HS 311 Chapter 10: Life Insurance Planning and Purchasing Decisions
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Created by:
markshields on January 23, 2011
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Terms | Definitions |
|---|---|
 financial needs analysis | a process that identifies survivors' immediate cash needs and ongoing income needs, and assumes that life insurance proceeds will be liquidated to meet them; used to determine how much life insurance a person needs |
| capital needs analysis | based on the financial needs analysis, but assumes that beneficiaries' needs will be met using the ongoing interest earned from the policy principle |
| surrender cost index | the cost of surrendering the policy for the cash value at some future point |
| net payment cost index | the cost of insurance protection based on the assumption that the insured dies at the end of the policy's 20th year |
| illustration | a presentation or depiction that includes nonguaranteed elements of a life policy over a period of years |
| replacement | the process of replacing an existing life insurance policy with a new policy |
| 1035 exchange | the IRS allows a policyowner to leverage tax advantages when terminating one life policy for a "like policy" with the same insured and policyowner |
| rate-up age method | determining a premium for a substandard applicant by calculating the rate for an older person (that reflects the true mortality risk) |
| extra percentage tables | the most common method of applying additional risk factors onto a substandard applicant in order to calculate the higher necessary premium; typically adds 3-12% to the standard rate |
| flat extra premium | applying a defined amount per $1000 of coverage for substandard applicants |
| lien | a reduction in the death benefit for the beginning of a policy where an applicant has a temporary risk that would otherwise cause him or her to have a higher rate (e.g. a serious illness that should be recoverable); after the initial period the lien is removed and the death benefit is restored to "normal" |
| viatical settlement | the sale of a terminally ill insured's life insurance policy in exchange for a percentage of the face amount |
| life settlement | transferring the ownership of a life insurance policy to a third-party investor |
| stranger-oriented life insurance (STOLI) | an agreement in which a speculator initiates coverage on older persons and funds the premiums; the goal is to make a profit via the death benefit |
| key employee life insurance | policy purchased by a company to recover from the loss of an important employee |
| buy-sell agreement | a contract that binds the owner of a business interest to sell it upon death to a buyer for a determined price |
| entity agreement | a contract among owners of a business in which the surviving owners will buy out the shares of an owner who dies (and the owner's estate must agree to sell) |
| cross-purchase agreement | each stockholder is a buyer and a purchaser, and owners must buy a portion of a deceased owner's share; owners typically carry life policies on the other owners in an appropriate amount |
| Sec. 79 plan | The section of the IRS tax code that gives favorable tax treatment for money spent by businesses on group life benefits |
| split-dollar life insurance | a permanent life insurance plan frequently offered as an executive benefit before 2003; the employee and the company split the premiums 50/50 |
| transfer-for-value rule | if a policy is transferred from one owner to another for valuable consideration, the income tax exclusion is lost |
| cash value accumulation test | the cash value cannot exceed the net single premium that would be needed to fund the policy's death benefit |
| guideline premium and corridor test | limits the amount of premium that can be paid into the policy during any one time period, and the death benefit cannot exceed a multiple of its cash value at all times |
| inside buildup | the increase in the cash value of a permanent life insurance policy |
| modified endowment contract (MEC) | a life policy that fails the 7-pay test; a policy accepts too much premium (compared to the death benefit) during the first 7 years of the policy or after a material change in the policy |
| gift tax | a tax imposed on transfers of property by gift during the donor's lifetime |
| gift | a completed transfer and acceptance of property (including money), and a transfer for less than full and adequate consideration |
| estate tax | a tax imposed on the transfer of property at death |
| gross estate | property in the state upon death, as well property transferable upon death by other means (e.g. life insurance) |
| incident of ownership | an element of ownership or degree of control over a policy |
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