Life Insurance Basics L1 (ch. 4)

steps used for the Needs Analysis Approach are:

1) Gathering Information 2) Establishing Objectives 3) Analyzing Information

INDIVIDUAL USES FOR LIFE INSURANCE DEATH BENEFITS

1. FINAL EXPENSE FUND 2. HOUSING FUND 3. EDUCATION FUND 4. MONTHLY INCOME 5. RETIREMENT INCOME

BUY-SELL AGREEMENTS

A buy-sell agreement is a legal contract that requires one party to sell and other parties to buy a certain ownership interest in a business in the event of the owner's death, disability, or retirement. Life insurance is often used to fund business buy-sell agreements.

VIATICAL SETTLEMENTS

A chronically or terminally ill insured may assign his or her life insurance policy to a viatical settlement company in exchange for a lump-sum payment equal to a percentage of the policy's face value. Payments of 50-80% of the policy's face amount are the typical standards established by the National Association of Insurance Commissioners (NAIC). The viatical company then becomes the owner and beneficiary of the policy, and continues to make premium payments on the policy until the insured's death. After the insured's death, the viatical company collects the face value of the policy.

Corporations

A corporation is a legal entity that is owned by stockholders. It is an "artificial person" that has an unlimited life. When a stockholder dies, the corporation continues. Two advantages of corporations are: (1) Generally, corporations offer stockholders limited liability, thus helping to shield personal assets; (2) Corporations have numerous tax advantages that are not available to other business entities.

Sole Proprietorship

A sole proprietorship is an unincorporated business owned by only one person. The owner may have several employees; however, the sole proprietor is responsible for the business. Sole Proprieter dies = Buisness Dies. For a sole proprietor, life insurance can be used to fund a business continuation agreement, which could provide the necessary cash to run the business upon the owner's death, allowing enough time for the surviving family members to properly sell the business

PROVIDING LIFE INSURANCE DEATH BENEFITS

After establishing the amount of income you will need to replace, you then must decide if the amount of life insurance proceeds to provide this income will be liquidated over time or the principal maintained is to pass on to future generations. a. The Capital Liquidation Method b. The Capital Conservation Method

Analyzing Information

After the death of a spouse, the financial needs are for both cash and income. Cash needs could be met using a single lump-sum amount. The need for income could be fulfilled by using either the Capital Liquidation method or the Capital Conservation method.

AMOUNT OF LIFE INSURANCE

FAMILY DEPENDENCY PERIOD PRE-RETIREMENT PERIOD RETIREMENT PERIOD COMMON METHODS OF NEEDS CALCULATION

Gathering Information

Identifying assets, liabilities, income, savings, investments, funeral, medical, and postmortem expenses, less Social Security benefits and other insurance.

Establishing Objectives

Identifying objectives for family income needs, debt cancellation, reserve funds, education funds, and retirement funds. The Social Security black out period should also be included

DIVIDENDS PAID IN CASH

Life Insurance dividends are earned by permanent participating life insurance policies. Dividends can be paid to the insured in cash or the life insurance company can mail a check annually.

LOAN FROM CASH VALUES

Many permanent cash value policies allow loans from cash values. Policyowners may borrow, within certain limits, against the cash value in their policy while keeping the policy active. Loan interest is due at the end of each policy year, and if unpaid, is added to the outstanding loan balance. The loan interest rate may be changed once a year on the policy's anniversary. If a policy loan exceeds the total cash value of the policy, the policy will terminate 31 days after the policyowner receives written notice from the insurer.

CASH VALUE PARTIAL WITHDRAWALS

Some permanent policies allow for partial withdrawals from cash value. Partial withdrawals will not cause the coverage to lapse. But the cash value will be reduced by the amount withdrawn. It would also decrease the death benefit payable to the beneficiary.

