Chapter 5: Business Uses

What is business life insurance used for?

Businesses use life insurance for three main purposes: as a funding tool, for business interruption insurance, and as an employee benefit.

Which of the following business continuation agreements is most appropriate for Teri and Annette's business partnership?

Cross-purchase plan

Four partners share in the ownership of a bowling alley. Which of the following business continuation plans best fits their needs?

Entity Plan

Mary's Cosmetics purchases a life insurance policy on Samantha, the leading makeup salesperson in the nation. Which business continuation plan did Mary's Cosmetics buy?

Key person insurance (Key employee)

Which business continuation plan permits a deceased shareholder's heirs to maintain some ownership while the corporation redeems a portion of the deceased shareholder's shares?

Section 303 plan (A deceased stockholder's heirs can retain control over the portion of business owned.)

All of the following are buy-sell agreements, EXCEPT:

Split-dollar plan (Employee benefit plans)

What business continuation agreement would you recommend to a corporation with 3 shareholders so that when a shareholder dies, all other shareholders agree to purchase a portion of the deceased shareholder's stock at an agreed price?

Stock purchase plan (A stock purchase plan is a cross-purchase plan used by corporations to buy the stock from deceased shareholders. Each shareholder agrees to buy a portion of the deceased shareholder's stock at an agreed price. Each shareholder purchases, pays the premiums and is a beneficiary on a life insurance policy on each of the other shareholders.)

Betty and Jack have a partnership. If their partnership is worth $800,000 how much life insurance is issued on each partner if a cross-purchase plan is used?

$400,000 (Each partner insures the life of the other partner at $400,000. Therefore the total amount of life insurance on each partner is $400,000)

A furniture company is owned by five partners. What business continuation plan would you suggest to the company?

Entity plan (Best for several partners)

All of the following are true regarding executive bonus plans, EXCEPT:

The employee is the insured and owner of the policy. (The employer pays the premiums, but receives a tax deduction in the amount of the premium because it is treated as a pay raise. The employee pays income tax on the amount of the pay raise; however, in some cases the employer will _bonus_ the amount of the income taxes.)