Unit 3 Basics of Life Insurance Flashcards
____ ownership refers to a situation where the owner of a life insurance policy is someone other than the insured.
Third-party ownership
To have a policy issued on someone else’s life, the applicant must have an ____ interest in that person. This means that the person applying for the policy must be at risk of suffering a significant loss is the insured dies. The loss may be either ____ or ____.
Insurable interest
Emotional - based on love and affection
Economic - based on financial dependency
Is there an insurable interest among lenders and debtors?
Yes - economic
With life insurance, when is an insurable interest required?
At the time of applcation
A individual’s ____ are the assets they leave behind at death
Estate
____ refers to how easily an asset can be turned into cash without loss of value. Examples of liquid assets are:
- checking and savings accounts
- life insurance proceeds
Liquidity
Permanent life insurance policies have a cash value component that grows over time. The life insurance cash value is called the policies ____.
Living benefits
According to the principle of ____, the purpose of life insurance is to replace an individual’s economic value and the calculation is:
the amount of the individual’s annual income X the number of years until retirement
Human life value
The ____ is similar to the human life value approach and is used to find the amount of insurance coverage an individual should buy. Instead of focusing on income, this approach looks at the financial situation the survivors will face if the individual dies. This approach is much more detailed than the human life value approach and it results in a more accurate number. This approach is more commonly used.
Survivor’s financial needs fall into 2 categories:
- cash needs
- ____
Needs approach
Income needs
____ are those that can be met with a lump sum of money. This includes:
- final expenses - funeral/burial costs and final medical bills
- debt payoff - mortgage, credit cards, car loans, installment loans
- children’s education - fund to pay for future college
- emergency fund - unexpected expenses that can cause hardship
Cash needs
____ are those created by ongoing living expenses such as food, clothing, utilities, and a mortgage. Three periods:
1. ____ - during this period the surviving children are too young to support themselves and depend on the surviving parent
2. ____ - at this point the children have grown up and become self-supporting, but the surviving spouse has not yet reached retirement age
3. ____ - now the surviving spouse is no longer earning an income
Income Needs
Family Dependency
Preretirement
Retirement
Social Security pays survivor benefits during the family dependency and retirement periods. However during the preretirement period, often called the ____ period, payments are suspended.
Blackout Period
The Social Security Administration provides benefits for surviving spouses with children under age ____. When the youngest child turns ____, benefits stop and do not resume until the surviving spouse turns ____.
16, 16, 60
____ agreements provide for the sale of a business interest at the death or disability of an owner. They are often referred to as ____ plans.
Buy-sell agreements
Business continuation plans
Can buy-sell agreements be funded with life insurance?
Yes
Buy-sell agreements: Under an ____ plan, the purchaser of a deceased owner’s business interest is the business entity itself. When funded by life insurance, the business entity owns a policy on the life of each business owner. If the business is a corporation, these plans are often called ____ plans because the corporation is actually redeeming the deceased owner’s stock. The term for this plan is usually used with non-incorporated businesses such as partnerships.
Entity Plan
Stock-Redemption Plans
Buy-sell agreements: Under a ____ plan, the surviving owners 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 the other partners. If there are more than two partners or shareholders, many more policies are needed for this type of plan vs the entity plan.
Cross-purchase plan
Just as a family depends on the financial contribution of an income-earner, a business may depend on a particular employee whose contribution is key to its success. Businesses can protect themselves against the financial harm that would result from the death of such an employee with ____ coverage.
Key person coverage
Rather than giving a yearly bonus to an employee in cash, companies can use the money to buy a life insurance policy for the employee. Under an ____ plan, 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.
Executive bonus plan
An executive bonus plan, or ____ plan, is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. The bonus is tax-deductible to the employer as a salary expense. The employee uses the bonus to pay the premiums on a life insurance poicy covering their life. The employee is the owner of the policy, and the bonus is included in the employee’s gross income. When the employee dies the beneficiary named in the policy receives the death proceeds free of income tax.
Section 162 plan
Under a ____ plan, an employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying the money now. This benefits the employee because the money is not taxable until the employee actually receives it. If the money were paid now, it would be included with the employee’s current earnings and probably taxed at a higher rate. After retirement, the employee may be in a lower tax bracket.
Deferred compensation plan
Deferred Compensation Plan: …In return, the employee agrees to work for the employer until a specified future date - typically at retirement. The deferred compensation benefits are ____ if the employee leaves the company before then. This benefits the employer by helping to assure that a valuable employee continues to contribute to the company’s success and does not leave to work for a competitor or start a competing business of his or her own.
Forfeited
Deferred Compensation Plan: …If the employee dies before retirement, the deferred compensation benefits become payable immediately to the employee’s ____. Companies often buy a life insurance policy to make sure they will have the money to pay those benefits if that happens. If the policy is ____, the cash values can be used to help pay the deferred compensation benefits to the employee if they live to retirement.
Surviving spouse or other beneficiary
Permanent insurance
____ is a single contract that covers an entire group of people. Typically, the policyowner is an employer and the policy covers the employees or members of the group.
Group life insurance
