Principles of Life Insurance

Cross-Purchase Plan (Few Partners)

A type of buy-sell agreement that is typically used if only a few partners exist within a company. Each partner purchases a life insurance policy on the other partners in the company with face amounts equal to each partner's share of ownership in the company. 2 partners x 1 policy on each other = 2 total policies 3 partners x 2 policies each = 6 total policies 4 partners x 3 policies each = 12 policies

Accelerated Benefits

Advance payments of funds before the death is a non-taxable way to receive life insurance benefit funds before death to pay for medical and living expenses if the policyowner is diagnosed as terminally ill

Revocable Beneficiary Designation

Allows the policyowner to change beneficiaries after the policy becomes in force without the consent of the beneficiary

Split-Dollar Plans

An arrangement between the employer and employee to split premium payments for life insurance whereby the employer pays premium equal to the annual increase in the policy's cash value and the employee pays the premium equal to the death benefit minus the cash value.

Entity Plan (Several Partners)

An entity plan is typically used if several partners exist within a company. Instead of each partner purchasing multiple life policies, the company itself purchases a life policy on each partner and serves as the policyowner of each policy. Each partner's face amount is based on his or her share of ownership in the company.

Insurable Interest

An interest must exist between two parties where on party has the potential to suffer a loss in the event that a particular outcome occurs.

Estate Creation and Conservation

As a means of creating future wealth for one's descendants, life insurance policies are often used to create a family trust, naming one's estate as a designated beneficiary.

Stock Cross-Purchase Plan (Few Shareholders)

As with a partnership cross-purchase plan, when only a few shareholders exist, a corporate cross-purchase plan is purchased by each shareholder on the lives of the other shareholders.

Stock Redemption Plan (Several Shareholders)

As with a partnership entity plan, when several shareholders exist, an entity plan is purchased by the corporation on each shareholder. The amount of each policy is equal to each share in the corporation. Upon the death of a shareholder, his or her share is distributed to remaining shareholders, based on their ownership share in the corporation

Per Stirpes Rule

Death proceeds are divided equally among named beneficiaries. If beneficiary is deceased, his or her share goes to the living descendants of that individual.

Per Capita Rule

Death proceeds from an insurance policy are divided equally among the only living primary beneficiaries

Life policy (Capital) Liquidation/Utilization

Income is derived by both interest and principal. Funds eventually disappear and could be of concern if the surviving spouse outlives the policy's death beenfit

Estate Conversion (retention)

Income is derived only from interest gained on the principal. Income is indefinite and creates a legacy for the next of kin or for charity

Life Insurance Beneficiary

Individual who receives Life insurance benefit. Chosen by the policyowner.

Human Life Value Approach

Individual's life in terms of earning potential is calculated to determine a life insurance value to replace this individuals earnings if they died. - typically the breadwinner of the family

Stranger-Originated Life Insurance STOLI

Initiated by individual investors and investor groups such as hedge funds. These are schemes that often advertise "zero premium" or "no cost" life insurance promoting premium-paid life insurance for two years as well as a lump-sum of cash, in exchange for future ownership of the insurance.

Investor-Owned Life Insurance IOLI

Involves inducing an elderly individual into purchasing a life insurance policy with the intention of naming the investor the beneficiary in exchange for "free" insurance and future compensation. Much like STOLI, also considered a scam.

Buy-Sell Agreements

Life insurance can also be used to fund a partnership or corporation after the death of one of its partners or corporate shareholders. "Buyout" agreement, is defined as a financial agreement or arrangement that protects business partners and corporate shareholders against financial loss by securing a predetermined fair market value for each partner or shareholder

Viator

Life insurance policyowner who sells their policy to a viatical settlement provider.

Key-Person Insurance

Life insurance that protects a company against the financial loss of its key members

Family Needs Approach

More commonly used approach, it evaluates the specific financial needs of the client's family including medical deductible and financial expenses, and future expenses

Secondary Contingent

Next succession to the primary, will only receive the policy's death benefits after the primary beneficiary has died before the insured

Irrevocable Beneficiary Designation

Policyowner gives up the right to control the policy once it becomes in force, it cannot be changes in the future without the consent of the beneficiary.

Primary

Primary beneficiary is the first in line to receive a policy's death benefits upon the insured's death.

Tertiary Contingent

Third succession to the primary, receives benefits after the primary and secondary beneficiary

Living Benefits

Whole life insurance policies generate a cash value, which is a portion of the premium payment that accumulates over the life of the policy, and can be borrowed or used a collateral by the policyowner.

Sole Proprietor Business Continuation

death of a sole proprietor can create a large financial burden for the family members . This life insurance provides financial assistance to maintain standard living for dependents and to facilitate the potential sale of the business.

Viatical (Life) Settlement

if a policyowner is considered terminally ill, an option exist to sell the insurance plan to a viatical settlement company, who will pay 60-80% of the face amount. Once sold premiums are paid by the viatical settlement company

Viatical Settlement Provider

individual, company, or entity that purchases ownership of a life insurance contract from a policyowner who in return receives compensation less than the death benefit.

Viatical broker

licensed agent who solicits and sells viatical contracts between a life insurance policyholder and the viatical settlement provider

Blackout Period

period of time in the family income cycle when a family's children are no longer dependent on the surviving parent.

Family Income Cycle

•Family Dependency Period •Pre-retirement Period (Blackout Period) •Retirement Period

Need analysis

•Final Expense funds (funeral, doctor and hospital bills, etc) •Debt payment fund (credit cards, etc) •Home mortgage payments •Family income needs •Funds for children's college education •Retirement income needs •Health insurance needs - Both hospitalization and disability income coverage

Personal Uses of Life insurance

•Financial protection against the loss of a family's breadwinner •Estate creation and conservation •Living benefits through loans made against the policy's cash value •Accelerated benefits payable to the policyowner in the event of terminal illness or other qualifying event •Ability to sell one's life policy to a viatical company in exchange for immediate payment of a percentage of the policy's death benefit. The viatical settlement company typically pays between 60-80% of the policy's death benefit back to the insured and keeps the death benefit when the insured dies. This type of settlement allows a terminally ill individual the ability to receive living benefits before death, while at the same time earning a 20-40% profit for the viatical company.

Agent Recommendations

•Type of coverage: permanent, term, or a combination of both •Monthly premium affordability •Type of Premium: level, increasing, decreasing •Insurability - Is the customer insurable based on his or her health and the type and amount of coverage requested ($10,000 vs. $1 million). The higher the benefit, the higher the premium payment, and the more scrutinized the client's health history is reviewed to prove insurability.