Kaplan - Unit 3 Flashcards
Basics of Life Insurance (34 cards)
Third-party ownership
The owner of a life insurance policy is someone other than the insured.
- Insurer
- Insured
- Owner/applicant
Insurable Interest
The person applying for the policy must be at risk of suffering a significant loss if the insured dies. Loss may be emotional, bas on love and affection, or economic, based on the financial dependency such as the insured’s income.
To Prove Insurable Interest
- Have Financial or emotional loss
+ Only have to prove if owner is different than applicant
-Assumed you have insurable interest when purchasing policy on yourself - Insurable interest must be present at time of application only
Mortgage Payoff
Mortgage life insurance policy will pay off this debt if the insured dies and assures that their surviving familiy will be able to stay in their home.
Estate Creation
For people in their working years, insurance can create an estate if pre-mature death prevents them from doing so themselves.
Estate Conservation
Life insurance can ensure the estate is conserved and kept intact for the heirs as the individual intended.
Liquidity
How easily an asset can be turned into cash without loss of value.
Examples of Liquid and illiquid assets
Liquid
- Bank savings or checking accounts
- Life insurance proceeds (paid in cash)
Illiquid
- Precious metals, gems, stamps
- Real estate
- Farms and farming equipment
- Small or privately held business interests
Cash Accumulation
Permanent life insurance policies have a cash value component that grows over time called the policies living benefits.
Personal Uses of Life Insurance
- Survivor Protection
- Mortgage Payoff
- Estate Creation
- Estate Conservation
- Liquidity
- Cash Accumulation
Human Life Value
To replace an individual’s economic value:
the amount of the individual’s annual income x the number of years until retirement
Needs Approach
Used to find the amount of insurance coverage an individual should buy based on the financial situation the survivors will face if the individual dies.
2 categories:
- Cash needs
- Income needs
Cash Needs
Can be met with a lump of money:
- Final expenses
- Debt payoff
- Children’s education
- Emergency fund
Income Needs
Ongoing living expenses such as food, clothing, utilities, and a mortgage.
3 Income Need Periods
Family Dependency - during this period the surviving children are too young to support themselves and depend on the surviving parent for their needs.
Preretirement - at this point the children have grown up and become self-supporting, but the surviving spouse has not yet reached retirement age.
Retirement - now the surviving spouse is no longer earning an income.
Blackout Period
The Social Security Administration provides benefits for surviving spouses during the family dependency and retirement period but not during the preretirement period.
Data Gathering (or fact-finding)
Information required for the needs approach.
Buy-Sell Funding
Provides for the sale of a business interest at the death or disability of an owner. Often referred to as business continuation plans.
Entity Plan
Business entity owned policy on the life of each business owner. If business is a corporation, entity plans are often called stock redemption plans. Usually used with non-incorporated businesses such as partnerships.
Cross-Purchase Plan
Surviving owner’s purchase the deceased owner’s interest in the business. When funded by life insurance, each partner owns a policy on the lives of each of the other partners.
Key Person Coverage
The business owns, pays for, and is the beneficiary of the policy on the key person’s life.
Executive Bonus Plans
A business pays the premiums on a life insurance policy which the employee owns. During life, the employee has full access to the policy’s living benefits, and at death the proceeds are paid to the beneficiary named by the employee.
Deferred Compensation Plans
An employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying the money now. In return the employee agrees to work for the employer until a specified future date.
Business Uses of Life Insurance
-Buy-Sell Funding
+ Cross purchase
+ Entity purchase
- Key person
- Executive bonus
- Deferred compensation
