Looking for the answer to the question below related to Management ?
T would like to be assured $10,000 is available in 10 years to replace a roof on his house. What kind of $10,000 policy should T purchase?
a) Interest-Sensitive Whole Life
b) Ten-Year Endowment
c) Variable Universal Life
d) Ten-Year Renewable Term
The Correct Answer Is:
- b) Ten-Year Endowment
Let’s break down why the Ten-Year Endowment policy is the correct choice for T’s goal of assuring $10,000 will be available in 10 years to replace the roof on his house, and then we’ll explain why the other options are not suitable.
- Ten-Year Endowment:
A Ten-Year Endowment policy is a type of life insurance policy that provides a guaranteed payout at the end of a 10-year period. Here’s why it’s the correct choice for T:
Guaranteed Payout: The key feature of a Ten-Year Endowment policy is that it guarantees a specific payout after 10 years. In this case, T needs $10,000 to replace his roof, and this policy ensures that he will have that amount available at the end of the specified term.
No Market Risk: Unlike some other types of insurance policies, such as Variable Universal Life, Ten-Year Endowment policies do not expose the policyholder to market risk. T’s goal is to have a specific amount of money available in 10 years, and with this policy, that amount is guaranteed, regardless of how the financial markets perform.
Short-Term Commitment: T’s need for the $10,000 is relatively short-term (10 years), and the Ten-Year Endowment aligns perfectly with this timeframe. It provides a disciplined savings approach with a clear end goal in mind.
Predictable Premiums: T will pay regular premiums over the 10-year period, which are generally fixed and predictable. This allows him to budget for the policy premiums and ensures that he can maintain the policy until the end of the term.
Now, let’s explain why the other options are not suitable for T’s goal:
a) Interest-Sensitive Whole Life:
Interest-Sensitive Whole Life insurance is a type of permanent life insurance that combines a death benefit with a cash value component. Here’s why it’s not the right choice for T:
Overkill for T’s Goal: T’s primary goal is to ensure he has $10,000 available in 10 years for a specific expense (roof replacement). Whole life insurance is typically used for long-term financial planning and estate protection, making it unnecessarily complex and expensive for T’s relatively short-term need.
Higher Premiums: Whole life insurance tends to have significantly higher premiums compared to term or endowment policies. T might end up paying more in premiums than the $10,000 he needs for the roof replacement.
Cash Value Component: While whole life policies have a cash value that can grow over time, this feature may not be necessary or beneficial for T’s specific goal. He needs a guaranteed amount at the end of 10 years, and the cash value component may not align with that goal.
c) Variable Universal Life:
Variable Universal Life insurance is a type of permanent life insurance that allows policyholders to invest in various investment options. Here’s why it’s not the right choice for T:
Market Risk: Variable Universal Life policies expose the policyholder to market risk because the cash value is invested in financial markets. T’s goal is to ensure he has $10,000 in 10 years, and market fluctuations could jeopardize this goal.
Complexity: These policies are complex and require active management of the investment component. T’s goal is relatively straightforward – he needs a guaranteed amount in a fixed timeframe. Variable Universal Life adds unnecessary complexity to his financial planning.
Potentially Higher Costs: The fees and expenses associated with Variable Universal Life insurance can be higher than other types of policies. T might end up paying more in fees, reducing the amount available for his roof replacement.
d) Ten-Year Renewable Term:
Ten-Year Renewable Term is a type of term life insurance that provides coverage for a specific term, with the option to renew at the end of each term. Here’s why it’s not the right choice for T:
Lack of Guaranteed Payout: Term life insurance only provides a death benefit if the insured individual passes away during the term. It does not guarantee a payout if the policyholder survives the term. Since T’s goal is to have $10,000 available in 10 years for roof replacement, he might end up with no payout if he outlives the term.
No Savings Component: Term life insurance is purely for protection and does not have a savings or investment component. T’s goal involves saving a specific amount of money over time, which this type of policy does not provide.
In conclusion, the correct choice for T’s goal of assuring $10,000 is available in 10 years to replace his roof is a Ten-Year Endowment policy. It guarantees the desired amount without market risk, aligns with the short-term nature of his goal, offers predictable premiums, and is a straightforward savings vehicle for his specific need.
The other options, such as Interest-Sensitive Whole Life, Variable Universal Life, and Ten-Year Renewable Term, are not suitable due to their complexity, market exposure, lack of guaranteed payouts, or mismatch with T’s goal.