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CFP Module 7 > The Life Insurance Selection Process > Flashcards

The Life Insurance Selection Process Flashcards

Learning Objectives 7-1: Analyze client data to identify the facts affecting the selection of life insurance policies. 7-2: Analyze a client’s financial situation and goals to calculate the amount of life insurance needed under either the annuity or interest-only method. 7-3: Evaluate the client’s life insurance selection facts to select the most appropriate type of life insurance for the client. 7-4: Calculate life insurance costs to determine the most cost-effective policy. 7-5: Evaluate

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1
Q

Life Insurance Selection Process: How much do I need?

• Lump-Sum Needs

A

o mortgage
o debt
o education
o special goals

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2
Q

Life Insurance Selection Process: How much do I need?

• Income Needs

A

o dependent income
o blackout period (Social Security)
o spouse pre-retirement and retirement income

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3
Q

Life Insurance Selection Process: How much do I need?

Use PVAD Serial Payment

A

Calculation:

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4
Q

Life Insurance Selection Process: How much do I need?

• Human Life Value

A

o alternative method; not used in
this course

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5
Q

Question 1 - Rating a Life Risk
If a client is in very good health (i.e., better than
average) with a low incidence of loss
experience, insurance companies will probably
rate the client as a

A

a. standard risk.
b. substandard risk.
c. preferred risk.

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6
Q

Life Insurance Needs Determination Worksheet For_______

Step 1?

A

Gather information from the client.

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7
Q

Life Insurance Needs Determination Worksheet For_______

Step 2?

A

Estimate fair market value of assets owned.

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8
Q

Life Insurance Needs Determination Worksheet For Assets-_______

What Are the Assets Categories?

A

Assets include:
Liquid
Nonliquid

Fair Market Value

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9
Q

Life Insurance Needs Determination Worksheet For_______

Step 3?

A

Determine liabilities to be paid off if client dies.

Liabilities Amount
Total Liabilities
Estimate postmortem expenses.
Postmortem expenses
Total postmortem expenses
Total of Step 3

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10
Q

Life Insurance Needs Determination Worksheet For_______

Step 4?

A

Determine liquid assets remaining, if any, after subtracting estimated liabilities and postmortem expenses.

Total liquid assets

Subtract estimated liabilities and
postmortem expenses (Step 3)

Total of Step 4

If the TOTAL is greater than zero, the amount represents remaining liquid assets after total liabilities and postmortem expenses are paid. If
the TOTAL is less than zero, the amount represents the amount of insurance needed for estate liquidity.

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11
Q

Step 5 (for youngest child’s age 15 until age 18)
Estimate funds needed to provide all dependents with income until youngest child reaches age 18.

A

a. Desired monthly income

b. Expected monthly aftertax earnings of spouse

Expected monthly Social benefits
Other monthly benefits
Total of Step B

c. Step a. minus Step b.

d. Multiply by (p/yr) to arrive at annual total payment
e. Serial payment calculation:
number of periods
% inflation
% after-tax yield

Calculate present value of annuity due (PVAD)

Total Amount Needed in Step 5

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12
Q

Life Insurance Needs Determination Worksheet For_______
Step 6 Annual college costs (current) ?

A

a. Inflation adjustment calculation:
_number of periods until child begins college
_% inflation
Inflated Future Value of first year’s tuition

b. Serial payment calculation:
_number of years in college
_% inflation
_% after-tax yield

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13
Q

Life Insurance Needs Determination Worksheet For_______
Step 6? Calculate present value of
annuity due (PVAD)

A

Calculate present value of
annuity due (PVAD)

c. Discount calculation:
_ number of periods until
student begins college
_% interest/yield

Calculate the present value of the above PVAD
Total amount needed in Step 6

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14
Q

Life Insurance Needs Determination Worksheet For_______
Step 7 (for age 39 until age 65)
Estimate preretirement income fund for spouse after youngest child reaches age 18?

A

a. Desired annual income for surviving spouse
b. Expected annual after-tax earnings and
benefits of spouse
c. Subtract Step b. from Step a.
d. Serial Payment Adjustment

Inflation calculation:
_ number of periods until serial payments begin
_ % inflation rate

Calculate the future value of the needed
income when serial payments begin

Serial payment calculation:
_ number of periods between date when youngest
child reaches age 18 and retirement
- % inflation rate
- % interest/yield

Calculate PV of annuity due (PVAD)
Discount calculation:
_ number of periods until serial payments begin
_ % interest/yield

Calculate the present value of the above PVAD

Total Amount Needed in Step 7

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15
Q

Life Insurance Needs Determination Worksheet For_______
Step 8 (for age 65 until age 85)
Estimate retirement income fund for spouse.

