Life Insurance Lesson 2

Factors to be considered

-Medical bills and final expense costs of the deceased insured (burial expenses) -Home mortgage and estate or property taxes (these payment don't stop when the breadwinner dies!) -Ongoing utilities and other home maintenance costs -Any debts incurred by the deceased breadwinner or surviving family (car loans, college loans) - Cost-of-living needs including food, clothing, and home supplies, health and life insurance payments for the surviving family, medical bills, schooling costs, and any other common ongoing family expenses - Future schooling and college education costs - Retirement income needs for the surviving spouse - Ongoing mortgage payments and long-term life maintenance needs Inflation, in regards to the costs of these financial needs

Buy-Sell Agreements

A buy-sell agreement, also referred to as a '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 that, upon a predetermined event such as death, is sold to the remaining partners or shareholders in the business to ensure the continuation of the partnership or corporation. - put a value on each partner, and then if a partner dies, that preassigned face value will be sold to the remaining shareholders or partners in the business.

Entity-Type Plan

A type of business succession plan that is used by companies that have more than one owner. The plan involves having the company take out an insurance policy on the lives of owners in the amount equal to each owner's interest. In the event of death, the amount collected by the company from the insurance, which is equal to the deceased owners stake, is used to pay the deceased's estate for its share of the business. Buy-sell agreements legally bind business partners into agreeing to purchase each others shares of the company at a predetermined price in the event of death, disability or other predetermined qualifying event, such as a partner's retirement.

Corporate Buy-Sell Agreements

Corporations are similar to partnerships in that corporations can be small, having only a few shareholders, or large, being owned my many shareholders. Essentially, life insurance can be purchased on each shareholder or on the corporation as a whole to ensure financial risk is kept at a minimum in the event of a shareholder's death.

Needs Analysis

Financial assessment conducted by life insurance agents to determine the proper type and amount of life insurance to cover an individual and/or family's financial needs in the event of the breadwinner's premature death.

Business Continuation Agreements

Life insurance can be used to fund a business after the death of a sole-proprietor to keep it running while the surviving family prepares to sell it, thus helping the family maintain their standard of living

Stock Purchase Plan (Few Shareholders)

Similar to a cross-purchase plan whereby each shareholder agrees to purchase a share of the deceased shareholder's stock. The purchase price is funded with life insurance; each shareholder owns, pays the premium for, and is the beneficiary of a life policy on the lives of the other shareholders. As with a partnership cross-purchase plan, this arrangement is only practical when there are just a few shareholders.

Stock Redemption Plan (Several Shareholders)

Similar to a partnership entity-type plan whereby the corporation owns the life policy and agrees to buy the stock of a deceased shareholder upon his or her death

Cross-purchase Plan

This type of buy-sell agreement is typically used if only a few partners exist within a company. Multiple life policies exist since each partner purchases a life policy on the other partners, except for him or herself, thus owning a share of each of the partners' interests in the event of their premature death. Each partner is considered the beneficiary of the other partner(s). Examples: - If two partners exist, each partner would own one policy on the other partner (excluding him or herself) equaling a total of two insurance policies for the company. 2 partners x 1 policy on each other = 2 total policies. - If three partners exist, each partner would own two policies (one on each partner, excluding him or herself) equaling a total of six insurance policies for the company. 3 partners x 2 policies each = 6 total policies. - If four partners exist, each partner would own three policies (one on each partner, excluding him or herself) equaling a total of twelve insurance policies for the company. 4 partners x 3 policies each = 12 total policies.

Human Life Value Assessment

an agent can determine the correct amount of life insurance based on the client's occupation, annual income, planned retirement age, short and long-term family expenses, and finally, the depreciation in the value of the dollar, known as inflation, in the future. - Net annual salary - Annual expenses - Working years remaining before retirement - Depreciating value of the dollar over time (inflation)

Family Needs Assessment

an agent can determine the correct insurance amount based on the needs of the family. This assessment is more commonly used because it evaluates the specific financial needs of the client's family including medical deductibles and final expenses, surviving family maintenance income (mortgage, cost-of-living expenses), and future income needs such as college tuition and spousal retirement income. This assessment should list all of the family's future financial needs to determine the correct death benefit to allow the family to survive past the insured's death. **After determining the death benefit amount necessary to sustain financial security for the surviving beneficiaries, the agent should recommend a life insurance policy that not only fits these needs, but is also sustainable in premium payments.

Key-Person Insurance

corporations often purchase life insurance on its 'key' members, paying its premium and assigning itself as the beneficiary in the event of death. The death benefit provides the company with financial security to meet its obligations, supplement the company while it finds a new executive to replace the deceased member, or to help distribute the death benefit to shareholders if the company dissolves. Essentially, key-person policies are just as crucial to a business as a personal life insurance policy is to the surviving members of a family, upon the death of the breadwinner.

Split-Dollar Plans

two parties, usually an employer and employee, split a life insurance policy's obligations and benefits. Under this arrangement, both the employer and employee pay the policy's premium together, with the employer covering a specific amount, usually equaling the annual increase in the policy's cash value, and the employee covering the remaining amount. The policy's death benefit is payable to the beneficiary chosen by the employee, minus the amount paid into the policy by the employer or the policy's cash value, whichever is greater, which is paid 'back' to the employer.