Chapter 10 Flashcards
Inside Buildup
The increase in the cash value or a permanent life insurance policy
Modified Endowment Contract (MEC)
A life insurance policy that fails to meet the IRS Code’s 7-Pay Test. Distributions, therefore, receive less favorable tax treatment than other life insurance contracts receive.
Gift Tax
A tax imposed on transfers of property by gift during the donor’s lifetime.
Viatical Settlement
The sale of a terminally ill insured’s life insurance policy in exchange for a percentage of the face amount
Life Settlement
An arrangement that involves transferring the ownership of a life insurance policy to a third-party investor, much life a viatical settlement, but in cases where the insured is not chronically or terminally ill. Life settlements provide a relatively new way for seniors to convert their life insurance polices to cash.
Key Employee Life Insurance
Insurance on the life of a key employee to cover the possibility of an income loss and/or an increase in expenses resulting from the key employee’s death.
Buy-Sell Agreement
A contract binding the owner of a business interest to sell the business interest for a specified or determinable price at his or her death or disability and binding a designated purchaser to buy at that time
Entity Agreement
A business buy-sell agreement for partnerships and corporations in which the business itself is the designated purchaser of the deceased’s business interest
Cross-Purchase Agreement
A business buy-sell agreement for partnerships and corporations in which the surviving co-owners will be the purchasers of the business interest of a deceased owner
Split-Dollar Life Insurance
A plan under which two parties, usually an employer and an insured employee, share the premium costs, death proceeds, and perhaps the cash value of a life insurance policy pursuant to a prearranged agreement.
Transfer-For-Value Rule
A rule that specifies that, subject to certain exceptions, if a life insurance policy is transferred from one owner to another for valuable consideration, the death proceeds will be subject to federal income taxation.
Financial Needs Analysis
A system for determining how much life insurance a client needs if the principal sum is to be liquidated in the process of meeting the client’s financial objectives for his or her survivors
Capital Needs Analysis
A system for determining how much life insurance a client needs if the principal sum is to be preserved in the process of meeting the financial objectives for his or her survivors
Surrender Cost Index
A method of estimating the net cost of life insurance on a time-value-adjusted basis, assuming the policy will be surrendered at the end of a specified time period
Net Payment Cost Index
A method of estimating the net cost of life insurance on a time-value-adjusted basis, assuming that the policy’s death benefit will be paid at the end of a specified period of time.
