Life and Health ch 6

Which of the following is an indication of third-party ownership?

-Key employee life insurance

SDPs can also be used among family members (i.e., parent/child) or stockholders in a corporation. Other split dollar plan variations include

- single bonus plans, reverse split dollar plans and employer (non-contributory) pay-all plans.

A buy-sell agreement is a legal agreement which provides for:

-(1) an orderly continuation of the business; (2) an amount of money to be paid to the deceased's survivors. Funds to be paid to the surviving family may come from life insurance. Life insurance may be purchased to fund a buy-sell agreement.

Both corporation plans (stock redemption and cross-purchase) function similar to agreements available to partners and partnerships. An estate comprised mostly of stock which possesses potential estate tax problems (i.e., forced sale) may utilize a

-303 redemption funded by life insurance. To qualify for this type of plan the value of the stock must represent at least 35% of the deceased's adjusted gross estate.

The Sloppy Slangar Corporation is comprised of five partners. If it wishes to enter into an entity type of buy-sell agreement funded potentially by life insurance, how many policies need to be produced?

-5

Tristar Computers is a partnership comprised of John, Bob, and Tim. They hold an equal financial interest in the partnership. After deciding to enter into a buy-sell agreement, their agent suggests they utilize a cross-purchase plan and fund it with life insurance. If this plan is utilized, how many life insurance policies will be purchased?

-6

Two partners enter into a buy-sell agreement. The business is worth $100,000. Both partners have an equal interest in the firm. Which of the following would be used to best support this agreement?

-Buy $50,000 of life insurance on each partner

Another way in which this Split Dollar plan may be utilized may involve an employer providing funds to pay that part of each annual premium which is equal to the annual increase in cash value. The employee pays the balance.

-For example, if the annual premium was $500 and the increase in cash value was $420 after the premium was paid, the employer pays $420 and the employee $80. The employer is entitled to receive death proceeds in an amount equal to the policy's cash value with the balance paid to the employee's beneficiary.

Which of the following parties has the right to change the name of the primary beneficiary under a key employee life insurance plan?

-The employer

With stock redemption plan, The corporation is bound to purchase the stock of the deceased stockholder at a prearranged price. If funded by life insurance, the corporation

-buys a policy on each of the stockholder's lives

The principal reason that key person or key employee insurance was developed is to

-compensate a business for the loss of earnings (or increase in expenses) due to the death (or disability) of a key employee.

Deferred Compensation Plans generally refers to non-qualified retirement plans. These are plans that do not receive tax advantages according to the IRC as do qualified plans. These types of arrangements are generally between an employer and employee where

-compensation is paid to the employee in later years

As "Tax Facts" states, premiums paid by a business for key employee life insurance are generally not tax-deductible. In addition, none of the death benefit paid is taxable when the key employee dies. The death proceeds will not be included in the

-deceased employee's estate as long as he or she has no incidents of ownership in the contract.

A cross-purchase plan financed by life policies involves

-each stockholder buying policies on each of the other stockholders.

There are two types of partnership buy-sell agreements:

-entity plan and cross-purchase plan

if a partner dies, the partnership ends. The remaining partners must now wind up the business and pay to the deceased partner's estate an amount equal to the deceased's fair share of the liquidated value of the business. Therefore, life insurance which

-funds the buy-sell agreement will help to maintain the value of the business

A cross-purchase plan specifies that the agreement will exist between the partners themselves and not between the partnership and the partners as in the entity plan. Therefore, a cross purchase plan is a type of buy sell agreement supported by life insurance purchased by each partner on the lives of each of the other partners. For example,

-if the partnership consists of four partners, each of the partners will purchase, own, and pay for a policy covering each of the other partners. In this case, there would be a total of twelve policies. If a partner dies, proceeds will again be paid to the firm and payment to survivors will be made according to the terms of the buy-sell agreement.

Whole life or universal life contracts are commonly used to fund a key employee

-life insurance plan. Term life insurance may be used for short term needs.

The purpose of a Split Dollar Plan SDP is to join together the needs of one person (i.e., the employee) with the premium paying ability of another party (i.e., employer). A SDP can provide an employee with

-life insurance protection that he cannot afford on his own. The employer may discriminate when providing such plans. In other words, the employer can provide a SDP for any employee he or she chooses (does not have to provide for all employees).

Key employee insurance is not designed to cover the owner of the business. The potential economic loss of the business can be protected against the death of a key employee if the business is

-made the beneficiary of the life insurance policy.

An entity plan specifies that the partnership is

-obligated to buy out the ownership interest of the deceased partner. In other words, the agreement made is between the partnership and each of the partners.

With Deferred Compensation plans, some employers use cash value life insurance or annuity products to provide promised funds. There are two common types of non-qualified plans including

-pure deferred compensation plans and salary continuation plans.

The agreement obligates the estate of the deceased partner to

-sell its interest to the surviving partner(s). This agreement permits the surviving partners, officers or stockholders to maintain control of the business

Buy-sell agreements used for corporations may also be funded by life insurance. An entity plan used for a corporation is known as a

-stock redemption plan.

A firm is sometimes dependent upon a key person whose management skill, leadership, technical knowledge, and experience makes him or her an invaluable asset of the business. In a sense, the company is dependent on this key person for its success and to an extent its business profits. The proceeds of a life insurance policy covering a key employee will provide the business with

-the necessary funds to continue the business without further interruption. Key employee insurance is a common illustration of third party ownership.

A buy-sell agreement used in a partnership binds

-the surviving partners to purchase the partnership interest of the first partner to die, at a prearranged price identified in the agreement.

Buy-sell agreements can be funded for

-use in a sole proprietorship, partnership or in a closely-held corporation.

A Split Dollar plan is a funding method and not a specific type of life insurance policy. It is characterized by an arrangement between an employer and employee. The plan can only be funded with

-whole life, cash value, permanent or continuous-premium life insurance. The death benefit is split as is the cash value (i.e., living benefit). In some cases the premium may be split as well.

Which of the following is a non-qualified deferred compensation plan?

-Salary continuation plan