Unit 3 Basics of Life Insurance Flashcards
third-party ownership
a situation where the owner of a life insurance policy is someone other than the insured
insurable interest
personal applying for the policy must be at risk of suffering a significant loss if the insured dies (spouse, business partner). must be proven before policy can be purchased. relationship does not need to exist at death
6 personal uses of life insurance
-survivor protection
-mortgage payoff
-estate creation
-estate conservation
-liquidity (how easy an asset can turn into cash without loss)
-cash accumulation
determining amount of personal life insurance
-human live value (current income)
-needs approach (money for specific needs)
3 types of income needs
-family dependency
-preretirement (also called the blackout period. Social Security stops when child turns 16 and before surviving spouse turns 60)
-retirement
business uses of life insurance
-buy sell funding
+cross purchase
+entity purchase
-key person
-executive bonus
-deferred compensation
buy sell funding
a business use of life insurance. includes cross purchase and entity purchase. provides for the sale of a business interest a the death or disability of an owner. also known as business continuation plan
entity plan
a type of buy sell funding in which the purchaser of a deceased owner’s business interest is the business entity itself. often called a stock redemption plan because the corporation is redeeming the deceased owner’s stock
cross-purchase plan
a type of buy sell funding in which the surviving owner(s) purchase the deceased owner’s interest in the business
key person coverage
a business use of life insurance in which the proceeds can be used to offset direct financial losses and help pay the costs of finding and training a replacement
executive bonus plan
a business use of life insurance in which the business pays the premiums on a life insurance policy which the employee owns
deferred compensation plan
a business use of life insurance in which the employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying the money now
individual life insurance
-cost based upon individual insured
-individual policy issued
-policyowner chooses amount of insurance
group life insurance
-cost based upon the group
-policy issued to employer or group sponsor
-employer determines amount of insurance
term life insurance
-death benefit only
-increasing premiums
-temporary coverage; expires at end of term
-cannot be renewed (extended) after a certain age
permanent life insurance
-living and death benefits
-level premiums
-lifetime coverage; no expiration
-protection continues through advanced ages
participating life insurance
-may pay dividends to policy holder
-somewhat higher premium
-can be issued by mutual or stock insurers
nonparticipating life insurance
-does not pay dividends
-somewhat lower premium
-issued by stock insurers
fixed life insurance
-guaranteed cash value
-values expressed in dollar amounts
-can be sold by a producer with a life insurance license
variable life insurance
-no guarantee cash value
-values expressed in investment units
-can be sold by someone with a life and securities license
premium elements
-mortality
-interest
-expenses
mortality
the relative frequency of deaths in a specific population; death rate
interest
earnings on premium dollars between the time they are collected and the time they are paid out as claims
expenses
insurer operating costs
net premium
mortality minus interest
gross premium
mortality minus interest plus expenses
premium payment mode
reflects how frequently premiums are due
-annual, semi-annual, quarterly, monthly
-annual is the lowest amount you will pay
