Uses of Life Insurance

Question 1

DETERMINING THE PROPER INSURANCE AMOUNTS

Answer 1

1. 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
2. Needs Approach: identifies the needs of an individual and the individual’s dependents.

Question 2

BUSINESS USES OF LIFE INSURANCE

Answer 2

Third-party ownership of life insurance policies is widely used in business insurance and estate-planning situations.

Question 3

Buy-Sell Funding for Sole Proprietors

Answer 3

• 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:employee purchases a life insurance policy on the life of the proprietor.
-employee=policyowner, beneficiary, and pays the premiums.
-proprietor’s death, the funds from the policy are used to buy the business.

Question 4

Cross-purchase plans: each partner buys, pays the premiums, and is the
beneficiary of a life insurance policy on each of the other partners.
-equivalent to each partner’s share of the business.
Entity plans: the partnership itself agrees to buy the deceased partner’s share of the business.
-best for businesses with several partners. -business purchases, pays
the premiums and is the beneficiary of life insurance on each partner

Answer 4

Buy-Sell Funding for Partnerships

Question 5

Buy-Sell Funding for Close Corporations

Answer 5

-may purchase either buy-sell plans: cross-purchase or entity
-difference entity plan is termed a stock
redemption plan for close corporations.

Question 6

Close Corporation Cross-Purchase Plan

Answer 6

-requires surviving stockholders purchase the deceased stockholder’s interest in the company, and the deceased stockholder’s estate sell the interest to the surviving stockholders

Question 7

the corporation purchases, is the owner, pays the premiums and is the beneficiary of life insurance policies on each stockholder. The amount of life insurance is equal to each stockholder’s share of the corporation’s purchase price. When a stockholder dies, the corporation purchases, or redeems, the deceased stockholder’s share.

Answer 7

Close Corporation Stock Redemption Plan

Question 8

The purpose of ___ ______ _________ is to prevent the financial loss that may ensue when an owner, officer or manager dies.

Answer 8

key person insurance

Question 9

• It pays for finding and training a replacement if the key employee dies prematurely
• The company purchases, owns, pays the premiums and is the beneficiary of the life insurance policy on the key person.
• The premiums are not deductible for income purposes. However, the death proceeds received by the business are not taxable.

Answer 9

key person insurance

Question 10

EMPLOYEE BENEFIT PLANS

Answer 10

1. Deferred Compensation
2. Salary Continuation Plan
3. Split Dollar Plan

Question 11

Deferred Compensation

Answer 11

is an executive benefit an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement or death.

Question 12

works the same as deferred compensation except that the employer
funds the plan rather than the employee. The employer establishes an agreement, whereby an
employee will continue to receive income payments upon death, disability or retirement.

Answer 12

Salary Continuation Plan

Question 13

Split-Dollar Plan

Answer 13

• employer and an employee share in the cost of purchasing a life insurance policy on the employee.
• It is a method of buying insurance
• combo of term and whole life insurance.