UNIT 3 Flashcards
THIRD PARTY OWNERSHIP
REFERS TO A SITUATION WHERE THE OWNER OF A LIFE INSURANCE POLICY IS SOMEONE OTHER THAN THE INSURED
INSURABLE INTEREST
THE PERSON APPLYING FOR THE POLICY MUST BE AT RISK OF SUFFERING A SIGNIFICANT LOSS IF THE INSURED DIES.
THE LOSS MAY BE;
EMOTIONAL OR ECONOMIC
LIQUIDITY
REFERS TO HOW EASILY AN ASSET CAN BE TURNED INTO CASH WITHOUT LOSS OF VALUE.
LIVING BENEFITS
THE CASH VALUE ON A LIFE INSURANCE POLICY
HUMAN LIFE VALUE
THE AMOUNT OF THE INDIVIDUALS ANNUAL INCOME X THE NUMBER OF YEARS UNTIL RETIREMENT.
THE NEEDS APPROACH
THIS APPROACH FOCUSES ON THE FINANCIAL SITUATION THE SURVIVORS WILL FACE IF THE INDIVIDUAL DIES. MUCH MORE DETAILED THAN THE HUMAN LIFE APPROACH AND RESULTS IN A MORE ACCURATE NUMBER.
- CASH NEEDS
- INCOME NEEDS
CASH NEEDS
ARE THOSE THAT CAN BE MET WITH A LUMP SUM OF MONEY
- FINAL EXPENSES
- DEBT PAYOFF
- CHILDRENS EDUCATION
- EMERGENCY FUND
INCOME NEEDS
ARE THOSE CREATED BY ONGOING LIVING EXPENSES SUCH AS FOOD, CLOTHING, UTILITIES AND A MORTGAGE.
- FAMILY DEPENDENCY
- PRERETIREMENT
- RETIREMENT
BLACKOUT PERIOD
THIS IS WHEN SOCIAL SECURITY BENEFITS HAVE STOPPED PAYING BENEFITS FOR A SURVING SPOUSE.
THE SS PROVIDES BENEFITS FOR A SURVIVING SPOUSE WITH CHILDREN UNDER THE AGE OF 16, WHEN THE YOUNGEST TURNS 16 THE BENEFITS STOP AND DO NOT RESUME UNTIL THE SURVIVING SPOUSE TURNS 60.
EXAMPLE, A WIDOWED SPOUSE IS 40 YEARS OLD WITH 2 CHILDREN AGES 12 AND 14. SS WOULD STOP PAYING BENEFIT TO THE SPOUSE AT AGE 44 AND RESUME/ BEGIN PAYING A BENEFIT AT AT 60
BUY SELL FUNDING
PROVIDE FOR THE SALE OF A BUSINESS INTEREST AT THE DEATH OR DISABILITY OF AN OWNER. THEY ARE OFTEN REFERRED TO AS BUSINESS CONTINUATION PLANS.
- ENTITY
- CROSS-PURCHASE
ENTITY PLAN
THE PURCHASER OF A DECEASED OWNERS BUSINESS INTEREST IS THE BUSINESS ITSELF.
WHEN FUNDED BY LIFE INSURANCE, THE BUSINESS ENTITY OWNS A POLICY ON THE LIFE OF EACH BUSINESS OWNER. IF THE BUISNESS OWNER IS A CORPORATION, ENTITY PLANS ARE OFTEN CALLED STOCK REDEMPTION PLANS BECAUSE THE CORPORTION IS ACTUALLT REDEEMING THE DECEASED OWNERS STOCK.
CROSS-PURCHASE PLANS
THE SURVIVING OWNER(S) PURCHASE THE DECEASED OWNER’S INTEREST IN THE BUSINESS. WHEN FUNDED BY LIFE INSURANCE, EACH PARTNER (OR SHAREHOLDER, IF THE BUSINESS IS A CORPORATION) OWNS A POLICY ON THE LIVES OF EACH OF THEIR PARTNERS. IF THERE ARE MORE THAN 2 PARTNERS OR SHAREHOLDERS, MANY MORE POLICIES ARE NEEDED FOR A CROSS-PURCHASE PLAN THAN AN ENTITY PLAN.
KEY PERSON COVERAGE
BUSINESSES CAN PROTECT THEMSELVES AGAINST FINANCIAL HARM THAT WOULD RESULT FROM THE DEATH OF THIS EMPLOYEE.
INSURANCE PROCEEDS CAN BE USED TO OFFSET DIRECT FINANCIAL LOSSES SUCH AS A DROP IN SALES AS WELL AS HELP PAY THE COSTS OF FINDING AND TRAINING A REPLACEMENT
EXECUTIVE BONUS PLANS
A BUSINESS PAYS THE PREMIUMS ON A LIFE INSURANCE POLICY WHICH THE EMPLOYEE OWNS. DURING LIFE THE EMPLOYEE HAS FULL ACCESS TO THE POLICY’S LIVING BENEFITS, AND AT DEATH THE PROCEEDS ARE PAID TO THE BENEFICIARY NAMED BY THE EMPLOYEE.
DEFERRED COMPENSATION PLANS
AN EMPLOYER AGREES TO PAY AN EMPLOYEE A STATED AMOUNT OF INCOME BEGINNING AT RETIREMENT RATHER THAN PAYING THE MONEY NOW. THE MONEY IS NOT TAXABLE UNTIL IT IS RECEIVED. (AT RETIREMENT THE EMPLOYEE WILL LIKELY BE IN A LOWER TAX BRACKET)
