Looking for the answer to the question below related to  Management ?

All of these statements about Equity Indexed Life Insurance are correct, EXCEPT:

 Options:

a) Cash value has a minimum rate of accumulation b) If the gain on the index goes beyond the policy’s minimum rate of return, the cash value will mirror that of the index c) The premiums can be lowered or raised, based on investment performance d) Tied to an equity index such as the S&P 500

The Correct Answer Is:

• c) The premiums can be lowered or raised, based on investment performance

Answer Explanation:

Equity Indexed Life Insurance (EILI) is a type of life insurance product that combines elements of both traditional life insurance and investment. It is designed to offer policyholders the potential for higher returns compared to traditional whole life insurance policies, while also providing a level of downside protection.

Let’s break down each statement and explain why it is either correct or incorrect.

c) The premiums can be lowered or raised, based on investment performance.

The premiums for Equity Indexed Life Insurance are typically fixed and do not change based on the investment performance of the policy. Premiums are set at the time the policy is issued and are generally level throughout the life of the policy.

The policyholder pays the same premium amount regardless of how the underlying index performs. Therefore, the premiums do not fluctuate based on investment performance. The main flexibility in EILI policies is related to the cash value growth, which can vary based on the performance of the chosen equity index.

a) Cash value has a minimum rate of accumulation.

Explanation: One of the features of Equity Indexed Life Insurance is that it offers a minimum guaranteed interest rate for the cash value component of the policy. This means that even if the performance of the selected equity index is poor or negative, the cash value will still accumulate at a specified minimum rate.

This feature provides a level of security for policyholders, ensuring that their cash value does not decrease below a certain threshold due to market fluctuations.

b) If the gain on the index goes beyond the policy’s minimum rate of return, the cash value will mirror that of the index.

Explanation: Equity Indexed Life Insurance policies are linked to a specific equity index, such as the S&P 500. When the index performs well and generates gains beyond the policy’s minimum rate of return, the cash value of the policy can benefit from that positive performance. \

The cash value is typically credited with a portion of the index’s gains, subject to a cap or participation rate specified in the policy. This allows policyholders to participate in the upside potential of the chosen index while still having the downside protection provided by the minimum guaranteed interest rate.

d) Tied to an equity index such as the S&P 500.

Explanation: Equity Indexed Life Insurance policies are indeed tied to a specific equity index, like the S&P 500. The performance of the policy’s cash value is linked to the movements of the chosen index. The insurer uses a formula to determine how much of the index’s gains will be credited to the policy’s cash value.

While the policy is tied to an index, it’s important to note that policyholders do not directly invest in the index itself. Instead, they participate in the index’s performance through the insurance company’s crediting mechanism.

In summary,

Equity Indexed Life Insurance is a complex financial product that combines elements of life insurance and investments. It offers a minimum guaranteed interest rate for the cash value, the potential to benefit from gains in the chosen equity index, and is tied to a specific index like the S&P 500.

However, the premiums for EILI policies are typically fixed and do not fluctuate based on investment performance, which is why statement c) is incorrect. Policyholders can enjoy potential upside gains while having a safety net in the form of the minimum guaranteed interest rate, making EILI an attractive option for those seeking both life insurance coverage and investment potential.

• Y purchased $100,000 worth of permanent protection on himself and $50,000 worth of 10-year Term coverage for his wife on the same policy. Which of these policies did Y purchase?