T19-1

REVIEW EXERCISES | CHAPTER 19SECTION I

Calculate the annual, semiannual, quarterly, and monthly premiums for the following life insurance policies:
Type of Policy Whole Life 10-Year Term 20-Year Endowment 20-Payment Life 5-Year Term Whole Life 20-Payment Life 20-Year Endowment $ 79.50 53.50 842.00 4,223.25 270.00 967.60 1,125.25 11,510.00 $ 41.34 27.82 437.84 2,196.09 140.40 503.15 585.13 5,985.20 Annual Premium $ Semiannual Premium Quarterly Premium 20.67 13.91 218.92 1,098.05 70.20 251.58 292.57 2,992.60 Monthly Premium $ 7.16 4.82 75.78 380.09 24.30 87.08 101.27 1,035.90

Face Value of Policy

Sex and Age of Insured

1. 2. 3. 4. 5. 6. 7. 8.

5,000 10,000 25,000 75,000 100,000 40,000 35,000 250,000

Male24 Female35 Male19 Male50 Female29 Male35 Male30 Female45

1. Face value

Male-24 5,000 55 Number of 1,000s 5 1,000 Whole life annual premium 5 $15.90 3 5 5 $79.50 Semiannual premium 5 79.50 3 .52 5 $41.34 Quarterly premium 5 79.50 3 .26 5 $20.67 Monthly premium 5 79.50 3 .09 5 $7.16

$5,000

T19-2
REVIEW EXERCISES | CHAPTER 19SECTION I

Calculate the value of the nonforfeiture options for the following life insurance policies:

Face Value of Policy Type of Policy Whole Life 20-Year Endowment Whole Life 20-Payment Life $ 4,900.00 46,500.00 5,495.00 2,900.00 $ 9,300.00 95,250.00 10,990.00 9,000.00 10 7 15 3

Years in Force

Cash Value

Reduced Paid-Up Insurance

Extended Term Years Days 17 26 21 4 54 310 218 217

9. 10. 11. 12.

$ 50,000 250,000 35,000 100,000

9. Nonforfeiture options: Face value $50,000 10 years in force, Whole life Number of 1,000s 5 50 Option 1, Cash value $ 98.00 per 1,000 5 98.00 3 50 5 $4,900.00 Option 2, Reduced, Paid up $ 186.00 per 1,000 5 186.00 3 50 5 $9,300.00 ins. for life Option 3, Extended terrm 17 years, 54 days

T19-3

REVIEW EXERCISES | CHAPTER 19SECTION I

13. Herbert Love is 35 years old and is interested in purchasing a 20-year endowment insurance policy with a face value of $120,000. a. Calculate the annual premium for this policy. Face value 5 $120,000, 20-year endowment, M-35 120,000 Number of 1,000s 5 5 120 1,000 Annual premium 5 43.67 3 120 5 $5,240.40 b. Calculate the semiannual premium. Semiannual premium 5 $5,240.40 3 .52 5 $2,725.01 14. Jenny Chao, age 27, wants to purchase a 5-year term insurance policy with a face value of $25,000. As her insurance agent, answer the following: a. What is the annual premium for this policy? Face value 5 $25,000, 5-year term, F-27 Number of 1,000s 5 25 Annual premium 5 $2.58 3 25 5 $64.50 b. What is the monthly premium? Monthly premium 5 64.50 3 .09 5 $5.81 c. How much more will Jenny pay per year if she chooses monthly payments? Total payments 5 5.81 3 12 5 69.72 69.72 2 64.50 If paid monthly $5.22 More will be paid

T19-4
REVIEW EXERCISES | CHAPTER 19SECTION I

15. Libby Young purchased a $75,000, 20-payment life insurance policy when she was 20 years old. She is now 30 years old and wants to investigate her nonforfeiture options. As her insurance agent, calculate the value of Libbys three options.

Face value 5 $75,000, 10 years in force, 20 payment, life Option 1 5 191.00 3 75 5 $14,325 Cash value Option 2 5 496.00 3 75 5 $37,200 Reduced paid-up insurance Option 3 5 30 years 206 Days extended term

16. Michael McDonald is evaluating his life insurance needs. His familys total living expenses are $37,500 per year. Vickie, his wife, earns $14,900 per year in salary and receives another $3,500 annually in disability benefits from an insurance settlement for an accident. If the prevailing interest rate is 7 1%, how much life insurance should 2 Michael purchase to cover his dependents income shortfall? Round to nearest $1,000. 5 $37,500 5 $14,900 1 3,500 5 $18,400 5 $37,500 2 18,400 5 $19,100 19,100 5 5 $254,666.67 5 $255,000 Insurance needed .075

