Management Notes

Management Notes

Reference Notes for Management
K purchased a Life insurance policy in 1986 which paid 10% interest in the early years of the policy. Twenty years after the purchase, she received a notice from the insurer stating that the policy will soon terminate unless a much-higher premium is paid because of falling interest rates. This type of policy is known as a(n) __________ policy.

K purchased a Life insurance policy in 1986 which paid 10% interest in the early years of the policy. Twenty years after the purchase, she received a notice from the insurer stating that the policy will soon terminate unless a much-higher premium is paid because of falling interest rates. This type of policy is known as a(n) __________ policy.

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K purchased a Life insurance policy in 1986 which paid 10% interest in the early years of the policy. Twenty years after the purchase, she received a notice from the insurer stating that the policy will soon terminate unless a much-higher premium is paid because of falling interest rates. This type of policy is known as a(n) __________ policy.

 Options:

  1. Whole
  2. Universal
  3. Graded
  4. Increasing

The Correct Answer Is:

b. Universal

In this scenario, the type of life insurance policy that K purchased in 1986 and received a notice about its possible termination due to falling interest rates twenty years later aligns with a Universal life insurance policy.

Explanation of  Correct Answer: b. Universal

Universal life insurance is a type of permanent life insurance that offers flexibility in premiums and death benefits.

This policy typically includes a cash value component that earns interest based on current market rates.

Initially, the policy pays a high-interest rate, often known as the credited interest rate, which can fluctuate over time based on prevailing market conditions.

Reasons for Universal as the Correct Answer:

➦ Interest Rate Flexibility: The policy in question paid 10% interest in the early years, which is common in the initial phase of a Universal life policy when the insurer might offer a higher interest rate to attract customers.

➦ Notice of Termination Due to Falling Rates: The key indicator here is the notice received after twenty years, stating the policy might terminate unless higher premiums are paid due to declining interest rates.

This aligns with Universal life policies, as their cash value is influenced by prevailing interest rates, and a decrease in rates can affect the policy’s sustainability.

➦ Adaptability of Premiums: Universal life policies allow for flexible premiums, enabling policyholders to adjust payments within certain limits.

The notice about the possible termination due to lower interest rates often prompts the need for increased premiums to maintain the policy’s viability.

K purchased a Life insurance policy in 1986 which paid 10% interest in the early years of the policy. Twenty years after the purchase, she received a notice from the insurer stating that the policy will soon terminate unless a much-higher premium is paid because of falling interest rates. This type of policy is known as a(n) __________ policy.

Explanation of Why Other Options Are Incorrect:

a. Whole Life Insurance:

➦ Fixed Premiums: Whole life insurance policies typically have fixed premiums that remain constant throughout the life of the policy.

➦ Guaranteed Interest Rates: Whole-life policies often come with guaranteed interest rates that are not subject to market fluctuations.

Why Whole Life Insurance is Incorrect:

➦ In the scenario presented, the policy initially paid a high-interest rate of 10%, which is not a characteristic of whole life insurance. Whole life policies usually offer lower but guaranteed interest rates.

➦ The notice of possible termination due to falling interest rates contradicts the stability associated with whole life insurance.

➦ These policies are designed to provide predictability and certainty in premium payments and returns.

c. Graded Life Insurance:

Graded Benefits or Premiums: Graded life insurance typically involves a structure where either the death benefits or premiums increase over time.

Why Graded Life Insurance is Incorrect:

➦ The scenario does not mention any graded structure related to benefits or premiums. Instead, it focuses on the policy’s termination due to falling interest rates, which is not a defining characteristic of graded life insurance.

➦ Graded life insurance is more commonly associated with policies that have a predefined schedule for increasing benefits or premiums rather than being influenced by changes in interest rates.

d. Increasing Life Insurance:

➦ Increasing Death Benefits: Increasing life insurance policies are designed to provide a death benefit that grows over time.

Why Increasing Life Insurance is Incorrect:

➦ The scenario does not emphasize an increase in death benefits but rather highlights the issue of the policy possibly terminating due to falling interest rates.

➦ Increasing life insurance policies focus on the growth of the death benefit, which may not necessarily be tied to fluctuations in interest rates affecting the policy’s continuation.

➦ In summary, Whole Life Insurance is characterized by fixed premiums and guaranteed interest rates, Graded Life Insurance involves graded benefits or premiums that increase over time, and Increasing Life Insurance focuses on a growing death benefit.

➦ None of these characteristics align with the scenario described, where the policy initially paid high interest, and the insurer warned of possible termination due to declining interest rates.

➦ The features and flexibility associated with Universal life insurance make it the most fitting choice in this context.

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