Chapter 10: Uses of Life Insurance

an individual’s economic worth, measured by the sum of the individual’s future earnings that is devoted to the individual’s family

a method for determining how much insurance protection a person should have by analyzing a family’s or business’s needs and objectives should the insured die, become disabled, or retire.

describes the ethical duty of a producer to sell a product that fits the needs of the prospect rather than the needs of the producer. An example of a needs-based violation is a prospect being sold insurance with the highest premium (and the greatest commission) instead of the proper coverage. By committing themselves to professionalism and the needs of the client, insurance producers can act both responsibly and ethically. There are two principles involved in needs-based selling:

• Fact-finding: the first step. an agent should understand what his client’s goals are (long term, short term, retirement, etc.) and be able to create a map that will lead to the fulfillment of those goals. Treat all information with utmost confidentiality

• Education is the second step. Show clients how insurance can be used as an effective financial tool to help them reach their individual goals. Make certain the client understands the application and underwriting processes, the policy purchased and any attached riders.

are agreements that provide 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 other principals.

agreements in which a business assumes the obligation of purchasing a deceased owner’s interest in the business, thereby proportionately increasing the interests of surviving owners

the protection of a business against financial caused by the death or disablement of a vital number of the company, usually individuals possessing special managerial or technical skills or expertise.

arrangements between two parties where life insurance is written on the life of one party who names the beneficiary of the net death benefits (death benefits less cash value), and the other party is assigned the cash value, with both sharing premium payments.

• estimate an individual’s average annual future earnings after deducting taxes and personal living costs

• Estimate the number of years the individual expects to work until retirement

• Select a reasonable interest rate (comparable to current rates paid on insurance proceeds held by insurers) at which future earnings should be discounted

• Multiply the present value of one dollar payable annually for the number of years until expected retirement, using the selected interest rate, by the estimated average future annual earnings. The result is a reasonably accurate estimate of the individual’s economic value to his or her family.

• 
  to a personal life insurance planning may involve creating a lump sum to provide for such things as education, retirement, and charitable requests.

• The needs approach to personal life insurance planning also includes the creation of an emergency reserve fund. This fund is designed primarily to cover the cost of unexpected expenses

• The “needs approach” in life insurance is most useful in determining how much life insurance a client should apply for.

Final expense fund, housing fund, education fund, monthly income, emergency fund, income needs (if disabled or ill), retirement income, estate conservation (using life insurance to enable heirs to pay estate taxes)

-As a funding medium, as a form of business interruption insurance, as an employee benefit.

1. A buy-sell agreement is drafted by an attorney, setting forth the employee’s obligation to buy and the responsibility of the proprietor’s estate to sell the business interest at an agreed-upon price. This is sometimes referred to as a stock redemption plan

2. An insurance policy is purchased by the employee on the life of the proprietor. The employee purchases a life insurance policy on the life of the proprietor. The employee is the policyowner, beneficiary, and pays the premiums. Upon the proprietor’s death, the funds from the policy are used to buy the business.
   In addition, when cash value life insurance is used to fund the agreement, the plan may call for a transfer of ownership if the proprietor prefers to retire at some point in the future. The employee could use the policy’s cash value to make a substantial down payment toward the purchase of the business. the balance of the purchase price might be paid in installments over a period of years.

cross-purchase plan: the more common approach to a buyout. the partners individually agree to purchase the interest of a deceased partner and the executor of the deceased partner’s estate is directly to sell the interest to the surviving partners.
the entity plan: a deceased partner’s interest is purchased from his or her estate by the partnership. The interest is divided among the surviving partners in proportion to their own interest.

Business indemnification, a reserve fund, business credit, favorable tax treatment

finding and training a replacement if they key person dies prematurely, the reduction of profits resulting from the key person’s death, the loss of new business resulting from the key person’s death, the loss of leadership resulting from the key person’s death