A

a. Desired annual income for surviving
spouse at retirement

b. Expected Social Security, retirement or other benefits of spouse

c. Subtract Step b. from Step a.

d. Serial Payment Adjustment
Inflation calculation:
_ number of periods until retirement
_ % inflation rate

Calculate the future value of the needed income
Serial payment calculation:
_ number of periods of retirement income
_ % inflation rate
_ % interest/yield
Calculate PV of annuity due (PVAD)

Discount calculation:
_ number of periods until retirement
_ interest/yield

Calculate the present value of the above PVAD

Total Amount Needed in Step 8

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16
Q

Life Insurance Needs Determination Worksheet For_______Emergency Fund.

A

Estimate the amount needed for an emergency fund

17
Q

Life Insurance Needs Determination Worksheet For_______Determine insurance needs (summary).

A

a. Add amounts determined by:
Step 5 $
Step 6 $
Step 7 $
Step 8 $
Step 9 $
Total financial needs

18
Q

Life Insurance Needs Determination Worksheet For_______

A

b. Total resources available (remaining
liquid assets from Step 4)
c. Subtract total resources available in Step b.
from the total actual needs in Step a. to
determine insurance needed, if any.
d. List insurance needed, if any, to provide
estate liquidity. ( This is the case when the
total in Step 4 is negative.)
e. Add amounts in Steps c. and d. to determine
additional amount of insurance needed

19
Q

Question 2 - Postmortem Expenses
Postmortem expenses typically include all of the
following except

A

a. funeral expenses.
b. investment funds.
c. last illness expenses.
d. estate taxes.

20
Q

Methods of Evaluating Policy Cost

A

Traditional Net-Cost Method
• add premiums, subtract dividends and cash value
Interest Adjusted Method
• essentially the same as the net-cost method
• considers TVM applying annual interest adjustment
Linton Yield Method
• compares alternate investment options
• subtract dividends and term cost from annual
premiums; whatever is left is
considered an addition
7-22
to savings

21
Q

Life Insurance Price per Thousand*

A

Yearly Price Per Thousand= (P+CVP)(1+i)-(CV+D)/(DB-CV)(.001)
DB = Death benefit
CV = Cash value at end of policy year
CVP = Cash value at end of previous policy year
P = Annual premium at beginning of policy year
D = Dividend
i = Rate of interest chosen by the client and the
financial planner

22
Q

Life Insurance Front-End Load Multiple*

A

Front - End Load Multiple = Yearly Price Per Thousand/Benchmark Price Per Thousand

23
Q

Irrevocable Life Insurance Trust

A

Irrevocable Life Insurance Trust (ILIT)
• Typically used as a means of removing any policy
values from an individual’s estate.
• Eliminating estate taxation means more money
goes to heirs.
• Trust assets normally cannot be challenged by
dissatisfied heirs or creditors.
• One negative factor is loss of control by the owner once a policy is put into (or purchased by) the trust.

24
Q

To Keep or Replace a Policy: Factors to Consider

A

• New acquisition costs
• Existing policy values
• New contestable and suicide clause period
• Dividends in new policy likely lower
• New initial cash value likely lower

25
Q

Question 3 - Life Insurance Policy Replacement
Which of the following does not accurately
describe a valid policy replacement scenario?

A

a. Replacing one term policy with another is
usually the least complex of the alternatives.
b. Replacing a cash value policy with a similar
cash value policy usually is not
advantageous.
c. Replacing a cash value policy with a term
policy usually is unwise.
d. Replacing a term policy through the policy’s
conversion clause is usually the best and
least expensive alternative.

26
Q

1035 Exchange

A

Non-taxable if done correctly
May have adverse consequences
• Insurability may impact new policy issue/cost
• New nonforfeiture period
• New suicide period
• New surrender charge period
• Cash values and dividends may be decreased
Allowable transfers
• Life policy for life policy or annuity
• Endowment for endowment or annuity
• Annuity for annuity

27
Q

Question 4 - 1035 Exchange
Which one of the following correctly identifies
an acceptable 1035(a) exchange?

A

a. an endowment contract for a term life policy
b. an annuity contract for a whole life policy
c. an annuity contract for an endowment
contract
d. an endowment for an annuity contract

28
Q

Question 5 - Variables and Assumptions
Which of the following are broad economic
assumption(s) (rather than an individual’s personal
situation) that must be made during the life
insurance selection process?

A

I. the rate of return a client can earn on
investments
II. the inflation rate for the calculation period
III. current resources available to purchase
insurance
IV. the client’s risk tolerance
a. I and II only
b. II and III only
c. III and IV only
d. I and IV only

29
Q

Question 6 - Losses from a Spouse’s Death
When a married client dies, economic losses to
be considered include all of the following except

A

a. the loss of the right to file a joint tax return.
b. the loss of the estate tax marital deduction.
c. the loss of the client’s invested assets.
d. the loss of the gift tax marital deduction.

30
Q

Question 7 - Life Insurance Suitability
Which of the following is not normally
considered a key factor in determining the
appropriate type of life insurance for a client?

A

a. age
b. health
c. income
d. employment background

CFP Module 7 (1 decks)

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