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Insurance Planning > Life Insurance Calculations & Types > Flashcards

Life Insurance Calculations & Types Flashcards

1
Q

3 most common methods used to determine life insurance needs

A
  1. Capital Needs Analysis
  2. Financial Needs Analysis
  3. Human Life Value
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2
Q

Capital Need Analysis

(method to determine life insurance need)

A

AKA Capital Retention
AKA Capital Preservation Analysis

Main goal is to generate cash and income required to meet family’s financial needs

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3
Q

7 Steps of Capital Retention Approach

A
  1. Determine client’s objectives.
  2. Evaluate client’s current financial position (in event of death).
  3. Based on objective, determine capital required to cover cash need shortfall.
  4. Determine cash resources.
  5. Determine income resources.
  6. Based on objective, determine capital required to cover income need shortfall.
  7. Combine total capital required for cash plus income needs
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4
Q

Capital Retention Formula

A

(Annual Income Shortfall ÷ Interest Rate) + (1st years payment - Existing Capital) = Net Income Capital Needed

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5
Q

Financial Needs Analysis

(method to determine life insurance need)

A

AKA Capital Depletion Approach

Assumes client’s money AND client expire at the same time

(Best for short term income needs)
(More Accurate)

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6
Q

Human Life Value Approach

(method to determine life insurance need)

A

Basically adds up all potential earnings of deceased (less taxes, etc), adjust for inflation, and get a huge number

(ignores “objectives”)

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7
Q

5 major types of Life Insurance Policies

A
  1. Term Insurance
  2. Whole Life
  3. Endowment Life
  4. Universal Life
  5. Variable Universal Life
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8
Q

What is Renewable Term insurance?

A

At end of term, insurance can be renewed (conditionally or guaranteed) regardless of health status/insurability

(costs more)

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9
Q

What is convertible term insurance?

A

Policy that includes the right to convert a term policy to “permanent” without evidence of insurability

(costs more)

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10
Q

What is Level / Decreasing / Increasing Term Insurance?

A

Level - death benefit stays the same (majority of term policies)

Increasing - death benefit goes up; premium goes up (rare)

Decreasing - death benefit goes down; premium goes down (good for mortgages/loans)

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11
Q

What is Whole Life Insurance?

(2 parts to definition)

A

-Policy intended to last beyond death
-Can borrow from cash value but have to pay interest

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12
Q

3 types of Whole Life Insurance

A
  1. Ordinary - fixed premiums
  2. Limited Pay - higher fixed premiums for a shorter period
  3. Modified Pay - premiums increase over time
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13
Q

What is Endowment Life Insurance?

A

Like Whole Life but

  • Duration is much shorter
  • Face amount of policy is paid at the earlier of maturity date
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14
Q

What is Adjustable Life Insurance?

A

Ability to adjust policies (premium and/or death benefit)

(Precursor to Universal Life)

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15
Q

True or False

The face amount of a Life Insurance Policy is its cash surrender value

A

False; Face amount = death benefit

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16
Q

What is Universal Life Insurance?

(6 things)

A
  1. Has a minimum premium, but you can pay more.
  2. Face amount is guaranteed
  3. Can withdraw loans or from cash value
  4. Interest on cash value paid by insurer
  5. Insurance companies get their cut from cash value
  6. You also pay mortality charge (think term premiums)
17
Q

True or False

Investment returns within a Universal Life policy are tax-deferred

A

True; BUT there are limits ont he cash value allowed

18
Q

What are the 2 added features in a Variable Universal Life policy that differentiate it from Universal Life?

A

Variable Universal Life Policy has:
1. Investment Sub-accounts
2. No guaranteed rate of interest

19
Q

How are Variable Universal Life Policies generally MORE risky?

A

-Death benefit AND cash value can vary
-Doesn’t guarantee investment earnings or minimum cash value

MORE RISK ON INSURED

20
Q

What does a “prospectus” do?

(Variable Universal Life reps are required to give this prior to or at sales call)

(6 things)

A
  1. Outline expense of policy
  2. Outline investment options
  3. Outline past performance of funds
  4. Outline benefit provisions
  5. Outline surrender charges
  6. Outline policy owner’s rights
21
Q

What is a Joint-Life Policy typically called and what are the 2 types?

A

Survivorship policy

  1. First to die (co-business owners, 2 incomes)
  2. Second to die (estate planning)
22
Q

3 primary types of Group Life Insurance

A
  1. Group Term Life Insurance
  2. Group Dependent Life Insurance
  3. Group Universal Life Insurance
23
Q

3 most popular “Carve-Out Plans” employers use to supplement Group Term Plans

A
  1. Section 162 Plans
  2. Split Dollar Plans
  3. Death Benefit Only Plans
24
Q

Group Term Life Insurance Plan Design

(5 things)

A
  1. 1-2 times salary
  2. Can be same benefits for all employees or tiered (see above)
  3. Death benefit usually is reduced as employee ages
  4. First 50k can be tax free if under section 79 of tax code
  5. Most plans include Accidental Death and Dismemberment
25
Q

True or False

Much like individual insurance, Group Term Life Insurance is not offered on a guaranteed basis

A

False; it usually is

26
Q

Contributory vs Noncontributory Group Term Life Insurance Plans

A

Contributory - Paid for in part or entirely by plan participants

Noncontributory - Paid for by employer

27
Q

True or False

Employees who are laid off, furloughed, terminated can continue for a limited time on group term life no matter what.

A

False; As long as the company policy is non-discriminatory can this work

28
Q

True or False

Retired and terminated employees have a right to convert Group Term Life Insurance into a Permanent Life Insurance Policy

A

True (But there’s a small window of time)

29
Q

What is Group Dependent Life Insurance?

A

Group Term Life Insurance for employee dependents; usually pretty small (25k for spouse; 10k per child)

30
Q

True or False

The cost of the first $50k of Group Term Life Insurance coverage is income tax free to employee

A

True; plan must simply meet nondiscrimination requirements

31
Q

How do Group Universal Life Plans work?

(3 things)

A

-Usually made to select group of employees

-Employees pay w/ after tax dollars

-Employer manages

32
Q

Why is it often attractive to the employer to “carve-out” key employees and only provide $50k of Group Term Coverage?

A

It’s expensive to both employer AND employee to provide group term in retirement / in excess of $50k

33
Q

How does a Section 162 Executive Bonus Plan work? (AKA Executive Bonus Plan)

3 things

A
  1. Employee owns it, but employer pays
  2. Permanent Life Insurance Policy
  3. It’s a way to keep legit executives (“golden handcuffs”)
34
Q

What is a “Split Dollar Plan?”

A

It’s a technique that allows a company to provide key executives with life insurance and cash value benefits on a favorable cost basis to the executive. The “split” has to do with a sharing of premium payments, death benefits, and/or cash values between the company and the executive.

35
Q

How do “Split Dollar Plans” work?

A

4 aspects of permanent life insurance policy can be “split”
—premiums
—policy ownership
—cash value
—death benefit

36
Q

True or False

Split Dollar premiums are income tax deductible

A

False

37
Q

True or False

A split dollar plan is always set up with a “first lien” to the cash values in order to secure the premium payments of the employer.

A

True

38
Q

How do Death Benefit Only Plans work? (4 parts)

A

Exec defers compensation and beneficiary receives funds (which exceed deferred comp) ONLY AT DEATH

Can be funded by life insurance policy on employer’s end

Benefits are taxed

Employers get a lot of leverage here

Insurance Planning (16 decks)

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