Looking for the answer to the question below related to  Management ?

The combination of Whole Life and _____________ Term insurance is referred to as a Family Income Policy.

 Options:

a) Decreasing b) Universal c) Variable d) Level

The Correct Answer Is:

• a) Decreasing

Answer Explanation:

Correct Answer (a) Decreasing:

A Family Income Policy typically combines Whole Life insurance with Decreasing Term insurance. This combination is designed to provide financial protection for a family in the event of the policyholder’s death. Here’s why Decreasing Term insurance is the right choice for this purpose:

Financial Protection Over Time: A Family Income Policy aims to provide a regular income to the beneficiaries over a specific period, often until dependents are financially independent. As time passes, the financial needs of the family usually decrease.

For instance, children grow up and become self-sufficient, and outstanding debts like mortgages may get paid off. Decreasing Term insurance aligns with this decreasing financial need by gradually reducing the death benefit over time.

Cost-Effective: Decreasing Term insurance is typically more cost-effective than other types of term insurance, such as Level Term insurance or Universal Life insurance. This makes it an attractive option for families who want to ensure they have sufficient coverage when it is needed most, without paying for unnecessary coverage later on.

Simplicity: The combination of Whole Life insurance and Decreasing Term insurance in a Family Income Policy offers simplicity and ease of management. Whole Life insurance provides a permanent death benefit and cash value accumulation, while Decreasing Term insurance complements it by reducing the death benefit over time. This combination simplifies the policy structure and premiums, making it more accessible to many families.

Tailored to Family Needs: The decreasing death benefit of the Decreasing Term insurance component can be customized to match the specific financial needs and timelines of the policyholder’s family. This tailoring ensures that the beneficiaries receive the necessary financial support during the critical years following the policyholder’s death.

Now, let’s examine why the other options are not suitable for a Family Income Policy:

Option (b) Universal:

Universal Life insurance is a flexible type of permanent life insurance that allows policyholders to adjust their premiums and death benefits over time. While Universal Life insurance has its advantages, it is not an ideal fit for a Family Income Policy for the following reasons:

Flexibility May Not Be Needed: A Family Income Policy aims to provide a steady income to beneficiaries over a specified period, and the decreasing death benefit of Decreasing Term insurance aligns with this goal. Universal Life insurance’s flexibility to adjust premiums and death benefits may not be necessary in this context.

Complexity: Universal Life insurance can be complex due to its investment component and the need for ongoing management. This complexity may not be suitable for individuals who want a straightforward and easily understood policy like a Family Income Policy.

Potentially Higher Costs: Universal Life insurance tends to have higher premiums compared to Whole Life insurance and Decreasing Term insurance. Given that a Family Income Policy aims to provide cost-effective coverage, choosing Universal Life insurance as the complement to Whole Life insurance may result in higher overall premiums.

Option (c) Variable:

Variable Life insurance is a type of permanent life insurance that allows policyholders to invest their cash value in various investment options. While it offers the potential for cash value growth, it is not suitable for a Family Income Policy for several reasons:

Investment Risk: Variable Life insurance exposes the policyholder to investment risk, as the cash value is tied to the performance of investment options. A Family Income Policy aims to provide a reliable and predictable income stream to beneficiaries, and the investment risk associated with Variable Life insurance may not align with this objective.

Complexity: Managing the investments within a Variable Life insurance policy requires a level of financial sophistication and ongoing attention that may not be practical or desired for individuals looking for a simple and straightforward Family Income Policy.

Inconsistent Income: Variable Life insurance policies can yield varying returns, which can lead to inconsistent income distributions to beneficiaries. In contrast, a Family Income Policy seeks to provide a steady and dependable income stream, making Variable Life insurance less suitable for this purpose.

Option (d) Level:

Level Term insurance provides a fixed death benefit throughout the term of the policy. While it offers consistent coverage, it is not typically used in conjunction with Whole Life insurance to create a Family Income Policy for the following reasons:

Mismatched Objectives: The primary goal of a Family Income Policy is to provide a decreasing death benefit over time to match the decreasing financial needs of the beneficiaries. Level Term insurance, which maintains a constant death benefit, does not align with this objective.

Higher Premiums: Level Term insurance premiums are generally higher than those of Decreasing Term insurance, making it less cost-effective for individuals seeking to provide reliable financial support to their beneficiaries while minimizing premium costs.

Unnecessary Coverage: As time passes, the financial needs of the family typically decrease. Having a constant, level death benefit may result in beneficiaries receiving more coverage than necessary in the later years of the policy, potentially leading to higher premiums without corresponding benefits.

Conclusion:

In summary, a Family Income Policy combines Whole Life insurance with Decreasing Term insurance because it aligns with the goal of providing a steady income to beneficiaries over time while minimizing costs and complexity. Decreasing Term insurance, with its decreasing death benefit, cost-effectiveness, simplicity, and customizability, is the most suitable choice for this purpose.

The other options, including Universal, Variable, and Level Term insurance, do not align with the specific objectives and characteristics of a Family Income Policy, making them less suitable choices for this financial planning strategy.

• Frank is shopping for a disability income policy. Which of the following would have the HIGHEST premium?