FIN UW

Question 1

Anti-selection?

Answer 1

Increased likelihood a person takes out an insurance contract because they believe their health risk is higher than what the insurance company has allowed for in the premium amount

Question 2

Insurable interest implies a degree of financial dependence on the beneficiary towards the insured. What are the 3 examples of financial dependence?

Answer 2

1) Relationship btwn children and their parents.
2) Relationship btwn bread winning spouse and homemaker spouse.
3) Relationship btwn business owners and top skilled employee who keeps company profitable.

Question 3

What does wagering or gambling on the life of the insured mean?

Answer 3

Insurance that covers nonexistent financial loss allowing the beneficiary to profit by the death of the insured instead of receiving payment for financial loss suffered. Incentivizes homicide, suicide or a fraudulent claim.

Question 4

Examples reasons to buy insurance?

Answer 4

1) to replace income that will be lost to family
2) pay funeral expenses
3) pay children’s education or special needs
4) pay off debts
5) pay estate taxes due at his time of death
6) make a charitable bequest
7) provide funds for business party to continue running company
8) provide funds for company to purchase business interest from heirs

Question 5

Slayer’s rule & slayer’s statutes?

Answer 5

In the common law of inheritance, stops a person inheriting property from a person they murder.

Certain states expand on this law to address situations such as when the beneficiary/murderer is a minor, or insane or kills in self-defense

Question 6

Contestable Clause?

Answer 6

Helps prevent claims d/t misstatement of info in application.

During the first 2 yrs a contract is in force, misrepresentation of material underwriting info in the application voids the contract and prevents payment of the claim. After two years, the contract becomes incontestable and misrepresentation is no longer grounds to deny a claim.

Question 7

3 income replacement methods

Answer 7

1) Multiple of income - max death benefit is a multiple of the insured’s income that would have been otherwise earned.
2) Human Life Value - death benefit is a payment that is equal to the current value of the insured future earnings.
3) Needs Analysis - identifies specific lump sum and income needs and translate them into a proposed death benefit.

Question 8

Multiples of Income Method pros & cons

Answer 8

Pros: simple

Cons: may not be accutrate because is doesn’t adjust to individual circumstances
1 ) age of surviving spouse
2) existence of another family wage earner,
3) # of dependents
4) # of years for which income would be needed
5) gov benefits
6) inflation
7) income growth

Question 9

Human Life Value Method pros and cons?

Answer 9

Pros: sophisticated and accounts for after tax earnings, projected rate of earnings growth, expected length of career and discount rate for future earnings (inflation).

Cons: if estimates are inaccurate, insurance need can be underestimated or over estimated.

Question 10

Needs Analysis Method pros and cons?

Answer 10

Pros: Comprehensive

Cons: can be based on needs and not income creating a situation where the insured is worth more dead than alive

Question 11

How are nonworking spouses insured?

Answer 11

1) Estimating the total amount of funds required to replace their services and multiplying it per expected amount of years in that role.
2) If the surviving spouse quits their job to agrees to quit work for X yrs to take care of children, their usual income can be replaced for X years by death benefit.

Question 12

What is the need for juvenile protection?

Answer 12

1) Typically it’s for a small amount; funeral expenses
2) Can be a large amount in anticipation of their needs as adults. Acquiring LI at a very low cost when the child is still young. Cash value accumulation can also help save for child’s education or future needs.
3) Can also be a large amount for estate planning for children of wealthy families.

Question 13

What are a few reasons to have LI in regards to estate planning?

Answer 13

1) Offset probate costs
2) Provide cash for use by the estate so that assets aren’t sold at discount to pay probate costs (or estate taxes in the US)
3) To offset capital gains taxes (50%) on estate assets which are sold at a profit

Question 14

3 important UW considerations for charity giving:

Answer 14

1) Is it a legitimate charity
2) Relationship btwn insured and charity - questionable if there’s none.
3) How much is an appropriate amount - a multiple of regular annual donation is reasonable

Question 15

Type of business insurance

Answer 15

1) Key Person - protects the company against the financial loss of an employee whose skills and contributions are critical to the firm.
2) Creditor - replaces the deceased insured’s contribution towards the repayment of a loan.
3) Buy-Sell - btwn business owners of a company, if one dies, the remaining business owners can purchase the business interest from the estate of the deceased.

