Chapter 1-Economic Bases of Life Insurance Flashcards
What is life insurances primary concern regarding the human life value?
The economic value
The earning capacity of a life and the support it provides to charity, the estate, and family
What is the method of calculating the economic value of a human life?
- Estimate average earnings over the remaining income producing years
- Deduct state and federal taxes, life insurance premiums, and self maintenance costs
- Determine the number of income earning years before retirement
- Determine a rate to discount future earning to their present value
- Multiply net earnings by the present value factor of $1 for the remaining income earning years (or use financial calculator to solve)
What are some characteristics of the economic value of human life?
- It tends to diminish with the passage of time (greatest during the years with the lowest ability to pay premiums)
- It begins when net earnings benefit dependents
- It should equal the capitalized value of net earnings
What is the purpose of a needs analysis?
-Focus on the needs of dependents after death
What are the characteristics of the human life value approach?
- A combination of investment earnings and a gradual liquidation of the capital sum
- A liquidating approach where the money will run out
What are some characteristics of the capital needs approach?
- Investment earnings on a capital sum
- A non-liquidating approach that provides cash indefinitely
How can the human life value be used to avoid the beneficiary from outliving the income?
- Selecting a life insurance settlement option that provides annuity payments
- Purchasing a life annuity with the life insurance proceeds
What are the 6 categories of needs used to determine the amount of life insurance to purchase?
- Clean up fund (medical expenses, estate costs, unpaid loans, taxes, and burial)
- Readjustment Income (1-2 years)
- Dependency period income/critical period income (education)
- Life Income for surviving spouse
- Special needs (mortgage, education, emergency fund, etc)
- Retirement income needs
In a needs analysis, what type of situation would affect the type of life insurance chosen?
-Retirement income
What are some characteristics of a trust?
- Established by the trustor
- Trustee manages the trust for the trust beneficiaries (disabled children, etc)
- Managed by a trust company or bank trust department
- May own multiple policies
- May be the beneficiary of a policy
- May be used to minimize estate tax liability
- May hold and manage life insurance proceeds indefinitely
- May be arranged to pay premiums and receive life insurance proceeds
- May own policies for a beneficiary
- May be used for family money management to distribute income periodically
What are some characteristics of charitable giving?
- May minimize estate taxes
- May be named as beneficiary of an existing policy
- May be achieved by providing life insurance proceeds to the family which would allow assets and property to be donated
- May be the recipient of an existing life insurance policy and continue making premium payments as desired
- May benefit a charity, family, or both
- Has Insurable interest in donor’s life in most states
- May have life insurance and trust arrangements as gifts
- May apply for and own a policy on a donor
When is the prematurity policy value useful?
While the insured is still alive ( such as long term care riders that provide death benefits for nursing home care).
What is a QTIP and its most common uses?
Qualified Terminal Interest Property Trust provides life insurance for a surviving spouse and the trust corpus (remaining funds) is distributed to the children
What is the federal income tax treatment of key person indemnification?
Proceeds are tax-free
How does life insurance enhance the credit of a small business owner?
- Lender has repayment security in the event of death
- Lender has repayment security in the event of default (with a cash value policy)
- Business own could use policy cash value funds in an emergency
