CH 8. Uses of life insurance

Which of the following is NOT a reason for a business to buy key person life insurance?

An increased pension liability if the key employee dies

Which of these is NOT considered to be a cost connected with an individual's death?

Business expenses

According to the needs approach, an emergency reserve fund's primary purpose is to

Cover cost of unexpected expenses

XYZ Corp gives money to an employee to purchase a life insurance policy and allows the employee to select the beneficiary. What kind of plan is this?

Split-dollar A split-dollar plan is an arrangement where an employer and an employee share in the cost of purchasing a life insurance policy on the employee. The employee is also allowed to name the beneficiary.

Which of the following is NOT considered to be an expense for surviving family members of a deceased wage earner?

Unemployment tax liabilities are not expenses a surviving family will normally have.

Housing & education fund

When working with a client the insurance producer should consider these individual needs May involve creating a lump sum to provide for these such things

Buy-sell plan

an attorney drafts a buy-sell plan stating the employee's agreement to purchase the proprietor's estate and sell the business at a price that has been agreed upon beforehand. This is sometimes referred to as a Stock Redemption Plan.

Insurance policy

the employee purchases a life insurance policy on the life of the proprietor. The employee is the policyowner, beneficiary, and pays the premiums. Upon the proprietor's death, the funds from the policy are used to buy the business.

Human life-value approach

Calculates the amount of money a person is expected to earn over his lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual.

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?

Identifies the needs of an individual and the individual's dependents

Split dollar plans

is an arrangement where an employer and an employee share in the cost of purchasing a life insurance policy on the employee. It is a method of buying insurance, not an insurance policy itself. Many times, it is a combination of term and whole life insurance. This plan typically allows the employee to choose the beneficiary

key person insurance

The purpose of key person insurance is to prevent the financial loss that may ensue when an owner, officer, or manager dies. The company purchases, owns, pays the premiums, and is the beneficiary of the life insurance policy on the key person. This allows the business to pay for: Finding and training a replacement if the key person dies prematurely. ► The reduction of profits resulting from the key person's death ► The loss of new business resulting from the key person's death ► The loss of leadership resulting from the key person's death

Final expense fund

Final expense life insurance is a type of coverage that provides funds for the cost of a funeral, burial, and other related expenses that are considered to be one's "final expenses."

Employers often purchase life insurance on a key employee in order to

pay for finding and training a replacement if the employee dies prematurely Employers will frequently purchase life insurance on a key employee to help offset the cost of finding and training a replacement in the event of the key employee's premature death.

Needs approach (most common)

Calculates the amount of money a family needs immediately upon the death of the insured to pay for the family's expenses and basic necessities by considering maintenance income, debts or mortgages, death taxes, and dependent children's education. Needs analysis is a method of life insurance planning which identifies the needs of an individual and the individual's dependents. ► The needs approach to personal life insurance planning may involve creating a lump sum to provide for such things as education, retirement, and charitable bequests ► The needs approach to personal life insurance planning also includes the creation of an emergency reserve fund. This fund is designed primarily to cover the cost of unexpected expenses. ► The "needs approach" in life insurance is most useful in determining how much life insurance a client should apply for. When working with a client, the insurance producer should consider the following individual needs. ► Final Expense Fund ► Housing Fund ► Education Fund ► Monthly Income ► Emergency Fund ► Income Needs if Disabled or Ill ► Retirement Income ► Estate Conservation (using life insurance to enable heirs to pay estate taxes)

When using the needs approach for life insurance planning, a lump sum may be created to provide for all of the following EXCEPT

Employee benefits

Which of these factors does NOT influence an individual's need for life insurance?

Self maintenance expenses

Entity plans

The partnership itself agrees to buy the deceased partner's share of the business. Entity plans are best for businesses with several partners. In this case, the business purchases, pays the premiums and is the beneficiary of life insurance on each partner.

Which of these is NOT relevant when determining the amount of personal life insurance needed?

Unemployment rates