Unit 3: Basics Of Life Insurance Flashcards

Question

What is a cross-purchase plan?

Answer 1

•the surviving owner(s) purchase the deceased owner’s interest in the business •when funded by life insurance, each partner (or shareholder, if the business is a corporation) owns a policy on the lives of each of the other partners •if there are more than 2 partners or shareholders, many more policies are needed for a cross-purchase plan than an entity plan

Answer 2

•used by businesses to help protect themselves against the financial harm that would result from the death of a key employee •business owns, pays for, & is the beneficiary of the policy on the key person’s life •if the key person dies, the insurance proceeds can be used to offset direct financial losses like a drop in sales as well as to help pay the costs of finding a replacement

Answer 3

•rather than giving a yearly bonus to an employee in cash, companies can use the money to buy a life insurance policy for the employee •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, & at death, the proceeds are paid to the beneficiary named by the employee •section 162 plan •nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee •bonus is tax deductible to the employer as a salary expense •employee uses the bonus to pay the premiums on a life insurance policy covering her life •the employee is the owner of the policy & the bonus is included in the employee’s gross income •when the employee dies, the beneficiary named in the policy receives the death proceeds free of income tax

Answer 4

•employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying the money now •benefits the employee because the money is not taxable until the employee actually receives it •in return, the employee agrees to work for the employer until a specified future date-typically at retirement •the deferred compensation benefits are forfeited if the employee leaves the company before then •if the employee dies before retirement, the deferred compensation benefits become payable immediately to the employee’s surviving spouse or other beneficiary •companies often buy a life insurance policy to make sure they will have the money to pay those benefits if that happens •if the policy is permanent insurance, the cash values can be used to help pay the deferred compensation benefits to the employee if they live to retirement •under the life insurance policy, the company is the owner, premium payer, & beneficiary, and the employee is the insured

Answer 5

•buy sell funding •key person •executive bonus •deferred compensation

Answer 6

•a single contract that covers an entire group of people •typically the policyowner is an employer and the policy covers the employees or members of the group •often provided as part of a complete employee benefit package •usually the cost of group coverage is far less than what the employees or members would pay for an individual policy with similar coverage

Answer 7

•developed as a way for people of limited means to obtain some of the benefits of life insurance •face amounts usually small ($2,000 or less) & are often bought simply to help pay burial expenses **premiums come due weekly & are collected in person by producers who go door-to-door

Answer 8

•variation on industrial life insurance •sold by industrial/home service producers in the neighborhoods where they collect premiums at the houses of industrial life policyowners •policies larger in size-usually $10k-$25k in face value •policyowners are encouraged to pay the premiums through an automatic bank draft (often called a “monthly debit plan”) or by mail, so that producers do not have to collect them personally

Answer 9

•individual vs. group •term vs. permanent •participating vs. non-participating •fixed vs. variable •industrial & home-service

Answer 10

1. Mortality-the relative frequency of deaths in a specific population; death rate 2. Interest-earnings on premium dollars between the time they are collected & the time they are paid out as claims 3. Expenses-insurer operating costs, referred to as the “expense load;” adding the expense element to insurance premiums is called “loading”

Answer 11

Adding the expense element to insurance premiums

Answer 12

•the premium before loading •[mortality] - [interest]

Answer 13

Will fund a policy’s benefit with one premium payment

Answer 14

[net premium] + [expenses] = [mortality] - [interest] + [expenses]

Answer 15

•reflects how frequently premiums come due •premiums may be paid monthly, quarterly, semiannually, or annually •premium calculations are based on the assumption that the policyowner will pay the annual premium mode •premiums will be higher if not paid annually—>annually is the lowest

Answer 16

•cost based upon individual insured •individual policy issues •policyowner chooses amount of insurance

Answer 17

•cost based on group •policy issued to employer or group sponsor •employer determines amount of insurance

Answer 18

•death benefit only •increasing premiums •temporary coverage; expedited at the end of the term •cannot be renewed after a certain age

Answer 19

•living & death benefits •level premiums •lifetime coverage; no expiration •protection continues through advanced ages

Answer 20

•may pay dividends to policyowner •somewhat higher premium •can be issued by mutual or stock insurers

Answer 21

•does NOT pay dividends •somewhat lower premium •issued by stock insurers

Answer 22

•guaranteed cash value •values expressed in dollar amounts

Answer 23

•no guaranteed cash value •values expressed in investment units