T19-

1R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

Calc

ula

te t

he a

nn

ual, s

em

ian

nu

al, q

uart

erl

y,

an

d m

on

thly

pre

miu

ms f

or

the f

ollo

win

g

life

in

su

ran

ce p

olicie

s:

Fac

e V

alue

Sex

and

Age

Ann

ual

Sem

iann

ual

Qua

rter

lyM

onth

lyof

Pol

icy

of I

nsur

edT

ype

of P

olic

yP

rem

ium

Pre

miu

mP

rem

ium

Pre

miu

m

1.$

5,00

0M

ale—

24W

hole

Lif

e

2.10

,000

Fem

ale—

3510

-Yea

r T

erm

3.25

,000

Mal

e—19

20-Y

ear

End

owm

ent

4.75

,000

Mal

e—50

20-P

aym

ent

Lif

e

5.10

0,00

0F

emal

e—29

5-Y

ear

Ter

m

6.40

,000

Mal

e—35

Who

le L

ife

7.35

,000

Mal

e—30

20-P

aym

ent

Lif

e

8.25

0,00

0F

emal

e—45

20-Y

ear

End

owm

ent

1,03

5.90

2,99

2.60

5,98

5.20

11,5

10.0

0

101.

2729

2.57

585.

131,

125.

25

87.0

825

1.58

503.

1596

7.60

24.3

070

.20

140.

4027

0.00

380.

091,

098.

052,

196.

094,

223.

25

75.7

821

8.92

437.

8484

2.00

4.82

13.9

127

.82

53.5

0

$7.

16$

20.6

7$

41.3

4$

79.5

0

1.F

ace

valu

e$5

,000

Mal

e-24

Who

le li

fe a

nnua

l pre

miu

m5

$15.

903

5

5

$79.

50

Sem

iann

ual p

rem

ium

5 7

9.50

3.5

2

5

$41.

34

Qua

rter

ly p

rem

ium

5 7

9.50

3.2

6

5$2

0.67

M

onth

ly p

rem

ium

5 7

9.50

3.0

9

5$7

.16

Num

ber

of 1

,000

s5

5,00

01,

000

55

T19-

2R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

Calc

ula

te t

he v

alu

e o

f th

e n

on

forf

eit

ure

op

tio

ns f

or

the f

ollo

win

g l

ife i

nsu

ran

ce p

olicie

s:

Red

uced

Fac

e V

alue

Yea

rs in

Cas

hP

aid-

Up

Ext

ende

d T

erm

of P

olic

yF

orce

Typ

e of

Pol

icy

Val

ueIn

sura

nce

Yea

rsD

ays

9.$

50,0

0010

Who

le L

ife

10.

250,

000

720

-Yea

r E

ndow

men

t

11.

35,0

0015

Who

le L

ife

12.

100,

000

320

-Pay

men

t L

ife

217

49,

000.

002,

900.

00

218

2110

,990

.00

5,49

5.00

310

2695

,250

.00

46,5

00.0

0

5417

$9,

300.

00$

4,90

0.00

9.N

onfo

rfei

ture

opt

ions

:F

ace

valu

e$5

0,00

010

yea

rs i

n fo

rce,

Who

le l

ife

Num

ber

of 1

,000

s 5

50O

ptio

n 1,

Cas

h va

lue

$98

.00

per

1,00

05

98.0

0 3

505

Opt

ion

2, R

educ

ed, P

aid

up$

186.

00 p

er 1

,000

518

6.00

350

5

Opt

ion

3, E

xten

ded

terr

m17

yea

rs, 5

4 da

ys$9

,300

.00

ins.

for

life

$4,9

00.0

0

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

Annual premium 5 43.67 3 1205

b. Calculate the semiannual premium.

Semiannual premium 5 $5,240.40 3 .52 5

14. Jenny Chao, age 27, wants to purchase a 5-year term insurance policy with a facevalue 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-27Number of 1,000s 5 25Annual premium 5 $2.58 3 25

5

b. What is the monthly premium?

Monthly premium 5 64.50 3 .095

c. How much more will Jenny pay per year if she chooses monthly payments?

