Robert I. Mehr

Flexible Income Programming

This study develops a process for determining amounts of life insurance required to meet the survivors needs for postdeath income which exceed amounts available from such sources as social security, earnings of the surviving spouse, and personal services. Inflation rates and earnings patterns of the predeath and postdeath periods are considered in the process of dynamic income programming developed in this paper. The amount of life insurance required each year and their premiums over the programs life are generated by a computer. The postdeath income benefits are expressed as a geometrically increasing life annuity. Efforts to preserve a familys financial status following the death of the breadwinner frequently involve the purchase of life insurance. The ideal postdeath financial plan is one in which the life insurance proceeds payable at death, when combined with other assets, are sufficient to offset the cost of estate settlement and to allow the surviving beneficiaries to maintain the same standard of living that they would have enjoyed had the breadwinner survived. In nearly all cases, insurance proceeds fall short of meeting this ideal. The family budget places an upper limit on the amount of postdeath resources that the breadwinner can provide. The planning objective becomes one of meeting basic needs. Income programming is a planning system used to determine the amount of predeath protection required to meet the postdeath income needs of survivors [3]. When breadwinners say that following their death they want their spouses and children to have an income of

The Concept of the Level-Premium Whole Life Insurance Policy. Reexamined

800 per month if death occurs today, they generally are thinking in terms of current nominal income which can be used to purchase goods and services at current prices. While this amount may be adequate immediately following the breadwinners death, the survivors no longer are able to look forward to benefits from the breadwinners expected rising income. Patently, whatever inflation protection these pay increases offer also is lost. If these problems can be solved in an income program Terry Rose is Assistant Professor of Accounting and Finance, School of Business at Auburn University. Robert I. Mehr is Professor of Finance at the University of Illinois at UrbanaChampaign. He is the editor of The Journal of Risk and Insurance, a past president and current member of the Board of Directors of ARIA, a past director of the American Finance Association, a founder of the Risk Theory Seminar, the Pacific Insurance Conference, and the Interamerican Risk and Insurance Forum. He is a two time winner of the Elizur Wright Award for outstanding original contribution to the literature of risk and insurance. The authors thank two anonymous referees for their constructive criticism and helpful suggestions.

Primacy in Automobile Bodily Injury Coverage

The traditional concept of the level-premium whole life insurance policy is misleading. It has led to an explanation of the policy in terms of a divisible product with its components of decreasing protection and increasing savings. It suggests a divisible premium with one part used to pay for decreasing amounts of insurance protection and one part used to build a savings account. A more realistic explanation of the level-premium whole life insurance policy would appear to be one of an installment purchase agreement. Furthermore, level-premium whole life insurance is offered to the public as a means of obtaining tax-sheltered buildups of cash values with the implication that these tax-sheltered buildups are unique to life insurance. Arguments are presented to (1) show the faulty logic in the contention that levelpremium whole life insurance offers a unique tax-sheltered buildup of cash values and (2) demonstrate that level-premium whole life insurance, instead of offering favorable income tax treatment, is treated adversely. On several occasions, congressional committees have considered the concept of including as taxable income to the policyowner roughly the amount by which the cash value of his policy increases for the year in. excess of the premium paid for that year. The motivation to tax cash,. value buildups in life insurance policies as ordinary income arises from. the successful manner in which life insurance salesmen and others have been able to sell the concept of life insurance as a tax-sheltered savings or investment medium. The attention in this paper is restricted to the need to reexamine (1) the traditional explanation of level-premium cash value life insurance, (2) the concept of cash value life insurance as a divided contract, one part decreasing death protection and the other part increasing savings, and (3) the illusion of a tax-free buildup of the cash values of a whole life policy. Robert I. Mehr is Professor of Finance at the University of Illinois at UrbanaChampaign. He is a past president of ARIA, a past director of the American Finance Association, a founder of the Risk Theory Seminar, the Pacific Insurance Conference, and the Interamerican Risk and Insurance Forum. This paper was presented at the 1974 annual meetings of the Risk Theory Seminar. This paper was submitted in June, 1974. See Charles E. McLure, Jr., The Income Tax Treatment of Interest Earned on Savings in Life Insurance, published by the Joint Economic Committee, 92nd Congress (1972).

Should the "No-Fault" Concept Be Applied to Automobile Property Damage?

This paper considers the primacy issue relating to automobile no-fault personal injury protection coverage where collateral sources of health insurance benefits are available. It reviews the sources of duplication of coverage and benefits and discusses the approaches to the duplication problem taken by various states in their auto no-fault laws, and in their regulations applicable to other sources of benefits. A survey of the extent of the duplication of coverage and benefits for victims of automobile accidents in Champaign, Illinois, is reported. The results show significant duplication of benefits, especially in medical payments. Although the population from which the sample was drawn is atypical, with consequently atypical results, it can be hypothesized that the aberration results in an understatement of the extent of duplication (and multiplication) of payments. The paper concludes with a discussion of the issues involved in approaches to the solution of the primacy issue.

