Life insurance questions?
Our class just read “A Raisin in the Sun”. For extra credit, our teacher asked us these questions:
-What is the equivalent (approximately) value of a $10,000 life insurance policy today (story takes place in the 1950’s)?
-What formula is used to determine how much life insurance a person should have?
- What’s the difference between term and whole life insurance?
Esther
November 22nd, 2008 at 6:56 AM
Charlotte
A. Hard to say, but I presumed an inflation rate of 2.5% for 55 years. The purchasing power of a $10,000 policy purchased in 1950 would be about $2500 today. Note: coverage does not increase unless you purchase a type of policy that reinvests dividends into the policy.
There’s no formula that I’m aware of. It should be based upon your living standards and how long you want your beneficiary to maintain that standard before having to get a job.
Term: A fixed amount of coverage for a fixed period of time for a fixed premium. When the time runs out, you have no insurance. You can renew the policy at a probably cost prohibitive premium (because you are older and may have picked up some bad habits - smoking & drinking & bungee jumping & flying). This policy does not accumulate a cash surrender value. It is usually a lower premium for the same value of coverage.
Whole Life (and other variations): Perpetual coverage forever as long as you continue to make payments. Premiums are higher. Builds cash value that you can borrow against. If you don’t pay it back, the balance is deducted from the beneficiary’s payout. Some versions allow you to invest the cash value into a higher beneficiary payout instead of accumulating cash value.
Final note: Insurance is a gamble. You are betting against the insurance company that you are going to collect. The insurance company is betting against you that you are not going to collect. In either case, you lose. If you die, your beneficiary collects (lot of good that does you). If you live, no one collects.
November 24th, 2008 at 5:10 PM
Lucy
A)
B) There is no formula to determine how much a person “should” have. It all depends on what the person wants to provide. Most people at least buy enough to cover their own funeral costs.
C) Term is just like it sounds, it’s for a specific term. Think of it like an auto policy. You pay the premiums for a set period of time. If something happens (car accident/death), the policy will pay. If nothing happens, you get nothing. Term is sold in increments of 1 yr, 5 year, 10, 20, etc.
Whole Life is also just what it sounds like. You purchase a policy right now, and then pay premiums until you die. As long as you continue to pay the premiums, it will cover you until you die, or reach age 100 (at which time you get the full amount the policy would pay)
November 27th, 2008 at 5:42 AM
Elaine
Term life insurance is easy. It only pays if you die. Like car insurance you use it or you lose your money. And, hopefully you do not use it.
November 29th, 2008 at 11:15 AM
Julio
1) $50-$75,000 depending on whether you’re using 3 or 4% inflation
2) 25 X income would completely replace that persons income at 4% income and not spending principal
3) Term is for a shortened period of time and whole life lasts to and past age 100.