Total living expenses Total income Income shortfall Income shortfall Prevailing interest rate

T19-5

BUSINESS DECISION | CHAPTER 19SECTION I

THE CONSULTATION
17. Stacy Spencer, a single mother, is 20 years old. She has called on you for an insurance consultation. Her objective is to purchase life insurance protection for the next 10 years while her children are growing up. Stacy tells you that she can afford about $250 per year for insurance premiums. You have suggested either a 10-year term policy or a whole life policy. a. Rounded to the nearest thousand, how much insurance coverage can Stacy purchase under each policy? Hint: Divide her annual premium allowance by the rate per $1,000 for each policy. 10-year term policy rate 5 $4.20 Number of 1,000s 5 250 5 59.5 5 60 4.20 Whole life policy rate 5 $12.09 Number of 1,000s 5 250 5 20.6 5 21 12.09

She can purchase a $60,000 10-year term policy. She can purchase a $21,000 whole life policy. b. If she should die in the next 10 years, how much more will her children receive under the term insurance? Term face value 5 $60,000 Whole life face value 5 2$21,000 $39,000 Under term policy, $39,000 more would be paid. c. If she should live beyond the 10th year, what are her nonforfeiture options with the whole life policy? Nonforfeiture options of whole life policy in force 10 years Option 1 5 $98.0 3 21 5 $2,058 Cash value Option 2 5 $186.00 3 21 5 $3,906 Reduced paid-up insurance Option 3 5 17 years, 54 days Extended term insurance

T19-6
REVIEW EXERCISES | CHAPTER 19SECTION II

Calculate the building, contents, and total property insurance premiums for the following policies:

Area Structural Rating Class $ 88,000 124,000 215,000 518,000 309,000 $ 668.80 533.20 451.50 7,200.20 2,132.10 $21,000 35,000 29,000 90,000 57,000 $ 174.30 178.50 69.60 1,287.00 438.90 Area 4, Class B

Building Value

Building Premium

Contents Value

Contents Premium

Total Premium $ 843.10 711.70 521.10 8,487.20 2,571.00

1. 2. 3. 4. 5.

4 2 1 5 3

B C A D C

1. Building value $88,000, Contents value $21,000 88,000 Building, number of 100s 5 880 100 21,000 Contents, number of 100s 5 210 100

Building

.76 3 880 5 $668.80 Annual premium

Contents

.83 3 210 5 $174.30 Annual premium

Total annual premium 5 668.80 1 174.30 5 $843.10

T19-7
REVIEW EXERCISES | CHAPTER 19SECTION II

Calculate the short-term premium and refund for each of the following policies:

Annual Premium Premium $ 112.50 89.60 1,088.00 134.17 50.40 3 months 20 days 9 months 5 months 5 days insurance company insured insured insurance company insured

Canceled After

Canceled By

Short-Term Refund $ 337.50 470.40 192.00 187.83 579.60

6. 7. 8. 9. 10.

$ 450 560 1,280 322 630

6. Annual premium $450 after 3 months by insurance company 3 5 $112.50 Premium 5 $450.00 3 12 Refund due 5 $450.00 2 112.50 5 $337.50

7. Annual premium $560 after 20 days by insured Short-rate premium 5 $560 3 16% 5 $ 89.60 Refund due 5 $560.00 2 89.60 5 $470.40

T19-8
REVIEW EXERCISES | CHAPTER 19SECTION II

Calculate the amount to be paid by the insurance company for each of the following claims:

Replacement Value of Building Face Value of Policy $160,000 300,000 50,000 75,000 300,000 80 90 70 80 80 $ 75,000 125,000 37,000 50,000 200,000 Coinsurance Clause (%) Amount of Loss

Amount of Loss Insurance Company Will Pay $ 75,000.00 119,047.62 37,000.00 37,500.00 150,000.00

11. 12. 13. 14. 15.

$200,000 350,000 70,000 125,000 500,000

11.