Flexible Income Programming: Authors' Reply

In this study the automobile bodily injury liability insurance claims settlement process is compared to that of the property damage liability insurance system. The objective is to determine if similar problems exist in both settlement processes such that legislative modifications of both systems are warranted. In addition, the claims settlement process under automobile medical payments insurance and collision insurance are compared to their corresponding liability insurance coverages to provide an improved perspective of the claims settlement process. These analyses do not suggest either that modification or abandonment of negligence law in its application to property damage claims is warranted. Summary conclusions are that substantial differences exist between the settlement of property damage liability insurance claims and bodily injury liability insurance claims. Only minor differences were found in the settlement of first party collision insurance claims and property damage liability insurance claims. Indications are that the benefits to be derived from the preservation of the property damage tort liability insurance system outweigh any potential benefits to be gained by its elimination.

A Computer Model for Flexible Income Programming

In the opening paragraph of her comment on Flexible Income Programming (FIP) [1], Professor Gustavson includes the statement that . . . several changes should have been made before it [FIP] was presented to the public . . . It is the understanding of the authors that one of the functions of an academic journal is to provide a forum for the exchange of ideas. The intention of the authors was to present the concept to the readers of this journal and establish a basis for further research by interested colleagues. Patently, the article serves as a first step in the process of developing a more useful tool for the programming of survivors income needs. Gustavson perceives a problem in the relatively high amounts of life insurance needed (as calculated in the FIP model) in comparison to the current average amounts of coverage owned. Undoubtedly, buyer resistance could cause some marketing problems which should be left to the marketing people. Buyer resistance, however, presents no conceptual problem. The emphasis in our article was conceptual. FIP can be used to create awareness of the extent of unfilled coverage needs. Real income changes that follow a breadwinners death can have a severe adverse effect on survivors. Breadwinners should be congnizant of post-death needs when making a purchase decision. Even if they choose not to provide survivors with adequate post-death resources, they should know the extent of the problem. Further, the statement cited concerning the propensity to cover post-death needs clearly refers to the extremes and is not an all or nothing proposition [1, p. 59]. The authors, however, recognize that an improvement could result from a breakdown of protection requirements by type of need, as suggested by Gustavson. Gustavsons first specific program suggestion deals with social security and its impact on FIP. As the laws governing these benefits are subject to frequent change, most of the preliminary calculations are made outside the FIP computer model. The computer program makes the final calculation in the determination of the primary insurance amount. Maximum allowable benefits, after reduction for any excess earnings (over

Public Desires and Automobile Property Damage Insurance

3,480 annually for recipients under age 65 in 1979) are used to calculate post-death benefits available to survivors. Her suggestion to include allowable earnings adjustments in the program is a good one and should be incorporated in any revision of FIP. Her second suggestion deals with the specification of retirement benefits. No attempt was made during these early development stages of FIP to handle

Risk management : concepts and applications

inflation rates and the expected pattern of income from the breadwinners einployment. As the number of factors for consideration increases, the complexity of the process also increases. Therefore, computer models have been designed to aid planners in the evaluation and analysis of income needs. In a recent article, the authors presented a new approach to programming called Flexible Income Programming (FIP). FIP is used to calculate the cost and amount of life insurance needed (if any) that, when combined with other postdeath resources, will provide real income protection to the beneficiaries following the breadwinners death. The extent to which such protection is provided should be equivalent to the real income protection the survivors would have received from the breadwinners employment income had he or she survived. A footnote in that article indicated the computer program designed to handle the calculation requirements of FIP would be published as part of an article in a subsequent issue of this journal. However, the length of the program and accompanying text make the study too long for inclusion here. Therefore, this expanded abstract is being published as an announcement to interested readers that A Computer Modelfor Flexible Inicomne Programmning has been published by the School of Business of Auburn University. Copies may be obtained by writing to Terry Rose, Dept. of Accounting and Finance, Auburn University, AL 36849.

Life Insurance: Theory and Practice (Revised Edition)

In an article in this issue of the Journal, the authors conclude that sufficient evidence does not exist to warrant the modification or abolition of the negligence concept as it applies to automobile property damage. In an effort to provide further information pertaining to the question whether the automobile property damage liability insurance system should be changed, a questionnaire was developed to investigate consumer desires. Although many questionnaires pertaining to automobile insurance have been reported in the literature, none has focused upon automobile property damage insurance. Such is the objective of this research. The justification is that any changes in the system for compensating automobile property damage losses should not be made without consideration of the desires of the public. This study includes a random sample of 300 households whose automobiles had been involved in accidents in South Carolina during 1972-73. The names of the households were obtained from a major state agency. Persons from these households were selected for interview because it was believed that they would have a realistic basis upon which to judge the need for, and suggest changes in the present automobile insurance system. From the 300 households selected, a response rate of 80 percent was obtained through telephone interviews and 240 questionnaires were completed during October and November 1973.2 Respondents were in-