Chapter 4: Life Insurance Flashcards
Describe the three parties in an insurance contract
Insured: individual who is covered
Owner: person who purchased coverage
Beneficiary: the person entitled to receive the benefit
What is the Goodman Triangle or Unholy Trinity
When all three parties, insured, owner, and beneficiary are all different people. This has unfavorable tax treatment
What are the steps to the Human Value Approach for calculating an estimate of Life Insurance needs?
Estimate based solely on missed earnings
1) Determine earnings
2) Subtract personal expenses and taxes
3) Determine Work Life Expectancy (current age to retirement age)
4) Calculate future value (FV) of earnings
5) Calculate present value of FV accounting for inflation
Describe the needs approach for estimating a Life Insurance needs.
Estimate based upon the needs of the family after death
- Amounts needed for final expenses, medical care, and adjustment periods
- Eliminating debt
- Funding specific goals
- Income needs of survivor
- Retirement needs of survivor
- Planning for Social Security blackout period
What is the Social Security blackout period?
Between the ages of 40 and 62, when the last child reaches 18, no Social Security benefits are payable.
What is the following Universal Life Insurance policy (A or B):
The death benefit vary directly with the cash value and is more expensive
Universal B.
Universal A: Flexible premium, with and adjustable death benefit
What is the “Fire Escape Ladder” of insurance contract exchanges.
Ladder meaning you can exchange down without triggering a taxable event, but up would trigger a taxable event.
Life Insurance \/ MEC \/ Annuity
If an insured surrenders their policy prior to death, what are the ways they can take their distribution
Lump Sum: The amount above the normal premium paid as ordinary income
Interest Only: Interest is taxable as ordinary income
Installment Payments: A portion of the principal and interest where the interest is taxable
How is a Modified Endowment Contract created
Through failure of the 7-Pay test: the cumulative payments at any time during the first 7 years exceeds what the cumulative premiums should have been
When is a viatical settlement allowed?
When the insured is terminally ill they may sell their policy to third party, the transaction is not taxable
Which buy-sell agreement is typically preferred due to tax planning advantages and because it would increase the survivors basis in the business
Cross-purchase agreement
