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REVIEW EXERCISES
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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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REVIEW EXERCISES
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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
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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REVIEW EXERCISES
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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
1 230 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
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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REVIEW EXERCISES
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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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REVIEW EXERCISES
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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
T1
9-8
REVIEW EXERCISES
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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
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
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REVIEW EXERCISES
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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
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
T1
9-12
REVIEW EXERCISES
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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
T1
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REVIEW EXERCISES
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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
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
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
