Ch. 8 - Uses of Life Insurance

Question 1

Cross Purchase Plans

Answer 1

Agreements that provide that upon a business owner’s death, surviving owners will purchase the deceased’s interest, often with funds from life insurance policies owned by each principal on the lives of all other principals.

Question 2

Entity Plans

Answer 2

Agreements in which a business assumes the obligation of purchasing a deceased owner’s interest in the business, thereby proportionately increasing the interests of surviving owners.

Question 3

Human Life Value Approach

Answer 3

An individual’s economic worth, measured by the sum of the individual’s future earnings devoted to the individual’s family.

Question 4

Human Needs Approach

Answer 4

A 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 5

Key Person Insurance

Answer 5

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 6

Needs-based Selling

Answer 6

Describes 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. By committing themselves to professionalism and the client’s needs, insurance producers can act responsibly and ethically.

Question 7

Split-Dolar Plans

Answer 7

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.