Basics of Life Insurance Flashcards
Third party ownership
A situation where the owner of a life insurance policy is someone other than the insured
To have a policy issued on someone else’s life, the applicant must have an _________ _________ in that person
Insurable interest
In the personal insurance market, insurable interest exists between:
-Spouses or domestic partners
-parents and children
-close family members
In the business insurance market, insurable interest exists between:
-business partners
-corporations and their officers and directors
-any type of business and its key employees
With life insurance, insurable interest is only required at the time of
Application
Permanent life insurance policies have a ____ _____ component that grows over time
Cash value
The life insurance cash value is called the policies ______ ______
Living benefits
Principle that states that the purpose of life insurance is to replace an individual’s economic value
Human life value
Human life value calculation
The amount of the individual’s annual income x the number of years until retirement
Used to find the amount of insurance coverage an individual should by based on the financial situation survivors will face if the individual dies
Needs approach
Survivors financial needs fall into 2 categories
-cash needs
-income needs
Cash needs
-final expenses
-debt payoff
-children’s education
-emergency fund
Income needs
Created by ongoing living expenses such as food, clothing, utilities and a mortgage
3 income need periods
-Family dependency
-Preretirement
-Retirement
Family dependency income need period
The surviving children are too young to support themselves and depend on the surviving parent for their needs
Preretirement income need period
Children have grown up and become self-supporting, but the surviving spouse has not yet reached retirement age
Retirement income need period
Now the surviving spouse is no longer earning an income
Blackout period
The social security administration provides benefits for surviving spouses with children under 16. When youngest child turns 16, benefits stop and do not resume until spouse turns 60
Social security pays survivor benefits during what two income need periods
Family dependency and retirement
Buy-sell agreement
Provide for the sale of a business interest at death or disability of an owner. Can be funded with Life Insurance. Buyer of the business is the beneficiary
Entity buy-sell agreement
The purchaser of a deceased owner’s business interest is the business entity itself. The business owns a policy on the life of each business owner
Cross-purchase buy-sell agreement
The surviving owner(s) purchase the deceased owner’s interest in the business. Each partner owns a policy on the lives of each of the other partners.
Key person coverage
Business owns, pays for, and is the beneficiary of the policy on the key person’s life
Executive bonus plan
A business pays the premiums on a life insurance policy for which the employee owns
-nonqualified employee benefit arrangement
