P owns a $25,000 Life Policy that pays the face amount to him if he lives to age 70, or to his beneficiary if he dies before age 70. What kind of policy does P own?

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P owns a $25,000 Life Policy that pays the face amount to him if he lives to age 70, or to his beneficiary if he dies before age 70. What kind of policy does P own?

 Options:

a) Straight Life b) Modified Life c) Whole Life Paid-Up at Age 70 d) Endowment at Age 70

The Correct Answer Is:

• d) Endowment at Age 70

Answer Explanation:

P owns an “Endowment at Age 70” policy. This type of life insurance policy has a unique characteristic where the policyholder will receive the face amount of the policy if they live to a specified age, in this case, age 70. If the policyholder dies before reaching age 70, the beneficiary will receive the face amount of the policy.

Let’s break down why this is the correct answer and why the other options are not applicable in detail.

Endowment at Age 70:

• In an endowment policy, the insured individual (P in this case) will receive the face amount of the policy when they reach a certain age, which is specified in the policy. In this scenario, P will receive $25,000 if he lives until age 70.
• If P were to pass away before reaching age 70, the beneficiary would receive the face amount of the policy, which is also $25,000.
• This type of policy is often chosen as a form of savings or an investment vehicle because it guarantees a payout either to the policyholder or the beneficiary, depending on whether the policyholder survives to the specified age or not.

Now, let’s explain why the other options are not correct:

a) Straight Life:

• A straight life insurance policy, also known as whole life insurance, provides coverage for the entire lifetime of the policyholder.
• It does not have a specific age at which the face amount is paid out; instead, it provides a death benefit to the beneficiary upon the death of the policyholder, regardless of age.
• Since the policy described in the question has a condition of reaching age 70 for the payout, it cannot be a straight life policy.

b) Modified Life:

• A modified life insurance policy is a variation of whole life insurance that starts with lower premiums initially and gradually increases them over time.
• It is not characterized by a specific age (such as age 70) at which the face amount is paid out.
• The policy in the question does not involve modified premiums; rather, it has a clear condition of reaching age 70 for the payout, making it incompatible with a modified life policy.

c) Whole Life Paid-Up at Age 70:

• A whole life paid-up at age 70 policy is a type of whole life insurance where the policyholder pays premiums for a set period (usually until age 70), after which the policy becomes fully paid-up, and no further premiums are required.
• While it does involve age 70 as a significant milestone, the key difference is that in this policy, the premiums stop at age 70, but there is no guarantee of a payout at that age.
• The policyholder typically continues to hold the policy until death, and the beneficiary receives the death benefit whenever the policyholder passes away.

In contrast, the policy in the question specifies a payout at age 70, regardless of whether the policyholder is alive or not. Therefore, it does not fit the description of a whole life paid-up at age 70 policy.

In summary,

The policy described in the question is an “Endowment at Age 70” policy because it guarantees a payout at age 70 to the policyholder if they are alive at that time or to the beneficiary if the policyholder dies before reaching age 70. This type of policy is distinct from the other options, which do not have the same conditions and characteristics associated with endowment policies.

• Whole Life insurance is sometimes referred to as “Straight Life”. What does the word “Straight” indicate when using this phrase?