Total payments 5 5.81 3 12 5 69.7269.72 2 64.50

If paid monthly More will be paid$5.22

$5.81

$64.50

$2,725.01

$5,240.40

Number of 1,000s 5120,000

1,0005 120

T19-3 REVIEW EXERCISES | CHAPTER 19—SECTION I

T19-

4R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

15.

Lib

by Y

oung

pur

chas

ed a

$75

,000

, 20-

paym

ent

life

insu

ranc

e po

licy

whe

n sh

e w

as 2

0ye

ars

old.

She

is

now

30

year

s ol

d an

d w

ants

to

inve

stig

ate

her

nonf

orfe

itur

e op

-ti

ons.

As

her

insu

ranc

e ag

ent,

calc

ulat

e th

e va

lue

of L

ibby

’s t

hree

opt

ions

.

Fac

e va

lue

5$7

5,00

0, 1

0 ye

ars

in f

orce

, 20

paym

ent,

life

Opt

ion

35

exte

nded

ter

m

16.

Mic

hael

McD

onal

d is

eva

luat

ing

his

life

insu

ranc

e ne

eds.

His

fam

ily’s

tot

al l

ivin

gex

pens

es a

re $

37,5

00 p

er y

ear.

Vic

kie,

his

wif

e, e

arns

$14

,900

per

yea

r in

sal

ary

and

rece

ives

ano

ther

$3,

500

annu

ally

in

disa

bilit

y be

nefi

ts f

rom

an

insu

ranc

e se

ttle

men

tfo

r an

acc

iden

t. If

the

pre

vaili

ng in

tere

st r

ate

is 7

%, h

ow m

uch

life

insu

ranc

e sh

ould

Mic

hael

pur

chas

e to

cov

er h

is d

epen

dent

s’ in

com

e sh

ortf

all?

Rou

nd t

o ne

ares

t $1

,000

.

Inco

me

shor

tfal

lP

reva

iling

inte

rest

rat

e5

19,1

00.0

755

$254

,666

.67

5$2

55,0

00 I

nsur

ance

nee

ded

5$3

7,50

05

$14,

900

13,

500

5$1

8,40

05

$37,

500

218

,400

5$1

9,10

0

Tot

al li

ving

exp

ense

sT

otal

inco

me

Inco

me

shor

tfal

l

1 2

30 y

ears

206

Day

s

519

1.00

375

5$1

4,32

5 C

ash

valu

e5

496.

003

755

$37,

200

Red

uced

pai

d-up

insu

ranc

e

Opt

ion

1

Opt

ion

2

THE CONSULTATION

17. Stacy Spencer, a single mother, is 20 years old. She has called on you for an insur-ance consultation. Her objective is to purchase life insurance protection for the next10 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 termpolicy or a whole life policy.

a. Rounded to the nearest thousand, how much insurance coverage can Stacy pur-chase under each policy? Hint: Divide her annual premium allowance by the rateper $1,000 for each policy.

10-year term policy rate 5 $4.20 Whole life policy rate 5 $12.09

She can purchase a 10-year term policy. She can purchase a whole life policy.$21,000$60,000

Number of 1,000s 5250

12.095 20.6 5 21Number of 1,000s 5

2504.20

5 59.5 5 60

b. If she should die in the next 10 years, how much more will her children receiveunder the term insurance?

Term face value 5 $60,000Whole life face value 5

$39,000Under term policy, more would be paid.

c. If she should live beyond the 10th year, what are her nonforfeiture options withthe whole life policy?

Nonforfeiture options of whole life policy in force 10 years$98.0 3 21 5 $2,058 Cash value$186.00 3 21 5 $3,906 Reduced paid-up insurance17 years, 54 days Extended term insurance

Option 1 5

Option 2 5

Option 3 5

$39,000

2$21,000

T19-5 BUSINESS DECISION | CHAPTER 19—SECTION I

T19-

6R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

I

Calc

ula

te t

he b

uild

ing

, co

nte

nts

, an

d t

ota

l p

rop

ert

y i

nsu

ran

ce p

rem

ium

s f

or

the f

ol-

low

ing

po

licie

s:

Are

aSt

ruct

ural

Bui

ldin

gB

uild

ing

Con

tent

sC

onte

nts

Tot

alR

atin

gC

lass

Val

ueP

rem

ium

Val

ueP

rem

ium

Pre

miu

m

1.4

B$

88,0

00$2

1,00

0

2.2

C12

4,00

035

,000

3.1

A21

5,00

029

,000

4.5

D51

8,00

090

,000

5.3

C30

9,00

057

,000

2,57

1.00

438.

