Chapter 10 Flashcards
Inside Buildup
The increase in the cash value or a permanent life insurance policy
Modified Endowment Contract (MEC)
A life insurance policy that fails to meet the IRS Code’s 7-Pay Test. Distributions, therefore, receive less favorable tax treatment than other life insurance contracts receive.
Gift Tax
A tax imposed on transfers of property by gift during the donor’s lifetime.
Viatical Settlement
The sale of a terminally ill insured’s life insurance policy in exchange for a percentage of the face amount
Life Settlement
An arrangement that involves transferring the ownership of a life insurance policy to a third-party investor, much life a viatical settlement, but in cases where the insured is not chronically or terminally ill. Life settlements provide a relatively new way for seniors to convert their life insurance polices to cash.
Key Employee Life Insurance
Insurance on the life of a key employee to cover the possibility of an income loss and/or an increase in expenses resulting from the key employee’s death.
Buy-Sell Agreement
A contract binding the owner of a business interest to sell the business interest for a specified or determinable price at his or her death or disability and binding a designated purchaser to buy at that time
Entity Agreement
A business buy-sell agreement for partnerships and corporations in which the business itself is the designated purchaser of the deceased’s business interest
Cross-Purchase Agreement
A business buy-sell agreement for partnerships and corporations in which the surviving co-owners will be the purchasers of the business interest of a deceased owner
Split-Dollar Life Insurance
A plan under which two parties, usually an employer and an insured employee, share the premium costs, death proceeds, and perhaps the cash value of a life insurance policy pursuant to a prearranged agreement.
Transfer-For-Value Rule
A rule that specifies that, subject to certain exceptions, if a life insurance policy is transferred from one owner to another for valuable consideration, the death proceeds will be subject to federal income taxation.
Financial Needs Analysis
A system for determining how much life insurance a client needs if the principal sum is to be liquidated in the process of meeting the client’s financial objectives for his or her survivors
Capital Needs Analysis
A system for determining how much life insurance a client needs if the principal sum is to be preserved in the process of meeting the financial objectives for his or her survivors
Surrender Cost Index
A method of estimating the net cost of life insurance on a time-value-adjusted basis, assuming the policy will be surrendered at the end of a specified time period
Net Payment Cost Index
A method of estimating the net cost of life insurance on a time-value-adjusted basis, assuming that the policy’s death benefit will be paid at the end of a specified period of time.
Illustration
A presentation or depiction that includes nonguarenteed elements of a life insurance policy over a period or years
Replacement
Replacing one life insurance policy with another. To prevent financial harm to the policyowner, agents and insurers must follow prescribed procedures.
Rate-Up Age Method
A method of treating a substandard applicant for life insurance that bases the premium rate and policy values on an age older that the actual age.
Extra Percentage Tables
Tables used in treating substandard applicants for life insurance in which separate, higher-that-normal mortality rates are used in calculating the premium for the coverage.
Flat Extra Premium
A method of treating substandard life insurance applicants by charging a specified extra premium per $1000 of insurance, regardless of age.
Lien
A method of treating substandard applicants for life insurance in which the policy is issued as standard except that the death proceeds are reduced if death occurs within the first few years years.
Guideline Premium and Corridor Test
A two-pronged test to determine whether an insurance policy meets the definition of a life insurance policy for federal income tax purposes. The test relates to both the size of the total premium paid and the size of the death benefit relative to the cash value.
Cash Value Accumulation Test
A test to determine whether an insurance policy meets the definition of a life insurance policy for federal income tax purposes. To qualify under this test, the cash value must not exceed the net single premium that would be needed to fund the policy’s death benefit.
Gift
For Federal Gift Tax purposes, a completed transfer and acceptance of property for less than full and adequate consideration
