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41 Cards in this Set

  • Front
  • Back
What is a Buy/Sell Agreement?
An agreement among owners of a firm that provides the continuation of a business upon the premature death of an owner. Through legal contract the deceased's estate must sell the deceased's interest back to the entity, who must buy at a predetermined price. (See pg 5)
What is a nonparticipating (nonpar) policy?
Insurance policies which do not pay dividends to policyowners. (See pg 5)
What is a participating (par) policy?
Policies that may pay annual dividends to policyowners. (See pg 5)
What is pure risk?
The difference between the cash value and the face value. (See pg 5)
What is the face value of a policy?
The death benefit. (See pg 5)
What does the term "mutual" mean in regards to life insurance policies?
Owned by the policyholders. (See pg 5)
What is the "Human Life Value Approach" when determining the amount of personal life insurance needed?
This approach is a measure of the actual future earnings and services of a person at risk in the event of premature death. (See pg 6)
What is the "Needs Analysis Approach" when determining the amount of personal life insurance is needed?
This approach determines a need for coverage upon the premature death of an individual. (See pg 6)
What is Capital Liquidation?
Assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents. (See pg 6)
What is Capital Retention/Conservation?
Assumes the desired income will be generated by the investment earnings only, thus retaining or conserving the principal or capital invested. (See pg 6)
What are some the advantages of having a Buy/Sell Agreement?
It is legally enforceable, The value of the business is previously agreed upon, and it is an immediate and automatic method of transferring the deceased's interest. (See pg 7)
What are some of the disadvantages of NOT have a Buy/Sale Agreement?
Income to surviving family members stops, Surviving business owner(s) may suffer a loss of income, Asset reduction due to forced liquidation, The estate transfer may be delayed due to a forced business liquidation, Share(s) of ownership transfer to surviving relatives. (See pg 7)
Name the two types of Buy/Sell Agreements.
Cross Purchase Plan and Entity Plan. (See pg 7)
What is a Cross Purchase Plan?
Used when parties purchase life insurance on each other or the employer. (See pg 7)
Wha is an Entity Plan?
Used when the business owns the policies on the parties and is the designated beneficiary for each contract participant. (See pg 7)
For whose benefit is Key Person coverage written for?
Employer, not the employee's family. (See pg 7)
What is Key Person Insurance?
Life insurance purchased to offset the expense and financial losses due to the death of a valued employee. (See pg 7)
What will the Key Person policy provide funds for?
Decreased cash flow, recruiting cost, cost of training and cost of replacing the key employee. (See pg 7)
What is Deferred Compensation?
An incentive plan in which an employer promises to pay key employees certain amounts of money at a specified future date (usually retirement.) (See pg 7)
What are viatical settlements?
Life insurance policies puchased from a terminally ill insured. (See pg 5)
What is a Split Dollar Plan?
A policy that insures the employee's life with premium payments split between an employee and an employer. (See pg 8)
What is Third Party Ownership?
A policy owned by one person insuring the life of another person. (See pg 8)
Name the classes of Life Insurance polices.
Group, Individual, Ordinary Life Insurance, Industrial (Home Service), Permanent, Term, Participating, Nonparticipating, Fixed, Flexible, and Variable.
What is the definition of an Industrial (Home Service) policy?
Small policies, normally $250 to $1,000 that originally were sold to pay funeral expenses. (See page 9)
What are some other names that an Industrial policy might be known as?
Home Service policy or Monthly Debit Ordinary policy (MDO). (See page 9)
What is a Permanent policy?
A durable policy that stays level in amount and premium. (See page 9)
What is Ordinary Life Insurance?
Any type of life insurance that is not group, industrial, or government insurance. (See page 9)
What is a fixed policy?
The policy has a fixed amount of coverage, benefits and premium. (See pg 10)
What is a variable policy?
A policy introduced in the 1970s that uses separate accounts for the cash value accumulation. (See pg 10)
True or false: If a policyowner cash surrenders a life insurance policy, the insurer could assess a surrender charge.
True (Chapter 1 retention question)
Which type of life insurance policy pays a dividend?
Participating (Chapter 1 retention question)
True or False: When using the Human Life method of determining a need, an agent would not consider any past income of the prospective insured.
True (Chapter 1 retention question)
True or False: Key person Insurance insures the employee's retirement plan.
False (Chapter 1 retention question)
Kathryn's employer is both the owner and beneficiary of her Key Employee policy. What percentage of the premium will Karen, the owner, be allowed to deduct at tax time for business expense.
0% (Chapter 1 retention question)
Key Person Insurance is used to provide funds for all of the following except which: A) Recruiting costs B) Training expense C) Overhead expense D) To replace lost cash flow
C) Overhead expense (Chapter 1 retention question)
What is one of the greatest differences between group and individual life insurance policies?
Ownership (Chapter 1 retention question)
Who is not considered when computing the Emergency Reserve Fund for the family when doing Needs Analysis?
The insured (Chapter 1 retention question)
Which of the following is false concerning term life insurance: A) Premium outlay is low B) Provides a means to purchase large amounts of insurance c) Matures at age 100
C) Matures at age 100 (Chapter 1 retention question)
Which of the following is a type of Buy-Sell Agreement funded by life insurance: A) Entity Proceeds B) Cross Purchase C) Key Person Coverage
B) Cross Purchase (Chapter 1 retention question)
All of the following are types of a Buy-Sell Agreement, except which? A) Entity Cross Purchase Plan B) Cross Purchase Plan C) Entity Plan
A) Entity Cross Purchase Plan (Chapter 1 retention question)
True or False: One purpose of a Buy-Sell Agreement is to establish the value of a business before the agreement is activated.
True (Chapter 1 retention question)