Kaplan - Unit 3 Flashcards
Basics of Life Insurance
Third-party ownership
The owner of a life insurance policy is someone other than the insured.
- Insurer
- Insured
- Owner/applicant
Insurable Interest
The person applying for the policy must be at risk of suffering a significant loss if the insured dies. Loss may be emotional, bas on love and affection, or economic, based on the financial dependency such as the insured’s income.
To Prove Insurable Interest
- Have Financial or emotional loss
+ Only have to prove if owner is different than applicant
-Assumed you have insurable interest when purchasing policy on yourself - Insurable interest must be present at time of application only
Mortgage Payoff
Mortgage life insurance policy will pay off this debt if the insured dies and assures that their surviving familiy will be able to stay in their home.
Estate Creation
For people in their working years, insurance can create an estate if pre-mature death prevents them from doing so themselves.
Estate Conservation
Life insurance can ensure the estate is conserved and kept intact for the heirs as the individual intended.
Liquidity
How easily an asset can be turned into cash without loss of value.
Examples of Liquid and illiquid assets
Liquid
- Bank savings or checking accounts
- Life insurance proceeds (paid in cash)
Illiquid
- Precious metals, gems, stamps
- Real estate
- Farms and farming equipment
- Small or privately held business interests
Cash Accumulation
Permanent life insurance policies have a cash value component that grows over time called the policies living benefits.
Personal Uses of Life Insurance
- Survivor Protection
- Mortgage Payoff
- Estate Creation
- Estate Conservation
- Liquidity
- Cash Accumulation
Human Life Value
To replace an individual’s economic value:
the amount of the individual’s annual income x the number of years until retirement
Needs Approach
Used to find the amount of insurance coverage an individual should buy based on the financial situation the survivors will face if the individual dies.
2 categories:
- Cash needs
- Income needs
Cash Needs
Can be met with a lump of money:
- Final expenses
- Debt payoff
- Children’s education
- Emergency fund
Income Needs
Ongoing living expenses such as food, clothing, utilities, and a mortgage.
3 Income Need Periods
Family Dependency - during this period the surviving children are too young to support themselves and depend on the surviving parent for their needs.
Preretirement - at this point the children have grown up and become self-supporting, but the surviving spouse has not yet reached retirement age.
Retirement - now the surviving spouse is no longer earning an income.