14 - Uses of Life Insurance

All of these are examples of a business use for life insurance EXCEPT? A) Workers Compensation. B) Partnership entity plan. C) Key person. D) Buy-sell funding.

A) Workers Compensation. Workers compensation is not considered a business use of life insurance. It is a benefit payable for work-related injuries.

Under a partnership cross-purchase plan, when there are 4 partners how many policies are needed? A) 20. B) 4. C) 12. D) 16.

C) 12. With a partnership cross purchase plan, each partner owns, is the beneficiary of, and pays the premiums for life insurance on the other partner or partners in an amount equal to his or her share of the purchase price.

With three partners in a business, how many life insurance policies would be required to insure a cross-purchase buy-sell plan? A) 9. B) 12. C) 3. D) 6.

D) 6. Each partner owns, pays for, and is the beneficiary of an insurance policy on each of the other two partners in a cross-purchase buy-sell agreement.

All of the following business arrangements can use "insured buy-sell agreements" to assure the orderly continuation of a business EXCEPT? A) sole proprietorships. B) close corporations. C) partnership forms of business. D) government entities.

D) government entities. Government entities are not eligible for buy-sell agreements.

If a corporation collects the policy benefit on a key person life policy, which of the following is correct? A) Amount received is taxable. B) Amount received is non-taxable. C) Amount received is partially taxable. D) Amount received is subject to exclusionary rule.

B) Amount received is non-taxable. Key person life insurance receives favorable tax treatment. The death proceeds received by the business are not taxable. Premiums, of course, are not deductible for income purposes.

All of the following factors are used in the needs approach for determining the amount of required life insurance EXCEPT? A) the monthly income. B) the percentage of future income. C) the emergency fund period. D) the education fund.

B) the percentage of future income The percentage of future income is not used in the needs approach for determining the amount of required life insurance.

Determining a person's economic value through the human life value approach does NOT consider the effects of? A) savings. B) earnings. C) occupation. D) investments.

C) occupation. The human life value approach does not take into account occupation.

Which of the following statements regarding ways to determine the proper amount of life insurance is CORRECT? A) There are two basic approaches to determining the amount of life insurance that is needed: the human life value approach and the needs approach. B) When using the needs approach to determine the proper amount of life insurance to purchase non-insurance-type assets, such as pension benefits or personal savings, are not factors in the calculation. C) The most popular method today for determining the proper amount of life insurance is the human life value approach. D) The needs approach considers only the most immediate financial concerns, without regard for family financial goals such as college education for children or retirement income for a surviving spouse.

A) There are two basic approaches to determining the amount of life insurance that is needed: the human life value approach and the needs approach. The human life value approach and the needs approach are the two basic approaches to determining the amount of life insurance needed.

Life insurance can be used in business in all of the following ways EXCEPT? A) as an employee benefit. B) as a profit sharing plan. C) as a form of business interruption insurance. D) as a funding medium.

B) as a profit sharing plan. Life insurance is typically not used as a profit sharing plan in a business setting.

Acme Partnership has three individual partners. The partnership itself owns, pays for, and is beneficiary of the life policies that insure the lives of the individual partners. This type of arrangement is called a? A) partnership purchase plan. B) key person buy-sell plan. C) partnership entity buy-sell plan. D) partnership cross-purchase plan.

C) partnership entity buy-sell plan. An entity plan states that when a partner dies, that partner's interest is purchased by the partnership. The interest is then divided among the surviving partners.

What is the reason for key person insurance? A) Lessen the chance of financial loss due to fraud by a key employee. B) Provide retirement benefits to key employees. C) Lessen the risk of financial loss due to the death of a key employee. D) Provide health and life insurance to families of key employees.

C) Lessen the risk of financial loss due to the death of a key employee. Key person insurance can lessen the risk of financial loss due to the death of a key employee who has specialized skills, knowledge, or business contacts.

The approach that is used to make life insurance recommendations, determines the total funds available to a family from all sources, and subtracts the amount needed to meet their financial objectives is known as the? A) Input-Output approach. B) Human Life Value approach. C) Needs approach. D) Dollar Valuation approach.

C) Needs approach. The needs approach analyzes the family's financial needs and objectives should the breadwinner die or become disabled. These needs are then weighed against the ability of the family to meet them out of current or anticipated assets.

The Human Life Value Approach does not consider which of the following? A) Investments. B) Occupation. C) Savings. D) Earnings.

C) Savings. The Human Life Value Approach does not use savings in its calculations.

A partnership buy-sell agreement in which each partner purchases insurance on the life of each of the other partners is called a? A) split-dollar plan. B) key person plan. C) cross purchase plan. D) deferred buy-sell plan.

C) cross purchase plan. Under a cross purchase plan, the partners individually agree to purchase the interest of a deceased partner. Each partner is the owner, payor, and beneficiary of the life insurance on the lives of the other partners.

All the following statements regarding survivor financial needs are correct EXCEPT? A) The term dependency period refers to the 20-year period immediately following the insured's death during which the widowed spouse must depend on Social Security. B) A final expense fund addresses a deceased breadwinner's last illness and funeral costs, death taxes, outstanding debts, and more. C) A housing fund addresses a family's rental or home mortgage needs. D) The period for which there are no Social Security benefits for the surviving spouse is known as the blackout period.