The Capital Conservation Method

The Capital Conservation Method is when the death benefits are invested at interest, and the payments to the beneficiary consist only of the interest accrued. The principal amount is not reduced. requires a lower face amount of life insurance than the Capital Conservation Method. 1) Advantages • Ideally provides income stream indefinitely as the principal (death benefit) remains intact • Simple to calculate 2) Disadvantages • If the rate of return is lower than the assumed rate, the beneficiaries could run out of money prematurely • The amount of money needed to fund income replacement typically is greater than other methods, as the beneficiaries are intended to live off of income only

The Capital Liquidation Method

The Capital Liquidation Method is when the death benefits are invested, accrue interest, and are then paid to a beneficiary in payments over a certain period of time. 1) Advantages • Typically requires less money than the capital preservation method, as both principal and income are used. Less money required means less life insurance to purchase 2) Disadvantages • The length of time that the insured's salary needs to be replaced is not an exact science. • More complex to calculate

Needs Analysis Approach

The Needs Analysis Approach is concerned with the precise amount of money needed to pay the mortgage, groceries, clothes, education costs, and other expenses for the family if the breadwinner dies prematurely. The needs are itemized as opposed to the Human Life Value Approach formula

MONITOR AND REVIEW

The plan should be monitored and reviewed with the owner periodically for changes that may occur such as marriage, birth or adoption of a child, retirement, etc.

RETIREMENT INCOME FROM CASH VALUES

The primary purpose of life insurance is to provide a death benefit to help replace lost income and protect loved ones from the financial losses that could result from the insured's death. How- ever, there are certain living benefits that the cash value of a permanent life insurance policy can be sued for. For example, if a substantial amount of cash value has built up, it can be borrowed against systematically to help supplement retirement income.

Partnership

This business entity is an unincorporated relationship between two or more individuals. Each partner has unlimited liability, similar to the sole proprietorship. When one partner dies, the surviving partner must dissolve the business partnership

RETIREMENT PERIOD

This is the period when the surviving spouse's income from work ends and Social Security and other retirement benefits begin.

IMPLEMENTING THE PLAN

This stage consists of filling out the application, collecting the initial premium, and, if required, scheduling a medical exam.

DEVELOPING A PLAN

You identify and develop a plan to meet the overall objectives of the prospect

TYPES OF BUSINESS ENTITIES

a. Sole Proprietorship b. Partnership c. Corporations

ACCELERATED BENEFITS

are a standard provision in most individual and group life insurance policies. The accelerated benefit provision allows terminally ill insured to access a percentage of their policy death benefits. Typical requirements include a physician's certification that the insured has a terminal illness or condition that can reasonably be expected to result in death within two years or less. If the insured qualifies, the insurer will typically make available 50-80% of the policy's death benefit. After the insured's death, the remaining amount of death benefit is paid to the beneficiary.

FAMILY DEPENDENCY PERIOD

family's income needs will be the greatest during this period because the surviving spouse sometimes has young children at home.

BUSINESS USES OF LIFE INSURANCE

important role in the business world by protecting companies from the untimely death of key employees, managers, partners, and business owners. While business life insurance cannot prevent the disruption of business caused by the death or disability of a key employee, it can help defray the cost associated by these losses.

PRE-RETIREMENT PERIOD

period of time when the surviving spouse is not eligible for Social Security and may or may not have dependent children. If the surviving spouse has dependent children, this time is known as the "Black-Out Period," the time between the youngest child turning age 16 and when the surviving spouse turns age 60 (assuming that neither the spouse nor any child is disabled).

Human Life Value Approach

rational method of determining the financial insurance needs of individuals, families, and businesses. This approach looks at the monetary value of an individual's future earnings up to retirement age.

COMMON METHODS OF NEEDS CALCULATION

two most common methods used to calculate life insurance needs are the Human Life Value Approach and the Needs Approach. Human Life Value Approach Needs Analysis Approach

LIFE INSURANCE LIVING BENEFITS

• Loan from cash values • Retirement income from cash values • Cash value partial withdrawals • Dividends paid in cash • Accelerated death benefits • Viatical and life settlements