Basics of life Insurance Flashcards
Third party ownership
The owner of a life insurance policy is someone other than the insured
Insurable interest
The person applying for the policy must be at risk of suffering a significant loss if the insured dies
Could be emotional or economic
Only needed at time of application for life insurance
Purpose of life insurance
Help relieve financial strain that a person’s death may cause for surviving family members
Survivors
Can be spouse and children or other loved ones that depend on the financial support of the income earner
Mortgage payoff
Mortgage life insurance policy will pay off mortgage if the insured dies and assure that their surviving family will be able to stay in their home
Estate
The assets someone leaves behind after death
If a person dies in working years insurance can create an estate if they were unable to do so
Liquidity
Refers to how easily an asset can be turned into cash without loss of value
Personal uses of life insurance
Survivor protection Mortgage payoff Estate creation (if premature death) Estate conservation Liquidity Cash accumulation
Human Life Value
The purpose of life insurance is to replace an individual’s economic value. This begins with a straightforward calculation.
Individuals annual income + #of years until retirement
Needs approach
Used to find the amount of insurance coverage am individual should buy, but instead of looking at income it looks at the financial situation after death
Falls into 2 catagories
Cash and income needs
Cash needs
Those that can be met with a lump of money
Final expenses, debt payoff, child education etc.
Income needs
Created by ongoing living expenses like food clothing utilities etc.
3 distinct periods
Family dependency (children are not of working age)
Preretirement (children are working spouse hasn’t retired)
Retirement (spouse is no longer earning income)
Blackout period
Social security benefits provide for surviving spouses with children under 16. And resume once spouse turn 60.
Two types of buy sell agreements
Entity (purchased of deceased owner’s business interest is the business entity itself)
Cross purchase plan (surviving owner(s) purchase deceased owners interest in business)
Key person coverage
Businesses can protect themselves from the death of a very important or key employee
Executive bonus plan
Business pays the premium of a life insurance policy which employee owns. Employee and his named beneficiaries.
Can be used rather than a cash yearly bonus
Deferred compensation plan
Employer agrees to pay employee a stated amount of income beginning at retirement rather than paying the money now. If employee dies the deferred money becomes available immediately to the employees spouse or beneficiary
Business uses of life insurance
Buy sell funding -Cross and Entity purchase Key Person Executive bonus Deferred compensation
Buy sell agreement, the life insurance policy is written on the
Business owners life
Group life insurance
Single contract that covers an entire group of people
Industrial life insurance
Small amounts. Are collected in person by people going door to door
Three elements that go into calculation of insurance premiums
Mortality (death rate in specific population)
Interest (earnings on premium dollars between the time they are collected and the time they’re paid)
Expenses (insurer operating costs)
Net premium
Premium before loading or
Mortality - Interest = Net Premium
Gross Premium
Net premium + expense or
Mortality - Interest + expenses
Premium payment mode
Reflect how’s frequently premiums become due
Life insurance premiums are the lowest under which premium payment mode?
Annual
Living and death benefits, level premiums, and lifetime coverage are characteristics of which class of insurance?
Permanent life insurance