902,

132.

10

8,48

7.20

1,28

7.00

7,20

0.20

521.

1069

.60

451.

50

711.

7017

8.50

533.

20

$84

3.10

$17

4.30

$66

8.80

1.B

uild

ing

valu

e $8

8,00

0, C

onte

nts

valu

e $2

1,00

0A

rea

4, C

lass

B

Bui

ldin

g.7

6 3

880

5A

nnua

l pr

emiu

m

Con

tent

s.8

3 3

210

5A

nnua

l pr

emiu

m

Tot

al a

nnua

l pr

emiu

m 5

668.

80 1

174.

30 5

$843

.10

$174

.30

$668

.80

Con

tent

s, n

umbe

r of

100

s 21

,000

100

521

0

Bui

ldin

g, n

umbe

r of

100

s 88

,000

100

588

0

T19-

7R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

I

Ann

ual

Can

cele

dC

ance

led

Shor

t-T

erm

Pre

miu

mA

fter

By

Pre

miu

mR

efun

d

6.$

450

3 m

onth

sin

sura

nce

com

pany

7.56

020

day

sin

sure

d

8.1,

280

9 m

onth

sin

sure

d

9.32

25

mon

ths

insu

ranc

e co

mpa

ny

10.

630

5 da

ysin

sure

d57

9.60

50.4

0

187.

8313

4.17

192.

001,

088.

00

470.

4089

.60

$33

7.50

$11

2.50

Calc

ula

te t

he s

ho

rt-t

erm

pre

miu

m a

nd

refu

nd

fo

r each

of

the f

ollo

win

g p

olicie

s:

6.A

nnua

l pr

emiu

m $

450

afte

r 3

mon

ths

by

insu

ranc

e co

mpa

ny

Ref

und

due

5$4

50.0

0 2

112.

505

7.A

nnua

l pr

emiu

m $

560

afte

r 20

day

s by

ins

ured

Shor

t-ra

te p

rem

ium

5$5

603

16%

5

$ 89

.60

Ref

und

due

5

$560

.00

289

.60

5

$470

.40

$337

.50

Pre

miu

m5

$450

.00

33 12

5$1

12.5

0

T19-

8R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

I

Calc

ula

te t

he a

mo

un

t to

be p

aid

by t

he i

nsu

ran

ce c

om

pan

y f

or

each

of

the f

ollo

win

g

cla

ims:

Rep

lace

men

tA

mou

nt o

f L

oss

Val

ue o

fF

ace

Val

ueC

oins

uran

ceA

mou

ntIn

sura

nce

Com

pany

Bui

ldin

gof

Pol

icy

Cla

use

(%)

of L

oss

Will

Pay

11.

$200

,000

$160

,000

80$

75,0

00

12.

350,

000

300,

000

9012

5,00

0

13.

70,0

0050

,000

7037

,000

14.

125,

000

75,0

0080

50,0

00

15.

500,

000

300,

000

8020

0,00

015

0,00

0.00

37,5

00.0

0

37,0

00.0

0

119,

047.

62

$75

,000

.00

11.

Rep

lace

men

t co

st5

$200

,000

Fac

e va

lue

5$1

60,0

00C

oins

uran

ce5

80%

Los

s5

$75,

000

Insu

ranc

e re

quir

ed

520

0,00

03

80%

5$1

60,0

00

Am

ount

of l

oss

paid

5

160,

000

160,

000

375

,000

5$7

5,00

0

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 forproperty insurance on a new production facility in the amount of $1,640,000 andequipment and contents valued at $955,000. The building is structural classificationB and area rating 4.

Building premium 5 16,400 3 .76 5 $12,464Contents premium 5 9,550 3 .83 5 $7,926.50Total annual premium 5 12,464.00 1 7,926.50

5

17. A property insurance policy has an annual premium of $1,350. What is the short-rate refund if the policy is canceled by the insured after 9 months?