A) The term dependency period refers to the 20-year period immediately following the insured's death during which the widowed spouse must depend on Social Security. This is an inaccurate statement. The dependency period refers to that period following the death of a breadwinner during which the children are living at home.

Robert and his employer agree on the purchase of a split-dollar life insurance policy and the usual split-dollar approach to premium payments. Each year, the employer will contribute to the premium an amount equal to? A) the increase in the policy's cash value. B) one-half the premium. C) the annual dividend. D) two-thirds of the premium.

A) the increase in the policy's cash value. In a typical split-dollar plan, the employer and the employee share the premium cost. Though there are variations, generally the employer's contribution is equal to the increase in the policy's cash value.

Which of the following statements regarding key person insurance is NOT correct? A) Key person life insurance indemnifies a business for financial loss caused by the death of a key employee or key executive. B) Premiums for a key person life insurance policy are a tax-deductible expense to the business. C) The business may borrow from the cash value of a permanent key person life insurance policy. D) The policy's death proceeds received by the business are not taxable.

B) Premiums for a key person life insurance policy are a tax-deductible expense to the business. Key person life insurance premiums are not normally considered a tax-deductible expense to the business.

In which business plan do the partners agree to buy the interest of the deceased partner? A) Business insurance plan. B) Stock purchase. C) Cross purchase. D) Entity.

C) Cross purchase. Under the cross-purchase buy-sell plan (the more common approach to a buyout), the partners individually agree to purchase the interest of a deceased partner. The executor of the deceased partner's estate is then directed to sell the interest to the surviving partners. The partnership itself is not a party to the agreement.

Three individuals form a partnership with equal shares valued at $300,000. If they were persuaded to use an "entity" buy-sell plan funded with life insurance, how many policies and for what amounts would be purchased? A) Three policies for $200,000 each. B) Three policies for $100,000 each. C) Six policies for $50,000 each. D) One policy for $100,000.

B) Three policies for $100,000 each. They would need to purchase three policies for $100,000 each. This would cover each partner's share of the business should one of them die.

A partnership owns, pays for, and is the beneficiary of life insurance policies on the lives of its individual partners. This is known as? A) a Keough plan. B) an entity buy-sell plan. C) a stock redemption plan. D) a cross purchase plan.

B) an entity buy-sell plan. With an entity buy-sell plan, a deceased partner's interest is purchased from his or her estate by the partnership. This interest is divided among the surviving partners in proportion to their own interest.

Which of the following statements about key person insurance is CORRECT? A) The business may take a tax deduction for premiums paid. B) The death proceeds are taxable. C) It can be considered a business asset. D) The key employee's family is the beneficiary of the policy.

C) It can be considered a business asset. Complete control of the policy rests with the business, which means key person insurance can be considered a company owned asset not earmarked for any specific purpose.

All of these are legitimate uses of insurance in a business setting EXCEPT? A) Funding against financial loss by the death of a key employee. B) Funding business continuation agreements. C) Funding against general company financial loss. D) Funding a buy-sell plan.

Life and health insurance can be used for a variety of reasons in a business setting. Safeguarding against general company financial loss is not one of them.

What is the tax advantage of key-person life insurance? A) Death proceeds are nontaxable. B) Premiums are tax deductible. C) Cash value increase is taxed at a low rate. D) Proceeds are deferred.

A) Death proceeds are nontaxable. Death proceeds are nontaxable with key person insurance policies.

Which plan can be used as an incentive by an employer to help an employee buy life insurance? A) Split-dollar plan. B) Deferred compensation plan. C) Key person insurance. D) Sole proprietor buy-sell plan.

A) Split-dollar plan. In a typical split-dollar plan, the employer and the employee share the premium cost.

Which of the following statements regarding key person insurance is NOT correct?? A) The policy's death proceeds received by the business are not taxable. B) Key person life insurance indemnifies a business for financial loss caused by the death of a key employee or key executive. C) The business may borrow from the cash value of a permanent key person life insurance policy. D) for a key person life insurance policy are a tax-deductible expense to the business.

D) for a key person life insurance policy are a tax-deductible expense to the business. This is inaccurate. Key person life insurance premiums are not normally considered a tax-deductible expense to the business.

Which of the following statements regarding deferred compensation plans is CORRECT? A) Life insurance is not a permissible funding vehicle, but annuities are. B) A deferred compensation plan must be made available to all employees who are at least 21 years old and have 1 year of service to the business. C) They permit a business to provide extra benefits to officers, executives, and other highly paid employees. D) A deferred compensation plan must always be designed as a qualified plan.

C) They permit a business to provide extra benefits to officers, executives, and other highly paid employees. Deferred compensation is an arrangement whereby an employee (or owner) agrees to forgo some portion of his or her current income (such as annual raises or bonuses) until a specified future date, typically retirement.

Three business partners individually agree to acquire the interest of a deceased partner and own life insurance on each of the other partners in the amount of his or her share of the business's buyout value. What is described here is? A) an entity buy-sell plan. B) a stock redemption buy-sell plani. C) a 401(k) plan. D) a cross-purchase buy-sell plan.

D) a cross-purchase buy-sell plan. Under the cross-purchase buy-sell plan (the more common approach to a buyout) the partners individually agree to purchase the interest of a deceased partner. The executor of the deceased partner's estate is then directed to sell the interest to the surviving partners.