Chapter 3.5 questions

A corporation has key-person life insurance on its president. If the president dies, which of the following statements would be CORRECT?A) The company may use the death benefit proceeds to search for and retain a new president. B) The policy premiums will be returned to the beneficiary. C) The proceeds will be paid to the president's beneficiary. D) The death benefit proceeds will be distributed equally to the executives.

A) The company may use the death benefit proceeds to search for and retain a new president. -with key person life insurance the company is the owner. The death benefits can be used to search, retain and train a replacement.

Which of the following statements regarding a deferred compensation plan is CORRECT? A) The employee agrees to forgo part of his current income until a specified future date, typically retirement, and may use life insurance as the funding vehicle for the plan. B) The employee uses part of his current income to purchase a whole life insurance policy, the cash vaiue of which can be accessed only while he is employed by his current employer. C) The employer purchases a whole life insurance policy, the cash value of which the employee can access only while working for the employer. D) The employer purchases a whole life insurance policy on key employees and receives the death benefits if the employee dies before retirement.

A) The employee agrees to forgo part of his current income until a specified future date, typically retirement, and may use life insurance as the funding vehicle for the plan. -Deferred plan is an arrangement where an employee agrees to forgo some portion of current income until typically retirement.

Another name for an entity plan is? A. a stock redemption B . a business continuity plan C. a cross-purchase plan D. a deferred compensation plan

A. a stock redemption because the corporation is actually redeeming the deceased owner's stock.

Cybil is insured under a key-person life insurance policy owned by Delta Corporation and then quits her job. Which of the following statements is NOT correct? A) Delta can assign the policy. B) Cybil can convert the policy to an individual policy. C) Delta can keep the policy in force. D) Delta can surrender the policy for cash.

B) Cybil can convert the policy to an individual policy. - Cybil has no conservation rights because she is not the owner of the policy

Which of the following statements pertaining to sole proprietor buy-sell plans is CORRECT? A) In a sole proprietor buy-sell agreement, the sole proprietor is the owner if the policy. B) Concerning disposition of the business after the proprietor's death, the only alternatives open to a sole proprietor are to dissolve the business or leave it to an heir as a bequest. C) Life insurance is an ideal medium for funding a buy- sell agreement because, for a reasonable premium, it makes money available when needed to activate the sale of the business. D) A buy-sell agreement for a sole proprietor can be drafted by the proprietor or the life insurance agent.

C) Life insurance is an ideal medium for funding a buy- sell agreement because, for a reasonable premium, it makes money available when needed to activate the sale of the business. -buy-sell agreement funded by a life insurance policy purchased by an employee on the life of the proprietor will transfer the business from the owner to the other part at an agreed upon price.

Which of the following statements regarding executive bonus plans is NOT correct? A) An executive bonus plan is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee B) The employer may alternatively use the bonus to pay the premiums on a life insurance policy covering the employee's life. C) The employer becomes the policyowner of the insurance policy. D) The bonus is included in the employee's gross income.

C) The employer becomes the policyowner of the insurance policy. -the employee is the policy owner and the bonus is included in the employee's gross income

Which of the following statements about executive bonus plans is NOT correct? A) The bonus paid to the employee is includable in his gross income. B) The employee is the policyowner. C) They are considered nonqualified plans. D) At the employee's death, the company receives the death proceeds free of tax.

D) At the employee's death, the company receives the death proceeds free of tax.

Herb and Felicia have been married for several years and are interested in increasing their life insurance protection as their family grows. Herb is a lawyer with a midsized firm. Felicia is a freelance writer of childrenâ™Ms BEODE books. In planning for the future, when might they expect that their family Will have its greatest need for income should one of them die? A) If Herb is diagnosed with a terminal illness B) When the children move away from the home and are self-supporting C) If Felicia survives Herb and lives to an old age D) While the children are in elementary school

D) While the children are in elementary school -the greatest need the survivor might have is when the children are young.

According to the principle of human life value, the purpose of life insurance is? A) to determine the amount of insurance an individual needs B) to replace an individual's insurance based on life events C) to determine an individual's eligibility for insurance D) to replace an individual's economic value

D) to replace an individual's economic value -the purpose of life insurance is to replace an individuals economic value.

The needs approach can be used to determine all of the following Except A. the amount needed to provide income for the surviving spouse's retirement B. the amount needed to pay for a child's education C. the amount of income needed if the breadwinner dies D. the amount needed to replace the breadwinners projected increasing annual salary

D. the amount needed to replace the breadwinners projected increasing annual salary -needs approach determines how much life insurance is needed- replacement of the breadwinners projected salary is a factor that is taken into account to determine how much life insurance is needed

Which of the following statements pertaining to executive bonus plans is correct? A. death benefits are paid to the business B. the business owns the life insurance policy. C. premiums are paid to the employee D. The employee has access to the policy's living benefits

d. The employee has access to the employee's policy's living benefits -with an executive bonus plan the business pays the premium on a life insurance policy instead of giving a bonus The employee owns the policy and has full access to its benefits.