Annual premium 5 $1,350.00, canceled by insuredShort-rate premium 5 1,350.00 3 85%

5 $1,147.50Short-rate refund 5 1,350.00 2 1,147.50

5

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: afire, two burglaries, and a vandalism incident. The insurance company has elected tocancel the policy, which has been in effect for 310 days. What is the regular refunddue to Drake?

Annual premium 5 $1,320, 310 days in force, canceled by insurance company

1,320.00 2 1,121.10 5 $198.90

Regular refund 5 1,320 3310365

5 1,121.10

$202.50

$20,390.50

Contents, number of 100s 5$955,000

1005 9,550

Building, number of 100s 5$1,640,000

1005 16,400

T19-9 REVIEW EXERCISES | CHAPTER 19—SECTION II

T19-

10R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

I

19.

Pre

sto

Ele

ctro

nics

had

mul

tipl

e ca

rrie

r fi

re i

nsur

ance

cov

erag

e in

the

am

ount

of

$500

,000

, as

follo

ws:

Ass

umin

g th

at a

ll co

insu

ranc

e cl

ause

sti

pula

tion

s ha

ve b

een

met

, how

muc

h w

ould

each

car

rier

be

resp

onsi

ble

for

in t

he e

vent

of

a $9

5,00

0 fi

re?

Aet

na: $

57,0

00St

ate

Far

m: $

23,7

50L

iber

ty M

utua

l: $1

4,25

0

Aet

na—

$300

,000

pol

icy

Stat

e F

arm

—$1

25,0

00 p

olic

yL

iber

ty M

utua

l—$

75,0

00 p

olic

y

$50

0,00

0 to

tal c

over

age

Aet

na:

300,

000

500,

000

560

%

.63

95,0

005

$57,

000

Stat

e F

arm

: 125,

000

500,

000

525

%

.25

395

,000

5$2

3,75

0

Lib

erty

Mut

ual:

95,0

0050

0,00

05

15%

.1

53

95,0

005

$14,

250

BUSINESS INTERRUPTION INSURANCE

20. As the owner of a successful business, you have just purchased an additional type ofproperty insurance coverage known as business interruption insurance. This insuranceprotects the profits that a company would have earned had there been no problem.Business interruption insurance covers damages caused by all types of perils suchas fires, tornadoes, hurricanes, lightning, or any other disaster except floods andearthquakes.

This insurance pays for “economic” losses incurred when business operationssuddenly cease. These include loss of income due to the interruption and additionalexpenses incurred such as leases; relocation to temporary facilities; overtime to keepup 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. Yourcompany pays the other 20%. The annual premium is 2% of the income and extraexpenses that you insure.

a. If you have purchased coverage amounting to $20,000 per month, what is theamount of your annual premium?

20,000 3 12 5 $240,000 annual coverage240,000 3 .02 5

b. If a tornado put your company out of business for months, what would be theamount of the insurance reimbursement for your economic loss?

20,000 3 5.5 5 $110,000 total amount of loss110,000 3 .8 5 insurance reimbursement$88,000

5 12

$4,800 annual premium

T19-11 BUSINESS DECISION | CHAPTER 19—SECTION II

T19-

12R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

II

As a

n i

nsu

ran

ce a

gen

t, c

alc

ula

te t

he a

nn

ual

pre

miu

m f

or

the f

ollo

win

g c

lien

ts:

Dri

ver

Bod

ilyP

rope

rty

Mod

elV

ehic

leC

ompr

ehen

sive

Col

lisio

nR

atin

gA

nnua

lN

ame

Ter

rito

ryC

lass

Inju

ryD

amag

eC

lass

Age

Ded

ucti

ble

Ded

ucti

ble

Fac

tor

Pre

miu

m

1.R

osen

24

50/1

0025

J3

$100

$250

Non

e

2.M

aple

s1

210

/20

10R

1F

ull

Cov

erag

e50

01.

5

3.L

opez

31

25/5

05

U5

Ful

l C

over

age

250

3.0

4.Z

ahn

23

100/

300

25C

4$1

0025

0N

one

5.N

adle

r4

250

/100

100

H2

Ful

l C

over

age

500

1.7

6.M

aui

14

15/3

050

M3

$100

250

2.5

7.H

ale

21

10/2

010

Q6

$100

250

3.9

8.C

oll

33

100/

300

100

Z1

Ful

l C

over

age

500

Non

e44

4.00

1,14

6.60

822.

