3 - Basics of Life Insurance

Question 1

Personal Uses of Life Insurance

Answer 1

1) Survivor Protection
2) Mortgage Payoff
3) Estate Creation
4) Estate Conservation
5) Liquidity
6) Cash Accumulation

Question 2

Human Life Value

What is this and how is it calculated?

Answer 2

• According to the human life value, the purpose of life insurance is to replace an individuals economic value
• Amount of individuals annual income x # of years until retirement

Question 3

The Needs Approach

What is it and how is it calculated?

Answer 3

• The needs approach looks at the financial situation the survivor will face
• Much more of a detailed approach than the Human LIfe Value
• Calculated buy 1) Cash Needs 2) Income Needs

Question 4

Social Security Blackout Period

Answer 4

• SS Administration provides benefits for surviving Spouses with children under the age of 16
• Once a child turns 16 benefits stop and don’t resume until the spouse turns 60

Question 5

Buy-Sell Funding

What is it and describe the two types of buy-sell funding.

Answer 5

• Business continuation life insurance plan
• Makes sure the purchaser of the business has money when an owner dies
• No tax benefit on premiums
• Benefit paid out income tax-free

1. Entity Plan - The business entity is the purchaser of a deceased owners interest. For example, a corporation would be buying back deceased owners share of stock
2. Cross-Purchase Plan - Surviving owners purchase the deceased owner’s interest in the business

Question 6

Key Person Coverage

Answer 6

• Business use of life insurance
• Business purchases and is the beneficiary
• On the life of a key income or revenue-producing person in the business
• No tax benefit on premiums
• Benefit paid out income tax free

Question 7

3 Elements of Calculating Insurance Premiums

List them and explain them.

Answer 7

1. Mortality - The death rate of a specific population
2. Interest - On premium payment dollars from the time they are collected to the time they are paid out as claims
3. Expenses - Insurer operating costs referred to as the expense load

Question 8

How often can premium payments be made and what is the cheapest option?

Answer 8

• Annual (cheapest)
• Semi-annual
• Quarterly
• Monthly