Chapter 8: Uses Of Life Insurance

Question 1

What are the two types of determining insurance needs for an applicant?

Answer 1

Human Life Value Approach: Calculating how much a person will make during their lifetime to determine the face value of the insurance policy

Needs approach: Determining what a family needs upon the death of the insured (provide for retirement, education, unexpected expenses…)

Question 2

What are the 8 needs an agent should consider for their client?

Answer 2

• Final Expense fund
• Housing fund
• Education fund
• Monthly income
• Emergency fund
• Income needs if disabled or ill
• Retirement income
• Estate Conversion (be able to pay estate taxes)

Question 3

Describe third-party ownership

Answer 3

This is used in businesses to assure ownership if a business if the current owner dies or becomes disabled

Aka business continuation plans

Question 4

Describe the two types of Buy-Sell Funding for sole Proprietors in a business continuation

Answer 4

Buy-Sell Plan: Attorney writes a plan stating the the employee agrees to purchase the proprietors estate and sell the business at an agreed upon price

Insurance Policy: The employee purchases a life insurance policy on the life of the proprietor. The employee is the policyowner, beneficiary and pays the premiums. Insurance policy is used to buy business when owner dies

Question 5

Describe the two types of agreements for Buy-Sell funding for Partnerships

Answer 5

Cross purchase plans: Each partner buts, pays the premiums and is the beneficiary of a life insurance policy on each of the other partners

Entity Plans: The partnership agrees to buy the deceased partners share of the business. Best when there are several partners

Question 6

Buy-Sell Funding for Close Corporations

Answer 6

Can purchase either buy-sell plans but they are termed stock redemption plans

Small corporations often purchase life insurance on the loves of major stockholders to fund buy-sell agreement

Question 7

Close Corporation Cross-Purchase Plan

Answer 7

Each stockholder owns, pays the premiums and is the beneficiary of the life insurance on each of the other stockholders in an amount equal to his share of the corporations purchase price

Question 8

Close corporation Stock Redemption Plan

Answer 8

When the stockholder dies the corporation purchases or redeems the deceased stockholders share

Question 9

Key Person Insurance

Answer 9

• Prevents the financial loss that happens when an owner or manager dies

Allows them to pay for:

• Finding/training a replacement
• Covering lost profits
• Covers loss of new business that could have occurred
• Loss of leadership from key persons death

Question 10

Deferred Compensation

Answer 10

Benefit an employer can use to pay a highly paid employee at a later date upon death, disability or retirement

Question 11

Salary Continuation Plan

Answer 11

Same as deferred except employee must work with company until they retire

Question 12

Split-Dollar Plan

Answer 12

Employer and employee share in the cost of purchasing an insurance policy on the employee

Employee chooses the beneficiary

(To encourage them to stay with the company)