Looking for the answer to the question below related to Management ?
K pays on a $20,000 Year-Endowment policy for 10 years and dies from an automobile accident. How much will the insurance company pay the beneficiary?
Options:
| A) Return of premiums paid B) Cash value plus interest C) $20,000 death benefit D) Face amount plus interest |
The Correct Answer Is:
- C) $20,000 death benefit
The correct answer to this question is C) $20,000 death benefit. Let’s delve into a detailed explanation of why this answer is correct and why the other options are not.
C) $20,000 Death Benefit (Correct Answer):
In a Year-Endowment policy, the insured individual pays premiums for a specified period, in this case, 10 years. If the insured individual dies during the policy term, the insurance company is obligated to pay the death benefit, which is the face value of the policy.
In this scenario, the face amount of the policy is $20,000, and since the insured individual, K, has passed away due to an automobile accident, the insurance company will pay the beneficiary the full $20,000 death benefit.
This is the primary purpose of life insurance—to provide a financial payout to the beneficiary in the event of the insured’s death.
Now, let’s examine why the other options are not correct:
A) Return of Premiums Paid:
This option suggests that the insurance company would refund the premiums that the insured individual, K, has paid over the 10-year period. However, a Year-Endowment policy typically does not guarantee a return of premiums paid.
Instead, it is designed to provide a death benefit to the beneficiary if the insured individual passes away during the policy term. While some life insurance policies may offer a return of premiums with certain riders or conditions, this is not a standard feature of a Year-Endowment policy.
B) Cash Value Plus Interest:
A Year-Endowment policy may accumulate a cash value over time, depending on the terms of the policy. However, the cash value is not typically paid out upon the insured’s death.
Instead, the cash value serves as a savings component within the policy that the insured can access during their lifetime, either by surrendering the policy or taking out a loan against it.
In the event of the insured’s death, the beneficiary is entitled to the death benefit, which is the face amount of the policy ($20,000 in this case), not the cash value plus interest.
D) Face Amount Plus Interest:
This option suggests that the beneficiary would receive the face amount of the policy plus interest. While some insurance policies may offer interest on the death benefit, it is not a standard feature of a Year-Endowment policy.
Typically, the death benefit is a fixed amount specified in the policy, and it is paid out to the beneficiary upon the insured’s death. The interest may be relevant in certain types of investment-based life insurance policies, such as universal life or variable life insurance, but it is not a feature of a Year-Endowment policy.
In summary, the correct answer to this scenario is C) $20,000 death benefit because a Year-Endowment policy is specifically designed to provide a predetermined death benefit to the beneficiary in the event of the insured individual’s death during the policy term.
This benefit is not contingent on the return of premiums, the cash value, or interest. It is a fixed payout that offers financial protection to the beneficiary when the insured passes away.