Question 16

2 determinations which need to be made for Key Person Insurance?

Answer 16

1) Qualifying the proposed insured as the a key person.

2) Quantifying the potential financial loss caused by their death.

Question 17

7 UW considerations to qualify proposed insured for key person insurance

Answer 17

1) Age - an older employee would retire sooner, thus would qualify for less.
2) Level of expertise - the higher or technical it is, the more easily they qualify.
3) Business hx of proposed insured - hx of success & promotions are positive factors. hx of bankruptcy or little experience in that career are negative factors.
4) Company earnings - hx of stable earnings; an unstable pattern may not qualify the key person for coverage.
5) # of employees - the more employees there are, the less critical each one is.
6) Business hx of the company - successful business hx is a positive factor b/c they tend to have competent workers who could qualify as a keyperson
7) Current financial picture - business hx & current financial picture should be favorable to justify keyperson coverage on an employee

Question 18

2 Approaches to verify insurable value of an employee

Answer 18

1) Multiple of Earnings Approach - insurable value of an employee is based on the income they receive
2) Business Loss Approach - insurable value is tied to business w/ death of key employee

Question 19

In Multiple of Earnings Approach, the death benefit is 5-10x the earnings of the keyperson. What 3 things is it used for?

Answer 19

1) Hire a replacement
2) Offset cost of training replacement
3) Compensate company for financial losses d/t key person’s death

Question 20

4 determinations which need to be made for Creditor Insurance?

Answer 20

1) Understanding purpose of the loan
2) Verifying legitimacy of the lender
3) Assessing change of success of the business purpose that the loan is funding
4) Reviewing the business finances as well as the underlying assets that guarantee the loan to the lender

Question 21

When is it ill-advised to offer creditor insurance?

Answer 21

1) When the loan is being used to bail out a troubled business
2) When the company is required to have LI by the lender (venture capitalists) before being granted a loan
3) When the loan is to establish a new company w/ no other source of investment capital
4) If the loan agreement is informal btwn individuals
5) If the insured’s health is not insurable

Question 22

How much of loan is typical covered w/ creditor insurance?

Answer 22

60-80%.

Motivates lender to make sure debtor will be able to pay back loan through business operations or through the sale of collateral assets

Question 23

Buy-sell Agreement?

Answer 23

Mandatory arrangement whereby other business owners agree to purchase or redeem the business interest from the estate.

Question 24

Why are busy-sell arrangements beneficial for business owners and their heirs?

Answer 24

1) provides immediate market for business interest
2) provides liquid funds for the estate
3) allows for continuance of the business
4) makes business more creditworthy to lenders who value continuity of business

Question 25

Cross-purchase agreement

Answer 25

Buy-sell agreement where each partner or stockholder is obligated to purchase buy-sell coverage on every other partner or stockholder. If one of the business owners dies, the insurance money buys his interest in the company of the estate and transfers it to the remaining owners.

Good for small businesses w/ few owners.

Question 26

Liquidation/stock redemption agreement

Answer 26

Buy-sell agreement where the company as a whole can purchase the business interest from the estate. The stock is kept inactive giving the surviving owners a greater percentage of active ownership among remaining shares.

Question 27

Fringe benefits

Answer 27

Non-salary compensation for employees

e.g. company car, travel expense account, education expense account, group LI

Question 28

Fringe benefit that can be used to compensate and retain highly valued employees?

Answer 28

Individual Life Insurance. Usually a permanent plan w/ large internal values for executives to accrue extra funds for retirement along w/ valuable insurance benefit.

Can be structured as deferred compensation plan or executive bonus plans

Question 29

Sources of financial data?

Answer 29

1) application
2) cover letter
3) financial statements
4) buy-sell agreement
5) inspection report

Question 30

Income statement vs balance statement

Answer 30

Income statement: income received, expenses paid, net profit

Balance statement: assets, liabilities, NW