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RMIN 4000 FINAL EXAM () BROWN UNIVERSITY
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RMIN 4000 FINAL EXAM (2024-2025) BROWNUNIVERSITY
Aysmmetric Information - <<<Answers>>>Occurs when one
party has information that is relevant to a transaction that the
other party does not have
"Show me the Car Facts". EXAMPLE: Life insurance asks
you questions about your health & then sends a medical
professional to run tests & examine to avoid asymmetric
information
who needs life insurance - <<<Answers>>>Child- Probably
don't need it b/c of income, but might get it because of
additional expenses that could be incurred
Single person - NO children- Probably not
Single person - w/ children - Definitely need life insurance
Married - NO children - Depends ... can I maintain a standard
of living if spouse passes?
Married w/ children - both spouses work - Absolutely need
life insurance on breadwinner & potentially on lower earner
Married w/ children - one spouse works - Certainly need it on
working spouse.
premature death - <<<Answers>>>The death of a family head
with outstanding unfulfilled financial obligations.
Breadwinner makes $$$$. Costs: Possible reduction in
standard of living and future earnings are lost forever
Additional expenses incurred:
, RMIN 4000 FINAL EXAM (2024-2025) BROWN
UNIVERSITY
Funeral expenses
Uninsured medical bills
Higher childcare costs
Estate settlement expenses
Outstanding debts
Human Life Value Approach - <<<Answers>>>Present value
of the family's share of the deceased breadwinner's future
earnings
Process:
Estimate the individual's average annual earnings over his/her
productive lifetime
Deduct taxes and self-maintenance costs
Using a discount rate, determine the present value of the
family's share of the earnings for the number of years until
retirement
EXAMPLE:
Phil, age 27, is married and has three children. He plans to
retire in 40 years
Earns $50k/year
Spends $20k on taxes & personal needs
Using a 5% discount rate, the remaining $30k/year for 40
years has a present value of $514,800
, RMIN 4000 FINAL EXAM (2024-2025) BROWN
UNIVERSITY
Needs Appraoch - <<<Answers>>>How much money is
going to be needed if this person dies? amount needed
depends on the financial needs that must be met if the family
head should die.
Calculation should consider:
Estate clearing fund (burial, medical bills, debts, attorney's
fees, taxes)
One or two year readjustment period (same income as prior to
death)- Gives time for family to adjust standard of living
Dependency period for children (until youngest is at least 18)-
How much money do you need for your children who are
dependent on you?
Income for surviving spouse (if needed)
Special needs (college education, mortgage, emergencies)
Retirement needs
EXAMPLE: Cash needs + Income needs + Special needs -
Total assets (savings, mutual funds, IRA, other life insurance)
= Additional life insurance needed
Term Insurance - <<<Answers>>>Can be provided for 5, 10,
15, 20, 25, or 30 year periods (terms). Premiums paid during
the term are level, but increase if renewed. Most policies are
renewable, meaning the policy can be renewed without
evidence of insurability. Most policies are convertible,
meaning the term policy can be exchanged for a cash-value
policy without evidence of insurability. Appropriate when the
, RMIN 4000 FINAL EXAM (2024-2025) BROWN
UNIVERSITY
amount of income that can be spent on life insurance is
LIMITED, need for protection is temporary,
Insured wants to guarantee future insurability.
Limitations: Premiums increase with age at an increasing rate
& eventually reach prohibitive levels, Inappropriate if you
wish to save money for a specific need.
whole life insurance benefits - <<<Answers>>>Cash-Value
policy that provides lifetime protection
Stated amount is paid to a designated beneficiary when the
insured dies, regardless of when the death occurs
Can get cash-value back. Maintain coverage for your entire
life (vs. a certain time period with term)
Accumulate savings (cash-value). BAD PART IS HIGH
PREMIUMS.
ordinary whole life - <<<Answers>>>Level-premium policy
that accumulates cash values and provides lifetime protection
to age 121. Premiums are payable throughout the lifetime of
the insured
Accumulates a cash-surrender value, which is the amount paid
to a policyholder who surrenders the policy early
Policyholder has the right to borrow the cash value
PAY SAME AMOUNT EVERY YEAR
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