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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


a presentation or depiction that includes nonguaranteed elements of a life policy over a period of years


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


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


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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