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
Deferred compensation plan
-nonqualified
-employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying money now
-money is not taxable until employee receives it
Under the life insurance policy that funds a deferred compensation plan:
-the company is the owner, premium payer, and beneficiary
Industrial life insurance
-a way for people of limited means to obtain the benefits of life insurance
-small face amounts to help pay burial expenses
-premiums due weekly and are collected in person from door to door producers
Home service life insurance
-sold by industrial or home service producers in the neighborhood where they collect premiums
-Usually $10-25,000 in face value
-encouraged to pay premiums through automatic bank draft
Three elements go into the calculation of life insurance premiums
- Mortality
- Interest
- Expenses
Net premium
The premium before loading or the mortality element minus the interest element. The net single premium will fund a policy’s benefit with one premium payment.
Net premium Mortality- interest
Net premium=
Mortality - Interest
Gross premium
The net premium plus the expense element, referred to as the loaded premium. The gross annual premium is the amount a policy owner pays for a policy
Gross premium=
Mortality - Interest + expenses
The premium payment mode reflects
How frequently premiums come due
Premium modes
Annually, semi-annually, quarterly, or month. Annual is the lowest
