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chapter 10
uses of life insurance
| Cross-purchase plan | this is a plan that, upon a business owner's death surviving owners will purchase the deceased's interest, often with funds from life insurance policies owned by each principal on the lives of all the other principal |
| entity plan | this is an agreement whereby a business assumes the obligation of purchasing a deceased owner's interest in the business which proportionately increases the interest of the surviving owners |
| human life value approach | this is a method of determining an individual's economic worth as measured by the sum of the individual's future earning that is devoted to the individual's family |
| key person insurance | this insurance protects a business against financial loss caused by the death or disability of a vital member of the company, often individuals who possess special managerial or technical skills or other expertise |
| needs approach | method for determining how much insurance protection a person should have analyzed a family's or business's needs and objectives if the insured were to die, become disabled, or retire |
| calculates the capitalized value of an individuals net future earnings | human life approach |
| considered potential lost earnings as a measure of insurance needed | human life approach |
| formula | present value(projected earnings-expenses) x years until retirement |
| focuses only on income replacement not specific family needs | human life approach |
| determines insurance amount based on personal/family dinancial goals and objectives | needs approach |
| considers debt elmination, education goals, emergency funds | needs approach |
| formula(needs approach) | total capital needs- liquid assets= insurance needed |
| multiple earnings method | selects the number of years to replace the annual salary |
| interest only method | maintains principal for future payments |
| seat of the pants method | arbitrarily selects an amount of insurance |
| life insurance is both | an asset and a form of protection against loss |
| final expenses | funeral costs, final medical expenses, burial, and related costs |
| debt repayment | Pay off medical bills or other personal debts (sometimes included in final expenses) |
| emergency funds | Provide a financial cushion for unexpected events |
| mortgage redemption | Pay the remaining mortgage balance to assure housing for survivors. |
| estate protection and conservation | Preserve wealth and manage estate taxes. |
| charitable contributions | Leave a legacy to a cause you care about |
| income needs | These are future income needs used to calculate the amount of insurance required to provide the desired income during the period in which it is needed. |
| survivor protection and security | provide a monthly income for dependents. |
| education expenses | Fund children’s or dependents’ schooling |
| retirement income supplement | Add to retirement savings for later years. |
| cash accumulation and liquidity | Build accessible funds for future needs |
| policy | is an asset included in the owner's estate |
| cash value policies allow? | access to funds through policy loans |
| business uses of life insurance | funding method, business interruption insurance, employee benefit |
| funding method | for business continuation agreements or owndership transfers |
| business interruption insurance | Indemnifies the business for losses from death/disability |
| employee benefit | Protects employees and families from financial problems |
| buy-sell agreements | legal agreement providing orde |
| buy sell agreements guarantees what? | cash availability to purchase the deceased owner's interest |
| what can buy sell agreements be funded with? | life insurance for sole proprietorships, partnerships, or corporations |
| types of buy sell agreements | sole proprietors, partnerships, for closely held corporations |
| sole proprietors (buy sell agreements) | two step plan where the employee takes over management |
| partnerships (buy sell agreements) | entity plan or cross- purchase plan |
| for closely held corporations (buy sell agreements) | stock redemption plan (entity) or cross purchase plan |
| entity plan | agreement between the partnership corporation and each partner stockholder |
| business is obligated to buy the deceased owner's interest | entity plan |
| cross purchase plan | agreement between partners/ stockholders |
| cross purchase plan | each partner/ stockholder purchases policies on other partners/stockholders |
| key employee insurance | compensates the business for the loss of earnings due to the death/disability of a key employee |
| key employee insurance | covers individuals with special managerial/technical skills or expertise |
| provides funds to find and train replacements employees | key employee insurance |
| four primary purposees | business indemnification, reserve fund, business credit, favorable tax treatment |
| business indemnification | Compensates for financial loss |
| reserve fund | Provides a living benefit through cash value |
| business credit | Evidence of business character and a loan repayment guarantee |
| faborable tax treatment | Death proceeds are not taxable to the business |
| third party ownership | businesses have an insurable interest in their key employees |
| corporate owned life insurance | the company purchases and owns a policy on key empoyees |
| deferred compensation | Non-qualified retirement plans for highly paid employees |
| salary continuation | Corporate-sponsored benefit replacing executive income |
| executive bonus plan (section 162) | Employer pays bonus used for insurance premiums |
| split dollar plans | Employer-employee arrangement splitting the death benefit and cash value |
| paid to employee later | deferred compensation |
Created by:
Lupe12