Chapter 12: Uses of Life Insurance

Question 1

Human Life Value Approach

Answer 1

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

Question 2

Human Needs Approach

Answer 2

A method to determine insurance by analyzing a family’s or business’s needs and objectives should the insured die, become disabled, or retire.

Question 3

Entity Plans

Answer 3

Agreements in which a business assumes the obligation of purchasing a deceased owner’s interest in the business

Question 4

Split-dollar plans

Answer 4

Arrangements between 2 parties where life insurance is written on the life of one party who names the beneficiary of the net death benefits, and the other party is assigned the cash value, with both sharing premiums

Question 5

What should the producer consider before recommending a product? (8)

Answer 5

1. Final expense fund
2. Housing fund
3. Education fund
4. Monthly income
5. Emergency fund
6. Income Needs if Disabled or Ill
7. Retirement income
8. Estate conservation

Question 6

Buy-Sell Plan

Answer 6

AKA. Stock Redemption Plan Employee’s agreement to purchase the proprietor’s estate and sell the business at a price that has been agreed upon beforehand.

Question 7

Cross-purchase plans

Answer 7

Each partner buys, pays the premiums, and is the beneficiary of a life insurance policy on each of the other partners.
Amount is equal to shares.

Question 8

Entity Plans

Answer 8

The partnership itself agrees to buy the deceased partner’s share of the business.
Best for businesses with several partners.
The business pays the premiums.

Question 9

Close Corporations buy-sell plans

Answer 9

Can be cross-purchase or entity purchase.
The entity plan is termed a stock redemption plan for close corps.
Small corps will often purchase this on the lives of major stockholders to fund a buy-sell agreement

Question 10

Key person insurance allows the business to pay for: (4)

Answer 10

1. Finding and training a replacement if key person dies prematurely
2. Reduction of profits resulting from key person’s death
3. Loss of new business
4. Loss of leadership

Question 11

Deferred Compensation

Answer 11

An executive benefit an employer can use to pay a highly paid employee at a later date

Question 12

Salary Continuation

Answer 12

Employer funds the plan