Unit 3: Basics of Life Insurance Flashcards
third party ownership
refers to a situation where the owner of a life insurance policy is someone other than the insured
insurable interest
- have financial (financial dependency) or emotional (love or affection) loss
- only have to prove if the owner is different than the applicant (third party ownership)
ex: spouse, kids, business partner, key employees - assume you have _______ when purchasing a policy on yourself
- _______ must be present at the time of the application only
Personal uses of life insurance (aka why life insurance)c
- survivor protection
- mortgage payoff
- estate creation
- estate conservation
- liquidity
- cash accumulation
human life value
the purpose of life insurance is to replace an individual’s economic value and it begins with a straightforward calculation:
the amount of the individual’s annual income x the number of years until retirement
needs approach
more detailed approach
find the amount of insurance coverage. This looks at the survivors will face if the individual dies
Look at cash needs and income needs
blackout period
social security administration provided benefits for surviving spouse with children under age 16. When the youngest child turns 16 benefits stop and do not resume until the surviving spouse turns 60.
data gathering
insurance agent conducts interview to find out:
- names and birthdates of every member of the family to determine the length of the three income periods
- sources and amounts of income available upon the death of the individual
- debt, like home mortgages, that must be eliminate upon the death of the individual
- existing assets that can be used to offset survivors’’ cash needs upon the individuals death
business uses of life insurance
- buy selling funding: cross purchase, entity purchase
- key person
- executive bonus
- deferred compensation
buy-sell funding
agreements provide for he sale of a business interest at the death or disability of an owner
entity plan
the purchaser of a deceased owner’s business interest is the business entity plan
or also known as a stock redemption plan
cross purchase plan
the survivor owner purchase the deceased owner’s interest in the business
each partner owns a policy on the lives of each of the other partners
key person coverage
businesses can protect themselves against the financial harm that would result from the death of such an employee
executive bonus plan
business pays the premiums on a life insurance policy which the employee owns
when the employee dies , the beneficiary named in the policy receives the death proceeds free of income tax
Deferred compensation plan
an employer agrees to pay an employee a stated amount of income beginning at the retirement rather than paying the money now. This benefits the employee because the money is not taxable until the employee actually receives it.
Group life insurance
single contract that covers an entire group of people
typically the policy owner is the employer and the policy covers the employees or members of the group. In most cases, the cost of ____ is far less than what the employees or members would pay for an individual policy with similar coverage