50

625.

60

330.

00

1,12

5.00

456.

00

$34

3.00

T19-

13R

EV

IEW

EX

ER

CIS

ES

|C

HA

PT

ER

19

—S

EC

TIO

N I

II

9.Sh

aun

Tay

lor

wan

ts t

o pu

rcha

se a

n au

tom

obile

insu

ranc

e po

licy

wit

h bo

dily

inju

ry a

ndpr

oper

ty d

amag

e co

vera

ge in

the

am

ount

s of

50/

100/

50. I

n ad

diti

on, h

e w

ants

col

lisio

nco

vera

ge w

ith $

250

dedu

ctib

le a

nd c

ompr

ehen

sive

with

no

dedu

ctib

le. S

haun

is in

dri

ver

clas

sifi

cati

on 4

and

live

s in

ter

rito

ry 3

. His

veh

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11. Len Hawkins has motor vehicle liability insurance in the amount of 50/100/50 andalso 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 individualswere 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 Len’s camper sustained $3,780 in damages.

a. How much will the insurance company have to pay and to whom?

Insurance Co.Hart $13,500 Morgan 3,590Black 11,700 Bus 12,230Garner 4,140 CamperWilliams 50,000 $98,690

3,530

Liability 50/100/50Maximum of $50,000 per personMaximum of $100,000 per accidentMaximum of $50,000 property

Bodily injury (liability)Hart’s injuries $13,500 Insurance pays allBlack’s injuries 11,700 Insurance pays allGarner’s injuries 4,140 Insurance pays allWilliams’ injuries 57,800 Insurance pays 50,000Morgan’s injuries 3,590 Insurance pays all

Property damage (liability)Bus damage $12,230 Insurance pays all

CollisionLen’s camper $3,780Deductible

$3,530 Insurance portion2 2.50

b. What part of the settlement will be Len’s responsibility?

LenWilliams $7,800Deductible

$8,050 250

T19-14 REVIEW EXERCISES | CHAPTER 19—SECTION III

INSURING THE FLEET

12. The Yellow Cab Company of Statesville is interested in purchasing $250 deductiblecollision insurance and full-coverage comprehensive insurance to cover its fleet of 10taxi cabs. As a requirement for the job, all drivers already carry their own liabilitycoverage in the amount of 100/300/100. Statesville is rated as territory 2. Five of thecabs are 4-year-old Checker Towncars, model class Y. Three of them are 2-year-oldChrysler 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, theyare considered to be very high risk and carry a rating factor of 5.2. They are, how-ever, subject to an 18% multivehicle fleet discount.

a. As the insurance agent for Yellow Cab, calculate the total annual premium forthe fleet.

10 Cabs, Collision $250 deductible, Comprehensive full coverage, Territory 2

Comprehensive Collision

Total annual premium 5 505 1 555 1 249 1 312 1 126 1 178 5 $1,925.001,925.00 3 5.2 5 10,010.00 3 82% 5

b. When the owner saw your rate quote, he exclaimed, “Too expensive! How can Isave some money on this insurance?” At that point, you suggested changing thecoverage to $500 deductible collision and $100 deductible comprehensive. Howmuch can you save Yellow Cab by using the new coverage?

10 Cabs, Collision $500 deductible, Comprehensive $100 deductible, Territory 2

Comprehensive Collision

Total annual premium 5 495 1 535 1 237 1 303 1 162 1 118 5 $1,850.001,850.00 3 5.2 5 9,620.00 3 82% 5 $7,888.40

8,208.20 2 7,888.40 5 $319.80 Savings

@107 3 5 5 $535@101 3 3 5 $303@ 81 3 2 5 $162

@ 99 3 5 5 $495@ 79 3 3 5 $237@ 59 3 2 5 $118

5 Cabs Model Y, 4 years old3 Cabs Model R, 2 years old2 Cabs Model C, 0 years old

$8,208.20

@111 3 5 5 $555@104 3 3 5 $312@ 89 3 2 5 $178

@101 3 5 5 $505@ 83 3 3 5 $249@ 63 3 2 5 $126

5 Cabs Model Y, 4 years old3 Cabs Model R, 2 years old2 Cabs Model C, 0 years old

T19-15 BUSINESS DECISION | CHAPTER 19—SECTION III