Chapter 10: Uses of Life Insurance Concepts

Cross-Purchase Plan

Surviving owners use their policies to buy a deceased owner’s share.

Entity Plan

Business buys the deceased owner’s share, boosting survivors’ stakes.

Human Life Value Approach

Sum of an individual’s future earnings devoted to their family.

Needs Approach

Coverage based on analyzing financial needs and objectives.

Key Person Insurance

Protects a business from loss if a vital employee dies or is disabled.

Gathering Information

Collect ages, health history, wages, assets, etc.

Identifying Objectives

Prioritize client’s financial goals and needs.

Analyzing Financial Condition

Assess current assets, liabilities, and cash flow.

Developing & Implementing Plan

Design and carry out the insurance strategy.

Periodic Plan Review

Regularly reassess and adjust coverage.

Human Life Value Approach

PV of future earnings (minus taxes/expenses).

Needs Approach

Coverage based on family’s goals and obligations.

Charitable Gift Tax Advantage

Tax deduction via policy transfer or premium gifts.

Blackout Period

Interval from death until spouse’s retirement benefits start; child benefits until youngest turns 18.

Multiple Earnings Method

Coverage equals annual salary multiplied by chosen years (e.g., 5× pay).

Interest-Only Method

Principal set so interest alone sustains after-tax family consumption.

Single Needs Method

Coverage matches a specific financial need (loan, education, taxes).

Capital Needs Analysis

Calculates cash for final expenses, debts, taxes, and income replacement.

Seat-of-the-Pants Method

Arbitrary coverage amount without structured calculation.

Personal Uses

Funds for final expenses, survivor income, debts, education, retirement, liquidity, charity.

Estate Inclusion

Policy value counts in the insured’s estate and may be estate-taxable.

Immediate Estate Creation

Life insurance instantly creates an estate for beneficiaries at death.

Policy Loans

Loans against cash value for buy-sell funding, deferred comp, split-dollar.

Key Employee Insurance

Protects business against loss from death/disability of a vital employee.

Third-Party Ownership

Policy owned by an entity other than the insured to meet business or estate objectives.

Third-Party Ownership

Business is applicant, owner, premium payor, beneficiary, holding all policy rights.

Funding Contracts

Whole/universal for permanent key-employee plans; term for short-term needs.

Premium Tax Treatment

Business premiums non-deductible; death benefits non-taxable; excluded from estate.

Buy-Sell Agreement

Legal contract for orderly transfer and payment to deceased owner’s survivors.

Buy-Sell Plan (Sole Proprietor)

Attorney-drafted agreement for employee to buy proprietor’s estate at preset price.

Insurance Funding (Sole Proprietor)

Employee owns/pays policy on proprietor; proceeds fund the business purchase.

Entity Plan

Partnership funds buy-sell by owning life policies on each partner.

Cross-Purchase Plan

Partners individually own policies on each other to fund buy-sell.

Stock Redemption Plan

Corporation owns policies on shareholders to repurchase stock at death.

303 Redemption

Life-funded redemption when stock ≥35% of estate avoids forced sale.

Deferred Compensation Funding

Non-qualified executive benefit funded via cash-value life or annuity.

Salary Continuation Plan

Employer-funded plan replacing executive income on death/disability.

Corporate-Owned Life Insurance

Corporation owns life policies on employees to finance benefit plans.

Change-of-Insured Provision

Corporate policy clause letting employer swap covered employees without issuing a new policy.

Corporate-Owned Annuities

Annuity owned by a corporation; interest tax-deferred only if a natural person is annuitant or under specified trust/plan exceptions.

Executive Bonus Plan

Section 162 arrangement where employer bonus pays employee-owned policy premiums; employer deducts bonus, employee includes it in income, death benefit is tax-free.

Split Dollar Plans (SDP)

Funding method using whole-life policies where employer and employee share premiums, cash value, and death benefit.

Human Life Value Approach

Estimates capitalized future earnings lost to family upon premature death.

Needs Approach

Calculates coverage based on the family’s projected financial needs after death.

Viatical Settlement

Sale of an existing policy by a terminally ill insured for an accelerated death benefit.

Survivor Protection Planning

Assessment of assets, liabilities, and goals to determine insurance for post-death needs.

Key Person Insurance

Coverage that indemnifies a business for loss from a vital employee’s death or disability.

Buy-Sell Agreement

Legal contract specifying business transfer and survivor payments on owner’s death/disability.

Entity Purchase Method

Partnership or corporation buys a deceased owner’s interest using owned life policies.

Stock Redemption Method

Corporation-funded plan repurchasing deceased shareholder’s stock at a prearranged price.

Split Dollar Plan

Arrangement where employer and employee share policy premiums, cash value, and death benefit.

Deferred Compensation Plan

Non-qualified agreement funding future employee payments (retirement, disability, death).

Sole Proprietorship Risk

In a sole proprietorship, the business ceases to exist upon the owner’s death.

Cross-Purchase Plan

Partners each own and fund policies on one another to buy out a deceased share.

Entity Plan

Partnership owns policies and uses proceeds to purchase the deceased partner’s interest.

Closely Held Corporation

Legally separate entity whose buy-sell is structured as a stock redemption plan.

Stock Redemption Plan

Corporation-owned policies fund repurchase of deceased shareholder’s stock.

Key Person Insurance

Covers owner/officer/manager to offset financial loss on their death.

Corporate-Owned Life Insurance

Business owns policy; premiums generally deductible, benefits non-taxable.

Deferred Compensation

Employer-funded non-qualified plan paying selected employee later.

Salary Continuation Plan

Employer-funded benefit replacing executive income on death/retirement/disability.

Executive Bonus Plan

Employer bonus funds employee-owned policy premiums; bonus is deductible.

Cross-Purchase Plan

Surviving owners use their own policies to buy a deceased owner’s share.

Entity Plan

Business holds policies on each partner and uses proceeds to buy the deceased’s interest.

Closely Held Corporation

Privately owned company legally separate from its shareholders.

Stock Redemption Plan

Corporation-owned policies fund repurchase of deceased shareholder’s stock.

Key Person Insurance

Protects business against financial loss from a vital employee’s death/disability.

Corporate-Owned Life Insurance

Company owns the policy; premiums often deductible, benefits non-taxable to the business.

Deferred Compensation

Employer promises future payments (retirement/disability/death), often funded with cash-value life or annuity.

Salary Continuation Plan

Employer-funded benefit that replaces an executive’s income on death, retirement, or disability.

Executive Bonus Plan

Employer gives a taxable bonus; employee uses it to own/pay premiums on a personal life policy.