Life Insurance Calculations & Types

Question 1

3 most common methods used to determine life insurance needs

Answer 1

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

Question 2

Capital Need Analysis

(method to determine life insurance need)

Answer 2

AKA Capital Retention
AKA Capital Preservation Analysis

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

Question 3

7 Steps of Capital Retention Approach

Answer 3

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

Question 4

Capital Retention Formula

Answer 4

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

Question 5

Financial Needs Analysis

(method to determine life insurance need)

Answer 5

AKA Capital Depletion Approach

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

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

Question 6

Human Life Value Approach

(method to determine life insurance need)

Answer 6

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

(ignores “objectives”)

Question 7

5 major types of Life Insurance Policies

Answer 7

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

Question 8

What is Renewable Term insurance?

Answer 8

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

(costs more)

Question 9

What is convertible term insurance?

Answer 9

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

(costs more)

Question 10

What is Level / Decreasing / Increasing Term Insurance?

Answer 10

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)

Question 11

What is Whole Life Insurance?

(2 parts to definition)

Answer 11

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

Question 12

3 types of Whole Life Insurance

Answer 12

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

Question 13

What is Endowment Life Insurance?

Answer 13

Like Whole Life but

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

Question 14

What is Adjustable Life Insurance?

Answer 14

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

(Precursor to Universal Life)

Question 15

True or False

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

Answer 15

False; Face amount = death benefit

Question 16

What is Universal Life Insurance?

(6 things)

Answer 16

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)

Question 17

True or False

Investment returns within a Universal Life policy are tax-deferred

Answer 17

True; BUT there are limits ont he cash value allowed

Question 18

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

Answer 18

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

Question 19

How are Variable Universal Life Policies generally MORE risky?

Answer 19

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

MORE RISK ON INSURED

Question 20

What does a “prospectus” do?

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

(6 things)

Answer 20

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

Question 21

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

Answer 21

Survivorship policy

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

Question 22

3 primary types of Group Life Insurance

Answer 22

1. Group Term Life Insurance
2. Group Dependent Life Insurance
3. Group Universal Life Insurance

Question 23

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

Answer 23

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

Question 24

Group Term Life Insurance Plan Design

(5 things)

Answer 24

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

Question 25

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

Answer 25

False; it **usually** is

Question 26

**Contributory** vs **Noncontributory** Group Term Life Insurance Plans

Answer 26

**Contributory** - Paid for in part or entirely by plan participants **Noncontributory** - Paid for by employer

Question 27

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

Answer 27

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

Question 28

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

Answer 28

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

Question 29

What is Group Dependent Life Insurance?

Answer 29

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

Question 30

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

Answer 30

True; plan must simply meet nondiscrimination requirements

Question 31

How do Group Universal Life Plans work? (3 things)

Answer 31

-Usually made to select group of employees -Employees pay w/ after tax dollars -Employer manages

Question 32

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

Answer 32

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

Question 33

How does a Section 162 Executive Bonus Plan work? (AKA Executive Bonus Plan) 3 things

Answer 33

1. Employee owns it, but employer pays 2. Permanent Life Insurance Policy 3. It's a way to keep legit executives ("golden handcuffs")

Question 34

What is a "Split Dollar Plan?"

Answer 34

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.

Question 35

How do "Split Dollar Plans" work?

Answer 35

4 aspects of permanent life insurance policy can be "split" ---premiums ---policy ownership ---cash value ---death benefit

Question 36

# True or False Split Dollar premiums are income tax deductible

Answer 36

False

Question 37

# 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.

Answer 37

True

Question 38

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

Answer 38

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