Uses of Life Insurance

Question 1

Which of these factors does NOT influence an applicant’s need for life insurance?
<> Self-maintenance expenses
<> Number of dependents
<> Lifestyle of the applicant
<> Future educational costs of the dependents

Answer 1

Self-maintenance expenses
~ An individual’s need for death benefit for survivors is influenced by all of the following factors EXCEPT self-maintenance expenses

Question 2

What is considered a valid reason for small businesses to ensure the lives of its major shareholders?
<> Fund a buy-sell agreement
<> To pay for final expenses
<> To provide an income for the surviving dependents
<> Reduce the company’s tax liability

Answer 2

Fund a buy-sell agreement
~ Life insurance is purchased to fund a buy-sell agreement in the event of the death of a major shareholder in a business.

Question 3

Which of these is NOT a reason for purchasing life insurance on the life of a minor?
<> Provides funds for final expenses if the child were to die
<> Provides living benefits for the child’s college education
<> Provides child with insurance now, in case the child becomes uninsurable later
<> If both parents were to die, it would provide death benefits to the child

Answer 3

If both parents were to die, it would provide death benefits to the child
~ An insurance policy on a child would not pay any benefits if one or both of the parents died. All of the other answers are valid reasons for buying life insurance on a child

Question 4

Which type of plan allows an employer to give money to an employee for buying a life insurance policy and also permits the employee to select the beneficiary?
<> Split-dollar plan
<> Key employee plan
<> Employer purchase plan
<> Deferred compensation plan

Answer 4

Split-dollar plan
~ A split-dollar plan is an arrangement where an employer and an employee share in the cost of purchasing a life insurance policy on the employee. The employee is also allowed to name the policy beneficiary

Question 5

Which statement regarding a Key Employee Life policy is NOT true?
<> The application must be signed by the key employee
<> The company purchases, owns, pays the premiums, and is the beneficiary
<> The beneficiary is named by the key employee
<> its purpose is to prevent the financial loss that may ensue if a key employee dies

Answer 5

The beneficiary is named by the key employee

~ The company names the beneficiary, not the employee

Question 6

In a Key Employee life insurance policy, the third-party owner can be all of the following, EXCEPT:
<> Applicant
<> Insured
<> Owner
<> Payor

Answer 6

Insured

~ In a Key Employee life insurance policy, the third-party owner can be all of these EXCEPT the insured

Question 7

Two partners own equal shares in a business worth a total of $1,000,000. If they both commit to the purchase of a life insurance policy that will fund a Buy-Sell Agreement, which of the following is TRUE?
<> Each partner owns a $500,000 policy on their partner’s life
<> Each partner owns a $500,000 policy on their own life
<> Each partner owns a $1,000,000 policy on their own life
<> Each partner owns a $1,000,000 policy on their partner’s life

Answer 7

Each partner owns a $500,000 policy on their partner’s life
~The amount of the policy is equivalent to each partner’s share of the business. When one partner dies, the other partner receives the death benefit from the life insurance on the deceased partner, which is then used to buy the deceased partner’s ownership of the business.