10 - Uses of Life Insurance

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.

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

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? *Funeral expense *Tax liability *Business expenses *Probate costs

Business expenses All of these are considered to be costs associated with an individual's death EXCEPT business expenses.

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 amount of the policy is equivalent to each partner's share of the business. When one partner dies, the other partner receives the death benefit from the life insurance on the deceased partner, which is then used to buy the deceased partner's ownership of the business.

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

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 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 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.

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

tax-deductible to the employer

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 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 policy beneficiary.

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".

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 With Key Person Insurance, the company purchases, owns, pays the premiums and is the beneficiary of the life insurance policy on the key person.

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

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.

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 An insurance policy on a child would not pay any benefits if one or both of the parents died. All of the other answers are valid reasons for buying life insurance on a 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.