Economic Bases of Life Insurance

Question 1

Economic Value of Human Life

Answer 1

A human life has economc value if it has

1. Earning power and
2. some of person or organization who can expect to dervie financial benefit from the human life

Question 2

Why Earning Power does not create economic value that can service as basis of life insurance

Answer 2

If an individual has earnings capacity but is (a) without dependents and (b) no other person or organization stands to benefit financially through his or her living either now or in the future, then that life has no monetary value that needs to be protected with life insurance.

Question 3

Huebner’s obligation to insure

Answer 3

Huebner views family as parent’s most important business venture and, like other ventures run on a sound basis, should be protected against “needless bankruptcy” due to death or disability, but the purchase of insurance by the parent as a matter of responsibility to his or her dependents.

Question 4

5 steps to compute monetary value

Answer 4

1. Estimate individuals’s average annual earnings from personal efforts over remaining income-producing years
2. Deduct federal and state income taxes, life insurance premiums and self-maintenance costs
3. Determine number of years between present age and expected retirement age
4. Discounts future earnings at a reasonable rate

Question 5

3 broad categories of life insurance

Answer 5

1. Juvenile Insurance - life insurance purchased on a child’s life to enable the parents’ to recover the financial investment made in raising the child, if the child dies bteween birth and self-sufficiency
2. Family insurance - life insurnace purchased on the parent’s life to provide for care and maintencnace of the family in the event of the parent’s death
3. Income shortage in retirement - life insurance and annuities purchased to fill income gaps in retirement years.

Question 6

6 categories of life insurance needs

Answer 6

1. Cleanup fund - a fund to meet expenses resilting to insured’s death and to liquidate current outstanding obligations. Expenses include: medial bills, personal obligations, like household bills and personal loans, cost of estate administration, and estate, inheritance, income and property taxes.
2. Readjustment fund - the need for income equivalent to the family’s share of the income producer’s earnings at his or her death to cushion to adjustment to the family’s new standard of living.
3. Income during dependency period
4. Life Income for surviving spouse
5. Spcial needs - mortgage redemption, educational and emergency needs
6. Retirement needs

Question 7

Determine Life Insurance need with children

Answer 7

1. First, find the PV of income needs (reajustment fund, income during dependency income, life income for spouse, special needs)
2. Second, add amounts of lump-sum needs (cleanup find, mortgage redemption fund and emergency fund)
3. Next, identify sources of income available after income producers death and add them together. Also add together any investable assets available to meet lump sum needs
4. Net income sources against income needs and investable assets against lump sum needs

Question 8

Benefit of Ordinary Life over Term

Answer 8

While both term and ordinary life insurance would meet the income gap between family needs and currently available resources

Question 9

Use of Life Insurance for (a) key person indemnification, (b) credit enhancement, (c) business continuation and (d) employee benefit plans

Answer 9

1. Key person indemnification - indemnify a business concern for loss of earnings caused by death of a key officer or employee.
2. Credit enhancement - life insurance enhances a busienss concern’s credit in two general ways: by improving its general credit rating and by making collateral available (in the form of cash value)
3. Business continuation - life insurance can be used to fund (1) a buy-sell agreement that will prevent the partnership from dissolution upon the death of the general partner and (2) to fund a buy-sell agreement that will present the coporation from passing to an heir or outside party upon the death of a principal stockholder.
4. Employee benefit plans - Death benefits provided to employees an a benefit

Question 10

Expenses associated with Family Breadwinner Death

Answer 10

1. Medical Bills
2. Funeral Expenses
3. Estate settlement
4. Taxes
5. Emergency needs

Question 11

Common ongoing needs of survivor family members

Answer 11

1. Food
2. Clothing
3. Shelter
4. Education
5. Transportation
6. Ultiplies
7. Taxes
8. Lifetime support of disables dependents
9. Children during dependency
10. Dependent parents
11. Debt repayment

Question 12

Benefit of trust to provide ongoing support to surviving dependents

Answer 12

Trusts provide for professional management of finances. They can be used to control assets after the death of the parent and, in some cases, disabled dependents, and prevent the squandering of funds by beneficiaies who cannot manage money.

Question 13

Potential sources of and supplements to Retirement Income

Answer 13

1. Social Security
2. Corporate Pensions
3. IRAs
4. Qualified Plans
5. Investments
6. Life Insurance Proceeds
7. Life Insurance Surrenders
8. Life iNsurance cash withdrawals
9. Life insuance policy loans

Question 14

Problem with using rules of thumb to compute life insurance need

Answer 14

The rule of thumb approach ignores information about needs of client’s dependents, how much the client has already accumulated any anyother external sources of funds.

Question 15

Advantage of using rules of thumb to compute life insurance need

Answer 15

They may be a positive if they are used to motivate clients to purchase life insurance, when the clients are resistant to providing the information necessary to perform an appropriate and thorough analysis of their needs.

Question 16

Information to Collect and Analyze when recommending life insurance

Answer 16

Information about:

1. Current income
2. Potential future income
3. Accumulated assets, investments, pensions and other qualified plan holding
4. Profile of goals, objectives and priorities

Question 17

Expenses considered for lump-sum funds needed at death

Answer 17

If applicable:

1. Repayment of outstanding debt payable upon debt
2. Estate taxes
3. funeral, burial and/or cremation expenses
4. Probate court expenses
5. Attorney’s fees

Question 18

Information needed to estate education expenses for dependent children

Answer 18

The amount needed to pre-fund children’s education is a function of:

1. current age of those children
2. education costs
3. number of years of education
4. proportion of costs, intending to fund

Question 19

4 common categories of income needs for surviving spouses

Answer 19

1. Income for readjustment period immediately after death
2. Adjusted income starting after intitial transition period and continuing until the youngest child becomes self-sufficient
3. Income for surviving spouse after children attain self-sufficiency before eligibility for retirement income benefits (blackout)
4. Income during retirement age

Question 20

Categories of survivors entitled to social security benefits

Answer 20

The most commonly available source of income is Social Security benefits.

1. Surviving spouse receives income until youngest child reaches 16
2. Children receive benefits until age 18
3. Surviving spouse become eligible for widower benefit 60
   
   • Dependent parents benefits available at 62

Question 21

Contracts that provide income on liquidating basis and still guarantee a life income

Answer 21

1. Life insurance settlement options may allow for guaranteed income through life or
2. Annuity contracts

Question 22

Purpose of simplifying assumptions and working with rounded-off amounts to estimate income needs

Answer 22

Because this is an estimation process, numbers can be rounded off. Because no one knows the future with precision, simplifying assumptions must be made.

Question 23

Pros and cons of planning to fund survivor income needs on a liquidating basis

Answer 23

1. Pro is that less capital is provided
2. Con is that survivor may run out of money

Question 24

Critical Period Income

Answer 24

Income provided between the readjustment period and the age that youngest child reaches self sufficiency