Ch. 10

Question 1

Entity plans

Answer 1

involve the business buying back a deceased owner’s share using life insurance

Question 1

Cross-purchase plans

Answer 1

typically used by co-owners of a business to ensure that if one owner dies, the remaining owners can buy the deceased owner’s share of the business. In this plan, each owner purchases a life insurance policy on the life of the other owners. When an owner dies, the death benefit from the life insurance policy is used by the surviving owners to buy the deceased owner’s share of the business from their estate

Question 2

Human life value approach

Answer 2

calculates the economic value of a person’s future earnings over their working life. It estimates the amount of life insurance needed to replace this income, considering factors like age, salary, and inflation. This approach helps determine how much insurance is necessary to support dependents financially if the insured person passes away

Question 3

Human needs approach

Answer 3

method for determining how much insurance protection a person should have by analyzing a family’s or business’s needs and objectives if the insured were to die, become disabled, or retire

Question 4

Key person insurance

Answer 4

protects a business against financial loss caused by the death or disability of a vital member of the company, usually individuals possessing special managerial or technical skills or expertise

Question 5

Needs-based selling

Answer 5

the ethical duty of a producer to sell a product that fits the prospect’s needs rather than the producer’s needs. An example of a needs-based violation is a prospect being sold insurance with the highest premium (and the most significant commission) instead of the proper coverage

Question 6

Split-dollar plans

Answer 6

arrangements between two parties. Life insurance is written on one party’s life who names the beneficiary of the net death benefits (death benefit less cash value). The other party is assigned the cash value, with both typically sharing premium payments

Question 7

Multiple earnings method

Answer 7

selects a number of years to replace the insureds annual salary. For example, five times a person’s annual salary

Question 8

interest-only method

Answer 8

determines how much insurance is needed to maintain after-tax family consumption levels if the insurer holds the principle for future payments

Question 9

Single needs method

Answer 9

identifies the amount of insurance needed based upon a specific need (i.e., loan or debt, education fund, death taxes, etc.)

Question 10

Capital needs analysis

Answer 10

determines the immediate cash needs of an individual or family

Question 11

Seat of the pants

Answer 11

method arbitrarily selects the amount of insurance necessary

Question 12

Business uses of policy loans

Answer 12

funding buy-sell agreements, deferred compensation for key employees, or split-dollar arrangements

Question 13

Buy sell agreement

Answer 13

how a business owner’s share will be handled if they die, become disabled, or leave the business. It typically involves the remaining owners purchasing the departing owner’s share, ensuring the business continues smoothly and preventing unwanted parties from acquiring ownership. These agreements are often funded by life insurance policies

Question 14

Deferred Compensation Funding

Answer 14

executive benefit an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement, or death

Question 15

Salary Continuation Plan

Answer 15

works the same as deferred compensation except that the employer funds the plan rather than the employee

Question 16

Corporate owned life insurance

Answer 16

generally treated as a deductible business expense. The proceeds are paid tax-free up to a certain level (i.e., $50,000). If more than this amount is provided to an employee, the excess premium used to purchase must be reported by the employee as taxable income