13,500; Black, $11,700; Garner, $4,140; Williams, $57,800; and Morgan, $3,590. The damage to the bus was $12,230, and Len’s camper sustained $3,780 in damages.

a. How much will the insurance company have to pay and to whom?

Insurance Co. Hart $13,500 Morgan 3,590 Black 11,700 Bus 12,230 Garner 4,140 Camper Williams 50,000 $98,690 3,530 Liability 50/100/50

Maximum of $50,000 per person Maximum of $100,000 per accident Maximum of $50,000 property

Bodily injury (liability)

Hart’s injuries $13,500 Insurance pays all

Black’s injuries 11,700 Insurance pays all

Garner’s injuries 4,140 Insurance pays all

Williams’ injuries 57,800 Insurance pays 50,000

Morgan’s injuries 3,590 Insurance pays all

Property damage (liability)

Bus damage $12,230 Insurance pays all

Collision

Len’s camper $3,780

Deductible

$3,530 Insurance portion

2 2.50

b. What part of the settlement will be Len’s responsibility?

Len

Williams $7,800

Deductible

$8,050

250

(15)

INSURING THE FLEET

12. The Yellow Cab Company of Statesville is interested in purchasing $250 deductible

collision insurance and full-coverage comprehensive insurance to cover its fleet of 10 taxi cabs. As a requirement for the job, all drivers already carry their own liability coverage in the amount of 100/300/100. Statesville is rated as territory 2. Five of the cabs are 4-year-old Checker Towncars, model class Y. Three of them are 2-year-old Chrysler station wagons, model class R. The remaining two are new Buick sedans, in model class C. Because the vehicles are on the road almost 24 hours a day, they are considered to be very high risk and carry a rating factor of 5.2. They are, how-ever, subject to an 18% multivehicle fleet discount.

a. As the insurance agent for Yellow Cab, calculate the total annual premium for

the fleet.

10 Cabs, Collision $250 deductible, Comprehensive full coverage, Territory 2

Comprehensive Collision

Total annual premium 5 505 1 555 1 249 1 312 1 126 1 178 5 $1,925.00

1,925.00 3 5.2 5 10,010.00 3 82% 5

b. When the owner saw your rate quote, he exclaimed, “Too expensive! How can I

save some money on this insurance?” At that point, you suggested changing the coverage to $500 deductible collision and $100 deductible comprehensive. How much can you save Yellow Cab by using the new coverage?

10 Cabs, Collision $500 deductible, Comprehensive $100 deductible, Territory 2

Comprehensive Collision

Total annual premium 5 495 1 535 1 237 1 303 1 162 1 118 5 $1,850.00

1,850.00 3 5.2 5 9,620.00 3 82% 5 $7,888.40 8,208.20 2 7,888.40 5 $319.80 Savings @107 3 5 5 $535 @101 3 3 5 $303 @ 813 2 5 $162 @ 99 3 5 5 $495 @ 79 3 3 5 $237 @ 59 3 2 5 $118

5 Cabs Model Y, 4 years old 3 Cabs Model R, 2 years old 2 Cabs Model C, 0 years old

$8,208.20 @111 3 5 5 $555 @104 3 3 5 $312 @ 893 2 5 $178 @101 3 5 5 $505 @ 83 3 3 5 $249 @ 63 3 2 5 $126

5 Cabs Model Y, 4 years old 3 Cabs Model R, 2 years old 2 Cabs Model C, 0 years old

Figure

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References

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