Chapter 10- Uses of life insurance

Question 1

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 each partner’s share of the business

Answer 1

cross-purchase plans

Question 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

Answer 2

Entity Plans

Question 3

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

Answer 3

Human Life Value Approach

Question 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.

Answer 4

Human Needs Approach

Question 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.

Answer 5

Key Person Insurance

Question 6

describes the ethical duty of a producer to sell a product that fits the prospect’s needs rather than the producer’s needs.

Answer 6

Needs-Based Selling

Question 7

An example of a needs-based violation:

Answer 7

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 8

• arrangements between two parties
• life insurance is written on one’s 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

Answer 8

spilt-dollar plans

Question 9

a method of life insurance planning which identifies the obligations 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 family objectives

Answer 9

needs approach

Question 10

the needs approach to personal life insurance planning may involve creating a lump sum to provide for such things are ___ ___ & ___

Answer 10

education, retirement & charitable

Question 11

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.

Answer 11

Buy-Sell Plan

Question 12

• the employee purchases a life insurance policy on the life of the proprietor.
• The employee is the policy owner, and beneficiary, and pays the premiums.
• Upon the proprietor’s death, the funds from the policy are used to buy the business.

Answer 12

Insurance Policy

Question 13

Similar to partnership cross-purchase plans, a close corporation cross-purchase plan requires surviving stockholders to purchase the deceased stockholder’s interest in the company, and the deceased stockholder’s estate sells the interest 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 equal to his share of the corporation’s purchase price.

Answer 13

Close Corporation Cross-Purchase Plan

Question 14

• Similar to the partnership entity plan, the 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.

Answer 14

Close Corporation Stock Redemption Plan

Question 15

Unlike a partnership, a close corporation (i.e. an incorporated family business) is legally separate from its owners.
- It exists after one or more owners dies.
- A close corporation may purchase either buy-sell plans: cross-purchase or entity.
- The difference is that an entity plan is termed a stock redemption plan for close corporations.

Answer 15

Buy-Sell Funding for Close Corporations

Question 16

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

Answer 16

Deferred Compensation

Question 17

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.

Answer 17

Salary Continuation Plan