Replacement cost 5 $200,000 Face value 5 $160,000 Coinsurance 5 80% Loss 5 $75,000 Insurance required 5 200,000 3 80% 5 $160,000 160,000 Amount of loss paid 5 3 75,000 160,000 5 $75,000

T19-9

REVIEW EXERCISES | CHAPTER 19SECTION I I

16. You are the insurance agent for Far East Furniture Manufacturing, Inc. The owner, Michael Chang, would like you to give him a quote on the total annual premium for property insurance on a new production facility in the amount of $1,640,000 and equipment and contents valued at $955,000. The building is structural classification B and area rating 4. $1,640,000 5 16,400 Building, number of 100s 5 100 $955,000 5 9,550 Contents, number of 100s 5 100 Building premium 5 16,400 3 .76 5 $12,464 Contents premium 5 9,550 3 .83 5 $7,926.50 Total annual premium 5 12,464.00 1 7,926.50 5 $20,390.50 17. A property insurance policy has an annual premium of $1,350. What is the shortrate refund if the policy is canceled by the insured after 9 months? Annual premium 5 $1,350.00, canceled by insured Short-rate premium 5 1,350.00 3 85% 5 $1,147.50 Short-rate refund 5 1,350.00 2 1,147.50 5 $ 202.50 18. Drake Enterprises has a property insurance policy with an annual premium of $1,320. In recent months, Drake has filed four different claims against the policy: a fire, two burglaries, and a vandalism incident. The insurance company has elected to cancel the policy, which has been in effect for 310 days. What is the regular refund due to Drake? Annual premium 5 $1,320, 310 days in force, canceled by insurance company 310 5 1,121.10 Regular refund 5 1,320 3 365 1,320.00 2 1,121.10 5 $198.90

T19-10
REVIEW EXERCISES | CHAPTER 19SECTION II

19. Presto Electronics had multiple carrier fire insurance coverage in the amount of $500,000, as follows: Aetna$300,000 policy State Farm$125,000 policy Liberty Mutual$ 75,000 policy $500,000 total coverage

Assuming that all coinsurance clause stipulations have been met, how much would each carrier be responsible for in the event of a $95,000 fire? State Farm: $23,750 Liberty Mutual: $14,250

Aetna: $57,000

300,000 5 60% .6 3 95,000 5 $57,000 500,000 125,000 5 25% .25 3 95,000 5 $23,750 State Farm: 500,000 95,000 5 15% .15 3 95,000 5 $14,250 Liberty Mutual: 500,000

Aetna:

T19-11

BUSINESS DECISION | CHAPTER 19SECTION I I

BUSINESS INTERRUPTION INSURANCE

20. As the owner of a successful business, you have just purchased an additional type of property insurance coverage known as business interruption insurance. This insurance protects the profits that a company would have earned had there been no problem. Business interruption insurance covers damages caused by all types of perils such as fires, tornadoes, hurricanes, lightning, or any other disaster except floods and earthquakes. This insurance pays for economic losses incurred when business operations suddenly cease. These include loss of income due to the interruption and additional expenses incurred such as leases; relocation to temporary facilities; overtime to keep up with production demands; recompiling of business, financial and legal records; and even the salaries of key employees. Your coverage provides insurance reimbursement for 80% of any losses. Your company pays the other 20%. The annual premium is 2% of the income and extra expenses that you insure. a. If you have purchased coverage amounting to $20,000 per month, what is the amount of your annual premium? 20,000 3 12 5 $240,000 annual coverage 240,000 3 .02 5 $4,800 annual premium b. If a tornado put your company out of business for 5 1 months, what would be the 2 amount of the insurance reimbursement for your economic loss? 20,000 3 5.5 5 $110,000 total amount of loss 110,000 3 .8 5 $88,000 insurance reimbursement

T19-12
REVIEW EXERCISES | CHAPTER 19SECTION III

As an insurance agent, calculate the annual premium for the following clients:
Bodily Injury Full Full Full 50/100 10/20 25/50 100/300 50/100 15/30 10/20 100/300 Full 25 10 5 25 100 50 10 100 J R U C H M Q Z 3 1 5 4 2 3 6 1 $100 Coverage Coverage $100 Coverage $100 $100 Coverage $250 500 250 250 500 250 250 500 Property Damage Model Class Vehicle Age Comprehensive Collision Deductible Deductible Rating Factor None 1.5 3.0 None 1.7 2.5 3.9 None Annual Premium $ 343.00 456.00 1,125.00 330.00 625.60 822.50 1,146.60 444.00

Name 4 2 1 3 2 4 1 3

Territory

Driver Class

1. 2. 3. 4. 5. 6. 7. 8.

