Texas Life and Health Section 2: Life Insurance Basics Questions and Answers 100% Correct
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Course
Texas Life and Health
Institution
Texas Life And Health
-In life insurance, the owner must have an insurable interest at the time of application (ex. spouse, parent, child, someone with a business relationship with the insured such as partner or employer), insurable interest is not required at the time of the insured's death
Stranger/Investor-Owned L...
Texas Life and Health Section 2: Life
Insurance Basics Questions and
Answers 100% Correct
Insurable Interest - ANSWER-An underwriting test for an application of insurance that
demonstrates the person purchasing a policy has a legal interest in the continued
longevity of the insured
-In life insurance, the owner must have an insurable interest at the time of application
(ex. spouse, parent, child, someone with a business relationship with the insured such
as partner or employer), insurable interest is not required at the time of the insured's
death
Stranger/Investor-Owned Life Insurance (STOLI)/(IOLI) - ANSWER--In a stranger
originated life insurance a third party is involved who has no relation with the policy
owner and initiates the purchase of the policy by paying the premiums and later buying
the policy thereby profiting upon the death of the insured.
-Such transaction violate the law which is specifically designed to ensure that the
person buying the life insurance policy derives benefit from it and has an economic
interest (called insurable interest) in the continued life and not death of the insured
STOLI arrangements are typically promoted to consumers between the ages of 65 and
85 and include:
-allowing someone to purchase life insurance on their life in exchange for an immediate
lump sum payment of some amount
-allowing someone to purchase insurance on their life in exchange for a partial payment
of the policy's face value to their beneficiaries upon their death;
-purchasing a life insurance policy or entering into a contract for "free" or "no-cost"
insurance an their life
Personal Uses of Life Insurance - ANSWER-1. Survivor Protection: provides income for
spouses, children, and other dependents after the death of the insured
2. Estate Planning: the establishment of trusts or purchase of annuities to provide for
continued long-term income streams for dependents
3. Cash Accumulation: certain kinds of policies allow the owner to save money due to
the cash value that accumulates
4. Security: life insurance can offer a certain amount of financial independence and
freedom from doubt or anxiety over money issues for the survivors of the insured
,5. Liquidity: life insurance can be an excellent source because of the proceeds paid
which are tax free and in cash. Useful for paying off debts and providing cash to pay
taxes when there are not enough liquid assets to do so
6. Estate Conservation: provides funds to pay taxes, probate fees, and other final
expenses allowing the estate to pass fully to the heirs
7. Viatical Settlements: a terminally ill policy owner sells his or her life insurance policy
at a discount for cash to a third party. The insured gains access to money for medical
bills prior to death rather than the policy beneficiary getting the death benefit later.
When the original owner dies, the third party receives the policy's entire death benefit.
The new owner is actually investing in the death benefit of the policy
Determining the Amount of Life Insurance Needed - ANSWER-1. Human Life Value
Approach: this approach calculates the capitalized value of an individual's earning
capacity into the future
2. Needs Approach: attempts to determine how much life insurance will be needed by
surviving dependents to cover their needs and expenses, and also any expenses that
result from the death of the insured.
Types of Information Gathered
1. identify needs that arise or continue to exist after death of the insured
2. identify any existing available resources (savings, employer life insurance, Social
Security, etc.)
3. calculate the difference between the needs and the available resources. This figure
will represent the household's unmet needs, and is the amount to be covered by a life
insurance policy
Determining Lump-Sum Needs
1. funds for last expenses: funeral costs, applicable taxes, outstanding debts, medical
costs, etc.
2. an emergency fund to help with unexpected expenses, especially in the period
immediately following the death of the insured
3. educational needs of the family
4. mortgage and other payment funds
Planning for Income Needs: income needs would include a readjustment fund to
maintain the family's lifestyle while adapting to life without the deceased, income during
the period when children are dependents, and a source of income for the lifetime of the
spouse
Coordination with Social Security, Employee Benefit Plans, and Other Assets: if there
are source of available income such as social security, employee life insurance policy,
pension plans, investments, etc., those amounts should be considered when computing
, the amount of a life insurance policy purchase. If those sources are not figured in, the
policy amount could be inflated beyond what is actually necessary.
Debt and Final Expenses: includes burial costs, medical bills, and other debt
Types of Business Life Insurance - ANSWER-1. Business Continuation Insurance
2. Buy-Sell Agreements/Cross-Purchase Plans
Business Continuation Insurance - ANSWER-1. Helps a business continue to operate
when the death of the owner might otherwise cause the company to go out of business
2. Protects assets of the business from forced liquidation by making funds available to
surviving family members and/or partners
Buy-Sell Agreements/Cross-Purchase Plans - ANSWER-Arrangements between
partners or associates in which surviving members agree to purchase the ownership
interest in the company from the deceased owner's estate at a pre-determined price
1. Life insurance is the funding vehicle
2. A license attorney draws up the actual agreement binding the owners contractually to
carry out the purchase upon the death of the other
Corporate-Owned Life Insurance - ANSWER-A corporation might purchase a life
insurance policy to cover key people in order to indemnify the business against the loss
of knowledge and experience, and to assist in financing the cost of employee benefit
plans such as deferred compensation plans
Split-Dollar Life Insurance - ANSWER-Allows employees to buy life insurance at
reduced costs, "splitting" premium costs with employers
1. The employer pays the cost of the insurance that will be applied to the cash value of
the policy. The policy's cash value can be entered as an asset on the company's
balance sheet
2. The employee pays the cost of the actual insurance proceeds benefit
3. Upon the employee's death, the employer is paid the greater of the premiums paid or
the cash value of the policy. The employee's beneficiary is paid the death benefit minus
the amount paid to the employer
Key Employee Life Insurance - ANSWER-1. Protects the business owner when an
individual or small group of people is essential for the business' continued operation
2. Employer buys life insurance on the life of the key employee, usually equal to one to
tow years' salary
3. The employer is the beneficiary and owner of the policy, and if the key employee
ides, the business can use the death proceeds to hunt for and hire someone to take the
place of the deceased key employee
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