Definitions (Chapter 11) Flashcards
Human Life Value Approach
is an individual’s economic worth, measured by the sum of the individual’s future earnings that is devoted to the individual’s family. It 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 Needs Approach
Is a method for determining how much insurance protection a person should have by analyzing a family’s or business’s needs and objectives should the insured die, become disabled, or retire. This approach determines the total funds available to a family from all sources and subtracts the amount needed to meet their financial objectives. It takes 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
Needs-Based Selling
Describes the ethical duty of a producer to sell a product that fits the needs of the prospect rather than the needs of the producer.
The two principles involved in Needs-Based Selling
- Fact Finding - An agent should understand what his client’s goals are (long term, short term, retirement, etc.) and be able to create a map that will lead to the fulfillment of those goals. Treat all information with utmost confidentiality.
- Education - Show clients how insurance can be used as an effective financial tool to help them reach their individual goals. Make certain the client understands the application and underwriting processes, the policy purchased and any attached riders.
Buy-Sell Agreements (aka Business Continuation agreements)
are used to assure the ownership of the business is properly transferred upon the death or disability of an owner or partner. Third-Party ownership of life insurance policies is widely used in business insurance and estate planning situations.
Buy-Sell Funding for Sole Proprietors
there is a two step business continuation plan to keep the business running after the proprietor’s death, whereby the employee takes over the management of the business:
- Buy-Sell Plan - an attorney drafts a buy-sell 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.
- 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. Upon the proprietor’s death, the funds from the policy are used to buy the business.
Buy-Sell Funding for Partnerships
There are two types of buy-sell agreements for partnerships: cross-purchase plans and entity plans.
- Cross-Purchase Plans - In cross purchase plans, 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. The death benefit is used to buy the deceased partner’s ownership of the business
- Entity plans - The partnership itself agrees to buy the deceased partner’s share of the business. Entity plans are the 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.
Buy-Sell Funding for Close Corporations
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
- Close Corporation Cross-Purchase Plan: requires surviving stockholders to purchase the deceased stockholder’s interest in the company, and the deceased stockholder’s estate sell 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 equal amount to his share of the corporation’s purchase price.
- Close Corporation Stock Redemption 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 the stockholder dies, the corporation purchases, or redeems, the deceased stockholder’s share.
Key Person Insurance
is the protection of a business against financial loss caused by the death or disablement of a vital number of the company, usually individuals possessing special managerial or technical skill or expertise.
-pays for finding and training a replacement
Deferred Compensation - (Employee Benefit Plans)
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.
Salary Continuation Plan - (Employee Benefit Plans)
works the same as deferred compensation except that the employer funds the plan rather than the employee. The employer establishes and agreement, whereby an employee will continue to receive income payments upon death, disability or retirement.
Split-Dollar Plan - (Employee Benefit Plans)
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.
Life Insurance as Property - (Employee Benefit Plans)
A life insurance policy is a piece of property just like a home. Therefore, the value of this piece of property must be included in the owner’s estate at death and may be estate taxable. The biggest advantage of life insurance as property is that when an insured dies, the policy creates an immediate estate.
