2.7 - Personal Uses of Life Insurance Flashcards
There are many personal uses and advantages to purchasing life insurance, including:
Life insurance reduces uncertainty, giving a greater peace of mind by replacing the possibility of a larger loss (income) with a known smaller loss (premium). Life insurance does not eliminate risk; it reduces the loss by transferring the larger risk from the policyowner/insured to the insurance company.
A. Survivor protection
B. Estate creation
C. Estate conservation
D. Cash accumulation
E. Liquidity
F. Pre-need plan
G. Charities
H. Security
I. Exemption from creditor claims/probate
J. Viatical Settlements
Survivor Protection
Providing funds for surviving spouses and dependents
Estate creation
Life insurance proceeds paid in a lump sum provide financial assets to create an immediate estate the insured can pass on to survivors.
Estate conservation
Provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner (the insured), preserving the insured’s estate
Cash accumulation
An amount of cash accessible to the policyowner from within permanent life insurance policies
Liquidity
Immediate funds available upon death to pay creditors, taxes, and final expenses, as well as cash values available for policy loans, withdrawals, and full surrenders
Pre-need plan
A type of coverage with a small face amount, typically purchased to pay the burial expenses of the insured.
Charities
To help fund favorite charitable organizations upon the insured’s death
Security
Peace of mind knowing that future insurability is not an issue, and benefits will be in place as long as the required premiums are paid.
Exemption from creditor claims/probate
The policy’s values are normally exempt from any creditor claims, unless the policy was assigned as collateral for a loan that still exists at the time of the insured’s death.
Viatical Settlements
A terminally ill insured/owner selling their policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available.
Stranger Originated Life Insurance (STOLI)/Investor Originated Life Insurance (IOLI)
The life settlement industry has increased the awareness of these terms. The terms describe investors, producers, or brokers with absolutely no personal or business connection with a person, who induce a purchase of a life insurance policy with the sole intent of selling that policy to institutional investors for an amount less than the death benefit but greater than the policy’s cash value. Essentially, the insured is “selling” their mortality.
After the investors have paid for the policy, they will change the ownership and beneficiary designations. The investors will also have to pay premiums to keep the policy in-force. Upon the death of the insured, the investors will file a claim for the death benefit. The practice of STOLI and IOLI has resulted in fraudulent abuses causing many states to outlaw STOLI and IOLI policies because of the lack of insurable interest.
