Chapter 10 - Uses of Insurance

A Key Employee policy is taken out by Company X on its vice president. Ten years later, this employee leaves Company X and begins working for Company Y. If this individual were to die and the policy is still in force and unchanged, where would the death proceeds be directed?

Company X

Two partners own equal shares in a business worth a total of $1,000,000. If they both commit to the purchase of a life insurance policy that will fund a Buy-Sell Agreement, which of the following is TRUE?

Each partner owns a $500,000 policy on their partner's life

The premiums paid by an employer for his employee's group life insurance are usually considered to be

tax-deductible to the employer

In a Key Employee life insurance policy, the third-party owner can be all of the following EXCEPT

insured

What is considered a valid reason for small businesses to insure the lives of its major shareholders?

Fund a buy-sell agreement

An engineering firm that would suffer financially from the death of a project manager should purchase a

Key Person Life Policy

Which of these is NOT relevant when determining the amount of personal life insurance needed? Existing life insurance coverage Local unemployment rate Household income Household debt

Local unemployment rate

Which of these factors does NOT influence an applicant's need for life insurance? Lifestyle of the applicant Number of dependents Future educational costs of the dependents Self-maintenance expenses

Self-maintenance expenses

Which statement regarding a Key Employee Life policy is NOT true? The application must be signed by the key employee Its purpose is to prevent the financial loss that may ensue if a key employee dies The beneficiary is named by the key employee The company purchases, owns, pays the premiums and is the beneficiary

The beneficiary is named by the key employee

A Loss-Purchase Buy and Sell agreement among three partners, funded with individual life insurance, would require how many policies?

6

Which of these is NOT a reason for a business to buy key person life insurance? The reduction in sales as a direct result from death of the key employee A void in leadership if the key person were to die The loss of company revenues while a replacement is being sought A pension deficiency if the key employee dies

A pension deficiency if the key employee dies

C is a key employee at ABC Incorporated. If a Key Employee life policy is purchased on her life, which of these statements would be true?

ABC is the policyowner, C is the insured, and ABC is the beneficiary

Company Z has a Cross Purchase Buy-Sell Agreement in place among its three founding partners. If the agreement is funded with individual life insurance, what would it require?

Each partner must own a policy on the other partners

Which of these is NOT a reason for purchasing life insurance on the life of a minor? If both parents were to die, it would provide death benefits to the child Provides funds for final expenses if the child were to die Provides living benefits for the child's college education Provides child with insurance now, in case the child becomes uninsurable later

If both parents were to die, it would provide death benefits to the child

Which statement regarding third-party ownership of a life insurance policy is true? Beneficiary is required to be irrevocable Policy cannot be assigned once issued It is illegal in most states It is used extensively in estate-planning as well as business circumstances

It is used extensively in estate-planning as well as business circumstances

In life insurance, the needs approach is used mostly to establish

how much life insurance a client should apply for

Which of these is NOT considered to be a cost connected with an individual's death? Funeral expense Tax liability Business expenses Probate costs

Business expenses

When an individual is planning to protect his family with life insurance, one method of doing so is called needs analysis. What exactly does needs analysis involve?

Establishes the needs of the individual and his dependents

Which type of plan allows an employer to give money to an employee for buying a life insurance policy and also permits the employee to select the beneficiary?

Split-dollar plan