P is looking to purchase a life insurance policy that will pay a stated monthly income to his beneficiaries for 20 years after he dies and a lump sum of $20,000 at the end of that 20-year period. What type of policy should P Purchase? a) Whole Life Insurance b) Term Life Insurance c) Universal Life Insurance d) Annuity
The Correct Answer and Explanation is:
Correct Answer: d) Annuity
Explanation:
The type of policy P needs is an annuity because it aligns with his objective of providing a regular monthly income to his beneficiaries for 20 years after his death and a lump sum payment of $20,000 at the end of the 20-year period.
An annuity is a financial product that can be tailored to pay a stream of income for a specific time, such as 20 years in this scenario. Additionally, it can include a feature for a lump-sum payment at the end of the term. Here’s how each option compares:
1. Whole Life Insurance
- Whole life insurance provides coverage for the insured’s entire life, combining a death benefit with a savings component that builds cash value over time. However, it typically does not offer structured payouts like monthly income or a terminal lump sum. The primary purpose is lifelong coverage, not periodic income streams.
2. Term Life Insurance
- Term life insurance provides coverage for a specified period and pays a single lump sum upon the insured’s death if it occurs during the term. It does not offer options for regular monthly income or a lump sum at the end of a defined period.
3. Universal Life Insurance
- Universal life insurance offers flexible premiums and death benefits with a cash value component. While it allows some customization, it is not inherently designed for structured payouts like regular monthly income or lump sums at the end of a fixed term.
4. Annuity (Correct Option)
- An annuity provides a series of payments over a defined period. A life with period certain annuity ensures payments to beneficiaries for 20 years, coupled with a lump-sum benefit at the end of the term. This feature aligns precisely with P’s requirements, making it the appropriate choice.
Thus, an annuity meets P’s goals of providing financial stability to his beneficiaries through income and a lump-sum payout.