Chapter 8 - Uses of Life Insurance

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

tax-deductible to the employer

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

Three law partners form a Cross-Purchase Buy and Sell agreement. This agreement is funded with individual life insurance. How many total life policies are needed for this agreement?

6

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

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

An individual's need for a death benefit for survivors is influenced by all of the following factors EXCEPT self-maintenance expenses.

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

Business expenses

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

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

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 Needs analysis is a method of life insurance planning which identifies the needs of an individual and the individual's dependents.

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

Fund a buy-sell agreement Life insurance is purchased to fund a buy-sell agreement in the event of the death of a major shareholder in a business.

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

In a Key Employee life insurance policy, the third-party owner can be all of the following EXCEPT *Applicant *Owner *Payor *Insured

Insured In a Key Employee life insurance policy, the third-party owner can be all of these EXCEPT the insured.

Which statement regarding third-party ownership of a life insurance policy is true?

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

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?

Local unemployment rate

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

Which statement regarding a Key Employee Life policy is NOT true?

The beneficiary is named by the key employee The company names the beneficiary, not the employee.

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

The correct answer is "6". Each partner owns, is the beneficiary of and pays the premiums for life insurance on the other partners equal to his or her share of the purchase price.

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

The correct answer is "A pension deficiency if the key employee dies". All of these are reasons for a business organization to purchase key person life insurance EXCEPT "The increased pension liability resulting from the key person's death".

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

how much life insurance a client should apply for The "needs approach" in life insurance is most useful in determining the amount of life insurance to be recommended to a client.