Life Insurance Needs Analysis and Suitability

Liquidity

-as a result of the cash accumulation feature, some life insurance policies provide to the policyowner. That means the policy's cash values can be borrowed against at any time and used for immediate needs

With the key person insurance coverage, the key employee is the insured, and the business is all of the following:

-applicant -policyowner -premium payer -beneficiary

Cash Accumulation

-Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed. -for example, some life policies (those that provide permanent protection, such as whole life) accumulate cash value that is available to he policyowner during the policy term

Personal Insurance Needs

-Survivor protection -Cash accumulation -Liquidity -Estate creation -Estate conservation

Key Person Insurance

-a business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contracts. A business can lessen the risk of such loss by the use of this type of insurance -this insurance may be issued as term or permanent life, with whole life and universal life policies being used most often

Buy-sell agreement

-a legal contract that determines what will be done with a business in the event than an owner dies or becomes disabled. This is also referred to as a business continuation agreement

Estate Creation

-a person may do this through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time -the purchase of life insurance creates an immediate estate - is especially important for young families that are getting started and have not yet had time to accumulate assets -when an insured purchases a life insurance policy, they will have an estate of at least that amount the moment the first premium is paid -there is no other legal method by which an immediate estate can be created at such a small cost

Business Insurance Needs

-business use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured -the most common use of life insurance by businesses is as an employee benefit, which serves as a protection for employees and their beneficiaries. -there are also other forms of life insurance that can serve business owners and their survivors, and even protect the business itself. These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees -involves key person, buy-selling fund

Types of buy-sell agreements that can be used for partnerships and corporation

-cross purchase -entity purchase -stock purchase -stock redemption

Estate Conservation

-life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell of the assets

in the event of death of a key employee

-the business would use the money for the additional costs of running the business and replacing the employee -the business cannot take a tax deduction for the expense of the premium -if this happens, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except at that the employee(s) would need to give permission for this coverage

Survivor Protection

-the death of the primary wage-earner will usually stop the flow of income to a family -the death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors -life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as -planning for requires careful examination of current assets and liabilities as well as determining what survivors'' needs may be

Example of a cross-purchase buy-sell agreement

Partnership AB has two partners: A and B. The value of the business is $1,000,000. The partners each have an equal interest ($500,000 each). A buys a life policy on B for $500,000, and B buys a life policy on A for $500,000. IF A dies, B gets 100% ownership of the business and A's heirs receive $500,000

stock purchase

used by privately owned corporations when each stockholder buys a policy on each of the others

cross purchase

used in partnerships when each partner buys a policy on the other

stock redemption

used when the corporation buys one policy on each shareholder

entity purchase

used when the partnership buys the policies on the partners