Rosen Maples Lopez Zahn Nadler Maui Hale Coll

2 1 3 2 4 1 2 3

T19-13
REVIEW EXERCISES | CHAPTER 19SECTION III

9. Shaun Taylor wants to purchase an automobile insurance policy with bodily injury and property damage coverage in the amounts of 50/100/50. In addition, he wants collision coverage with $250 deductible and comprehensive with no deductible. Shaun is in driver classification 4 and lives in territory 3. His vehicle, a Mercedes 190S, is in model class B and is 1 year old. Shaun has had two accidents and one ticket in the past 12 months and is therefore considered to be a high risk. Consequently, the insurance company has assigned a rating factor of 4.0 to his policy. As his automobile insurance agent, calculate the total annual premium for Shauns policy. $106.00 85.00 95.00 67.00 353.00 Rating factor 4.0 3 353.00 Total annual premium 5 $1,412.00

Bodily injury Property damage Collision Comprehensive

10. Howard Marshalls Corvette was hit by a palm tree during a hurricane. The damage was estimated at $1,544. If Howard carried $250 deductible collision and $100 deductible comprehensive, how much of the damages does the insurance company have to pay?

Total damage $1,544.00 2 100.00 Less comprehensive deductible Insurance company responsibility 5 $1,444.00

T19-14

REVIEW EXERCISES | CHAPTER 19SECTION I I I

11. Len Hawkins has motor vehicle liability insurance in the amount of 50/100/50 and also carries $250 deductible collision coverage and full-coverage comprehensive. Recently, he was at fault in an accident in which his camper hit a bus. Five individuals were injured on the bus and were awarded the following settlements by the courts: Hart, $13,500; Black, $11,700; Garner, $4,140; Williams, $57,800; and Morgan, $3,590. The damage to the bus was $12,230, and Lens camper sustained $3,780 in damages. a. How much will the insurance company have to pay and to whom? Insurance Co. Hart $13,500 Black 11,700 Garner 4,140 Williams 50,000 Morgan Bus Camper 3,590 12,230 3,530 $98,690

Liability 50/100/50 Maximum of $50,000 per person Maximum of $100,000 per accident Maximum of $50,000 property Bodily injury (liability) Harts injuries $13,500 Blacks injuries 11,700 Garners injuries 4,140 Williams injuries 57,800 Morgans injuries 3,590

Insurance Insurance Insurance Insurance Insurance

pays pays pays pays pays

all all all 50,000 all

Property damage (liability) Bus damage $12,230 Insurance pays all Collision Lens camper Deductible

$3,780 2 2.50 $3,530

Insurance portion

b. What part of the settlement will be Lens responsibility? Len Williams Deductible $7,800 250 $8,050

T19-15

BUSINESS DECISION | CHAPTER 19SECTION I I I

INSURING THE FLEET

12. The Yellow Cab Company of Statesville is interested in purchasing $250 deductible collision insurance and full-coverage comprehensive insurance to cover its fleet of 10 taxi cabs. As a requirement for the job, all drivers already carry their own liability coverage in the amount of 100/300/100. Statesville is rated as territory 2. Five of the cabs are 4-year-old Checker Towncars, model class Y. Three of them are 2-year-old Chrysler station wagons, model class R. The remaining two are new Buick sedans, in model class C. Because the vehicles are on the road almost 24 hours a day, they are considered to be very high risk and carry a rating factor of 5.2. They are, however, subject to an 18% multivehicle fleet discount. a. As the insurance agent for Yellow Cab, calculate the total annual premium for the fleet. 10 Cabs, Collision $250 deductible, Comprehensive full coverage, Territory 2
Comprehensive Collision

5 Cabs Model Y, 4 years old @101 3 5 5 $505 @111 3 5 5 $555 3 Cabs Model R, 2 years old @ 83 3 3 5 $249 @104 3 3 5 $312 2 Cabs Model C, 0 years old @ 63 3 2 5 $126 @ 89 3 2 5 $178 Total annual premium 5 505 1 555 1 249 1 312 1 126 1 178 5 $1,925.00 1,925.00 3 5.2 5 10,010.00 3 82% 5 $8,208.20 b. When the owner saw your rate quote, he exclaimed, Too expensive! How can I save some money on this insurance? At that point, you suggested changing the coverage to $500 deductible collision and $100 deductible comprehensive. How much can you save Yellow Cab by using the new coverage? 10 Cabs, Collision $500 deductible, Comprehensive $100 deductible, Territory 2
Comprehensive Collision

5 Cabs Model Y, 4 years old @ 99 3 5 5 $495 @107 3 5 5 $535 3 Cabs Model R, 2 years old @ 79 3 3 5 $237 @101 3 3 5 $303 2 Cabs Model C, 0 years old @ 59 3 2 5 $118 @ 81 3 2 5 $162 Total annual premium 5 495 1 535 1 237 1 303 1 162 1 118 5 $1,850.00 1,850.00 3 5.2 5 9,620.00 3 82% 5 $7,888.40 8,208.20 2 7,888.40 5 $319.80 Savings