UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGNCollege of BusinessD E P A R T M E N T O F F I N A N C E Finance 230 Assignment 8Fall, 2007 Due: October 26, 20071. A 35 year old man has a Type B (Increasing Death Protection) universal life insurance policy with a face value of $100,000 and a cash value of $15,000 at the beginning of the year. He pays a premium of $1,533 a year. The mortality charge is $1.35 per $1,000 in coverage, the expense loading is 4.5% of the premium, there are no loans or withdrawals, and the policy earned a 7% rateof return this year. What is the end of the year cash value?A. $16,329 B. $17,472 C. $17,250D. $17,541 E. None of the above2. If an individual wants no uncertainty in an insurance policy, which one of the following types of life insurance would he or she be most comfortable with? A. Variable Life B. Universal Life C. Re-entry TermD Whole Life E. Variable Universal For the next seven questions, please consult the whole life insurance policy of John Doe, located in Appendix E, and the chapters on life insurance in the textbook. To simplify the calculations, assume that John Doe has selected the Premium Payment option for dividends (item 4.2 on page 741), and ignore the Premium Refund at Death provision (the last point under item 3.1 on page 741) and the Dividend at Death provision (item 4.4 on page 741). Note that provision 1.4 on page 740 does apply. Unless otherwise indicted, he has made all premium payments when due and kept the policy in force until his death.3. John Doe pays his first twelve premiums without a hitch. After watching the World Series of Pokeron television, however, John decides to stop paying the premium on August 1, 2007, without tellinghis wife and without selecting a surrender option. He then begins to enter the tournament every year for a $1,533 fee (the same as he was paying on his life insurance). Obviously, John never wins and because of the stress, suffers a stroke and dies on March 18, 2017. How much will his wife receive as a death benefit?A. $0 B. $14,515 C. $43,700D. $100,000 E. None of the above4. John Doe commits suicide on August 1, 2007. How much will his wife Jane receive from the insurance company?A. $1,533 B. $14,515 C. $18,396D. $43,700 E. None of the above5. Assume that the company paid a total of $6,000 in dividends in the first twelve years. If John Doe surrendered the policy on August 1, 2007, for the cash value, how much of the proceeds will be taxable income for him?A. 0 B. $2,119 C. $14,515D. $31,304 E. None of the above6. If John had lied about his age when he bought the life insurance policy in 1995, which of the following would happen if he died on October 18, 2007, and the insurance company then found outthat he was 45 years old, rather than 35, when he purchased the policy?A. The insurance company would have to pay Jane the full benefit because it only had two years to cancel the policy.B. The insurance company will increase the death benefit to reflect the age John actually was when he purchased the policy.C. The insurance company won’t pay any benefit to Jane because John lied about a material fact and therefore a valid contract never existed.D. The insurance company will reduce the death benefit to reflect the age John actually was when he purchased the policy. E. None of the above7. John surrenders the policy on August 1, 2020 and accepts the cash value option. If he dies from anillness on April 14, 2025, how much will his wife Jane receive as a death benefit?A. 0 B. $38,328 C. $47,545D. $71,800 E. None of the above8. John dies on August 2, 2039 from a car accident. His wife Jane with an adjusted age of 75 elects to receive joint and survivor life income with her son, Jack, who has adjusted age of 55. What is the minimum monthly benefit they will receive?A. $379 B. $402 C. $572D. $677 E. None of the above9. John surrenders the policy on August 1, 2005, and selects the paid-up insurance option. He dies in a car accident on August 15, 2037. If his wife Jane has an adjusted age of 64 at this point, what is the minimum monthly payment she will receive if she elects to receive a life income with a 20 year period certain?A. 0 B. $170.92 C. $181.76D. $2,051.04 E. None of the above10. According to Mil Grauer, the guest lecturer on October 12, how much in savings does the average 35 person have in reserve?A. NoneB. Approximately 2 months of incomeC. Approximately 6 months of income D. Approximately 1 year of incomeE. Over 2 years of
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