Uses of Life Insurance Flashcards
Human Life Value Approach
is an individual’s economic worth, measured by the sum of the individual’s future earnings that is devoted to the individual’s family.
Human Needs Approach
is a method for determining how much insurance protection a person should have by analyzing a family’s or business’s needs and objectives should the insured die, become disabled, or retire.
Needs-Based Selling
describes the ethical duty of a producer to sell a product that fits the needs of the prospect rather than the needs of the producer. An example of a needs-based violation is a prospect being sold insurance with the highest premium (and the greatest commission) instead of the proper coverage. By committing themselves to professionalism and the needs of the client, insurance producers can act both responsibly and ethically. There are two principles involved in needs-based selling:
- Fact-finding
is the first step. An agent should understand what his client’s goals are (long term, short term, retirement, etc.) and be able to create a map that will lead to the fulfillment of those goals. Treat all information with utmost confidentiality.
Education
is the second step. Show clients how insurance can be used as an effective financial tool to help them reach their individual goals. Make certain the client understands the application and underwriting processes, the policy purchased and any attached riders.
Cross-purchase plans
are agreements that provide that upon a business owner’s death, surviving owners will purchase the deceased’s interest, often with funds from life insurance policies owned by each principal on the lives of all other principals.
Entity plans
are agreements in which a business assumes the obligation of purchasing a deceased owner’s interest in the business, thereby proportionately increasing the interests of surviving owners.
Key Person Insurance
is the protection of a business against financial loss caused by the death or disablement of a vital number of the company, usually individuals possessing special managerial or technical skill or expertise.
Split-dollar plans
are arrangements between two parties where life insurance is written on the life of one party who names the beneficiary of the net death benefits (death benefits less cash value), and the other party is assigned the cash value, with both sharing premium payments.
DETERMINING THE PROPER INSURANCE AMOUNTS
- Human Life Value Approach: Calculates the amount of money a person is expected to earn over his lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual.
- Needs Approach: A method of life insurance planning which identifies the needs of an individual and the individual’s dependents. This approach determines the total funds available to a family from all sources and subtracts the amount needed to meet their financial objectives. It takes into consideration:
* Final Expense Fund
* Housing Fund
* Education Fund
* Monthly Income
* Emergency Fund
* Income Needs if Disabled or Ill
* Retirement Income
* Estate Conservation (using life insurance to enable heirs to pay estate taxes)
* NEEDS include ANY(ONE or THING) depending on that person, charity, child, pet,
- The needs approach to personal life insurance planning may involve creating a lump sum to provide for such things as education, retirement, and charitable
- The needs approach to personal life insurance planning also includes the creation of an emergency reserve fund. This fund is designed primarily to cover the cost of unexpected expenses.
- The “needs approach” in life insurance is most useful in determining how much life insurance a client should apply for.
BUSINESS USES OF LIFE INSURANCE
Buy-Sell agreements are also known as business continuation agreements and are used to assure the ownership of the business is properly transferred upon the death or disability of an owner or partner. Third-party ownership of life insurance policies is widely used in business insurance and estate- planning situations.
Buy-Sell Funding for Sole Proprietors
There is a two-step business continuation plan to keep the business running after the proprietor’s death, whereby the employee takes over management of the business:
- Buy-Sell Plan: an attorney drafts a buy-sell plan stating the employee’s agreement to purchase the proprietor’s estate and sell the business at a price that has been agreed-upon beforehand.
- Insurance Policy: the employee purchases a life insurance policy on the life of the proprietor. The employee is the policyowner, beneficiary, and pays the premiums. Upon the proprietor’s death, the funds from the policy are used to buy the business.
Cross-purchase plans:
In a cross-purchase plan, each partner buys, pays the premiums, and is the beneficiary of a life insurance policy on each of the other partners. The amount of the policy is equivalent to each partner’s share of the business. When one partner dies, each of the other partners 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.
Entity plans
the partnership itself agrees to buy the deceased partner’s share of the business. Entity plans are best for businesses with several partners. In this case, the business purchases, pays the premiums and is the beneficiary of life insurance on each partner.
Buy-Sell Funding for Close Corporations
Unlike a partnership, a close corporation (i.e. an incorporated family business) is legally separate from its owners. It exists after one or more owners dies. A close corporation may purchase either buy-sell plans: cross-purchase or entity. The difference is that an entity plan is termed a stock redemption plan for close corporations.
