Chapter 10 Review (Life): Uses of Life Insurance Flashcards
Determining the Proper Insurance Amounts
Calculates the amount of money a person is expected to earn over his lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual.
Human Life Value Approach
Determining the Proper Insurance Amounts
The method of life insurance planning which identifies the needs of an individual and the individual’s dependents. This approach determines the total funds available to a family from all sources and subtracts the amount needed to meet their financial objectives.
Needs Approach
The Needs Approach for determining proper insurance amounts takes these factors into consideration:
- Final Expense Fund
- Housing Fund
- Education Fund
- Monthly Income
- Emergency Fund
- Income Needs if Disabled or Ill
- Retirement Income
- Estate Conservation (using life insurance to enable heirs to pay estate taxes)
- NEEDS include ANY(ONE or THING) depending on that person, charity, child, pet,
The _____ _____ to personal life insurance planning may involve creating a _____ _____ to provide for such things as _____, _____, _____.
*needs approach
*lump sum
*education
*retirement
*and charitable giving
The _____ _____ to personal life insurance planning also includes the creation of an _____ _____ _____. This fund is designed primarily to cover the cost of _____ _____.
*needs approach
*emergency reserve fund
*unexpected expenses
_____ _____ agreements are also known as business continuation agreements and are used to assure the ownership of the business is properly transferred upon the death or disability of an owner or partner. _____ _____ ownership of life insurance policies is widely used in business insurance and estate- planning situations.
*Buy-Sell
*Third-party
Two-Part Buy-Sell Funding agreements
An attorney drafts a _____ _____ plan stating the employee’s agreement to purchase the proprietor’s estate and sell the business at a price that has been agreed-upon beforehand.
Buy-Sell
(Part 1 of Buy-Sell Funding plan for Sole Proprietors)
Two-Part Buy-Sell Funding agreements
The employee purchases a life _____ _____ on the life of the proprietor. The employee is the policyowner, beneficiary, and pays the premiums. Upon the proprietor’s death, the funds from the policy are used to buy the business.
Insurance Policy
(Part 2 of Buy-Sell Funding plan for Sole Proprietors)
There are two types of buy-sell agreements for partnerships:
cross-purchase plans and entity plans.
In a _____ _____ plan, each partner buys, pays the premiums, and is the beneficiary of a life insurance policy on each of the other partners. The amount of the policy is equivalent to _____ _____ _____ of the business. When one partner dies, each of the other partners receives the death benefit from the life insurance on the deceased partner, which is then used to buy the deceased partner’s ownership of the business.
cross-purchase
each partner’s share
The partnership itself agrees to buy the deceased partner’s share of the business. _____ plans are best for businesses with several partners. In this case, the business purchases, pays the premiums and is the beneficiary of life insurance on each partner.
Entity
Unlike a partnership, a _____ _____ (i.e. an incorporated family business) is legally separate from its owners. It exists after one or more owners dies.
close corporation.
A close corporation may purchase either buy-sell plans: cross-purchase or entity. The difference is that an entity plan is termed a _____ _____ plan for close corporations.
stock redemption
Similar to partnership cross-purchase plans, a close corporation cross-purchase plan requires _____ _____ purchase the deceased stockholder’s _____ in the company, and the deceased stockholder’s estate sell the _____ to the surviving stockholders. The corporation is not part of the buy-sell plan. Each stockholder owns, pays the premiums and is the beneficiary of life insurance on each of the other stockholders in an amount of the corporation’s purchase price.
surviving stockholders
interest
equal to his share
Similar to the partnership entity plan, the close corporation purchases, is the owner, pays the premiums and is the beneficiary of life insurance policies on each stockholder. The amount of life insurance is equal to each stockholder’s share of the corporation’s purchase price. When a stockholder dies, the corporation purchases, or redeems, the deceased stockholder’s share.
Close Corporation Stock Redemption Plan
The purpose of _____ _____ _____ is to prevent the financial loss that may ensue when an owner, officer or manager dies.
Key person insurance
_____ _____ _____ pays for finding and training a replacement if the key employee dies prematurely
Key person insurance
In Key person insurance what does the company’s relationship to the insurance policy?
The company purchases, owns, pays the premiums and is the beneficiary of the life insurance policy on the key person.
In Key person insurance, how are taxes assessed regarding the policy premiums and benefits?
The premiums are not deductible for income purposes. However, the death proceeds received by the business are not taxable.
This is an executive employee benefit plan an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement or death.
Deferred Compensation Employee Benefit Plan
This plan works the same as deferred compensation except that the employer funds the plan rather than the employee. The employer establishes an agreement, whereby an employee will continue to receive income payments upon death, disability or retirement.
Salary Continuation Employee Benefit Plan
This is an arrangement where an employer and an employee share in the cost of purchasing a life insurance policy on the employee. It is a method of buying insurance, not an insurance policy itself. Many times it is a combination of term and whole life insurance.
Split-Dollar Plan
Which of these is NOT considered to be a cost connected with an individual’s death?
Business Expenses
