Management Notes

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N is a 40-year old applicant who would like to retire at age 70. He is looking to buy a life insurance policy with level premiums, permanent protection, and be paid-up at retirement. Which of these should N purchase?

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N is a 40-year old applicant who would like to retire at age 70. He is looking to buy a life insurance policy with level premiums, permanent protection, and be paid-up at retirement. Which of these should N purchase?

 Options:

A) 30 pay life
B) Term to Age 70
C) Universal Life
D) Adjustable Life

The Correct Answer Is:

  • A)  30 pay life

The correct choice for N, the 40-year-old applicant who wants to retire at age 70 and is looking for a life insurance policy with level premiums, permanent protection, and be paid-up at retirement, is option A: 30 pay life. This choice aligns with N’s specific needs and financial goals.

Let’s delve into the details of why option A is the correct answer and why the other options are not suitable for N.

Option A: 30 Pay Life

30 pay life insurance is a type of whole life insurance policy with level premiums paid over a fixed period of 30 years. It provides permanent protection and will be paid up at the end of the 30-year period, meaning N won’t have to make any more premium payments but will still have coverage for the rest of his life. This option is well-suited for N’s goals and situation for several reasons:

Permanent Protection: N is looking for permanent protection, which means he wants coverage that will last for the rest of his life. 30 pay life insurance offers just that; it doesn’t expire as long as premiums are paid.

Level Premiums: N wants level premiums, which means he wants to pay the same premium amount throughout the life of the policy. With 30 pay life insurance, the premiums are fixed and won’t increase over time, providing predictability in his financial planning.

Paid-Up at Retirement: N plans to retire at age 70, and with the 30 pay life policy, his premiums will be fully paid by then. This ensures that he won’t have to worry about making insurance premium payments during his retirement years when he may have a fixed income.

Coverage for Life: This policy guarantees coverage for N’s entire lifetime, which aligns with his goal of having insurance in place until the end of his life. It also provides a death benefit that can be used to support his beneficiaries or cover final expenses.

Now, let’s examine why the other options are not suitable for N:

Option B: Term to Age 70

Term life insurance provides coverage for a specific term, in this case, until age 70. While it may seem appropriate to N’s retirement age goal, it has some significant drawbacks for his situation:

Temporary Coverage: Term life insurance is temporary coverage, meaning it expires at the end of the term. If N outlives the policy term, he won’t receive any benefits, and he would need to purchase a new policy at a much higher premium rate given his age at that time.

Premium Increases: Term life insurance premiums increase significantly when the policy is renewed or when a new policy is purchased at an older age. This can be financially burdensome for N, especially in retirement.

Lack of Cash Value: Term policies do not build cash value over time, which means N won’t have a cash savings component to tap into during retirement.

Option C: Universal Life

Universal life insurance is a flexible premium, permanent life insurance policy that includes a savings component. While it has flexibility, it may not be the best choice for N for the following reasons:

Complexity: Universal life insurance policies can be complex, with variable premiums and investment options. N may prefer the simplicity of level premiums.

Investment Risk: Universal life policies often include investment options that carry risk. If the investments underperform, N’s policy may not accumulate enough cash value to support him in retirement.

Premium Flexibility: While universal life offers premium flexibility, this could lead to higher premiums in the future if N doesn’t manage the policy carefully.

Option D: Adjustable Life

Adjustable life insurance is a type of permanent insurance that allows policyholders to adjust the coverage amount and premiums over time. However, it may not be suitable for N for the following reasons:

Complexity: Like universal life insurance, adjustable life policies can be complex due to the need to make adjustments to coverage and premiums. N may prefer a simpler, level premium policy.

Risk of Insufficient Coverage: If N adjusts his coverage downward to save on premiums, he may find himself underinsured later in life when he may still need protection.

In conclusion, option A (30 pay life) is the most suitable choice for N’s specific needs and financial goals. It provides permanent protection, level premiums, and will be paid up by the time he retires at age 70, ensuring that he has coverage in place throughout his retirement years without the risk of premium increases or policy expiration.

The other options either offer temporary coverage, complexity, or investment risks that do not align with N’s retirement and insurance objectives.

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