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Glossary of Insurance Terms:

Beneficiary

The beneficiary of your insurance policy is the person selected by you to receive the policy benefits upon your death. You may designate that the benefits from your policy be allocated to multiple beneficiaries. And you may change your beneficiary designations at any time.

Buy-sell Agreement and Cross Purchase Agreement coverage

Almost any owner of a closely-held business will benefit from a funded buy-sell agreement. The business is usually the source of the owner’s income and is most often the largest asset in a business owner’s estate. Death or disability of a business owner or partner can leave the business partners and their families in a precarious position.

All types of business entities; sole proprietorships, partnerships, LLC’s and corporations need the solutions buy-sell agreements provide. Each type of entity has unique problems which arise from the death or disability of an owner. A buy-sell agreement can be tailored to provide a solution for each.

A carefully developed buy-sell agreement will:

  • Create a market for a shareholders stock when it is needed at the owner’s death, disability or retirement.
  • Establish the purchase price for the deceased, disabled or retired owner’s interest.
  • Restrict the transfer of stock or interest in the business to other owners or family members.
    Provides liquidity for the payment of estate taxes or other costs.

Several methods are available to fund a buy-sell agreement:

  • Use funds from current or future working capital
  • Borrow funds from a third party
  • Initiate a sinking fund
  • Life and disability insurance funding

Coverage Amount / Face Amount

The amount that the policy will pay to the insured’s beneficiaries in the event of the death of the insured.

Deferred Compensation

Deferred income is accomplished in several steps:

  • Step 1: The key executive defers a percentage of his or her pre-tax salary and/or bonus for a period of years. In return, at the retirement or death of the executive, the employer provides a supplemental retirement income for the executive and his or her family.
  • Step 2: Purchasing Life Insurance;  The employer uses the executive’s deferred compensation to purchase a life insurance policy on the life of the executive, suitable to his or her risk tolerance, time horizon, and financial goals.  The employer is the owner of the policy and names itself as the beneficiary. The executive is the insured.  The policy offers an income tax–free death benefit and accumulates a tax–deferred cash value for the employer.  Premium payments are not deductible.
  • Step 3: Receiving Income;  When the executive retires or at another specified date, he or she begins receiving the deferred benefits from the employer, at which time the employer receives an income tax deduction and the benefits are taxable to the executive.  The employer can use the accumulated net cash value—through withdrawals or policy loans—to fund the benefit distributions. Since the deferred compensation benefits are an unsecured promise by the employer and are subject to the claims of the employer’s creditors, the employee is not taxed until the income is distributed.
  • Step 4: Beneficiaries; In the event of the executive’s death, the plan may provide that his or her beneficiaries receive either a taxable annual income or a taxable lump-sum death benefit, depending on plan design, funded by the policy proceeds received by the employer.

Estate Preservation

  • Grow some of your assets within a tax-deferred investment vehicle
  • Significantly increase your estate’s after-tax = value to your heirs
  • Avoid probate, legal and executor fees in respect of the insurance proceeds
  • Potentially protect your assets within the policy from creditors
  • Reduce the cost of a couple’s life insurance protection by purchasing a joint life policy

The assets you’ve built up over your lifetime - such as a home, cottage, investment portfolio, business, or farm - mean a lot to you, and to your family.  However, when you and your spouse pass away, virtually all of these assets will be subject to tax.  As a result, your heirs could receive an estate of considerably less value because they have to borrow against the value of the estate, or even be forced to sell these cherished assets just pay the tax bill.  Transamerica’s Estate Preservation Strategy is designed to solve this issue.

Insured

An individual who is currently covered under an existing life insurance policy.

Key Man Insurance/Key Person Insurance

Key Man Insurance is critical for companies that depend on a few “Key People” to generate a large portion of the company’s revenue. The absence of one of these individuals usually results in the death of the company.

Key man insurance, also called, key person insurance or sometimes keyman insurance, is an important form of business insurance. There is no legal definition for “key person insurance”. In general, it can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.

An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.

Length of Coverage

Different term life insurance policies have different durations.  For example 10, 15, 20, and 30-year term life insurance policies are very common. A 10-year level term policy will have an initial 10 year period in which premiums are level. Similarly, 15, 20, 25 and 30 term level premium terms can be issued.

Level Premium Term Life Insurance

Please refer to the Policy Features Page.  Term Life insurance provides a low cost alternative to whole or universal life insurance.

Premium

A payment to a life insurance company in exchange for a life insurance policy.

Retirement Planning

Planning for your retirement is important to every professional.  A few things to put on your checklist while you are saving for retirement include:

  • Have you performed a comprehensive retirement needs calculation?
  • Are you contributing enough to potentially reach your financial goal within your desired time frame, by maximizing contributions to tax-advantaged retirement accounts, such as your employer-sponsored retirement plan and an IRA?
  • Is your asset allocation aligned with your retirement goal, risk tolerance, and time horizon?
  • Have you determined if you might benefit from contributing to a traditional IRA or a Roth IRA?
  • Do you review your retirement portfolio each year and rebalance your asset allocation if necessary?

As you near retirement some of the following points are important:

  • Do you know the payout options available to you (e.g., annuity or lump sum) with your employer-sponsored retirement account, and have you reviewed the pros and cons of each option?
  • Have you considered your health insurance options, (i.e., Medicare and various Medigap supplemental plans or employer-sponsored health insurance), out-of-pocket medical expenses, and other related health care costs?
  • Have you contacted Social Security to make sure your benefit statement and relevant personal information are accurate?
  • Should you purchase long-term care insurance? If so, have you investigated which benefits are desirable?
  • Is your asset allocation properly adjusted to reflect your need to begin drawing income from your portfolio soon?
  • Have you determined an appropriate withdrawal rate of your assets to help ensure that your retirement money might last 20, 30, or more years?
  • Have you figured the amount of your annual required minimum distribution (RMD) and developed a strategy to reduce your tax burden once you’re required to begin taking RMDs?
  • Have you appointed a health care proxy and durable power of attorney to take charge of your health and financial affairs if you are unable to do so?
  • Have you reviewed all your financial and legal documents to make sure beneficiaries are up-to-date?
  • Are you making effective use of estate planning tools (such as trusts or a gifting strategy) that could reduce your taxable estate and pass along more assets to your heirs while also benefiting you now?

Also remember:

  • Planning for retirement is a lifelong process. Determining your retirement needs by identifying your potential retirement expenses and sources of retirement income is an important step.
  • Starting to invest early for retirement and contributing as much as possible to tax-advantaged employer-sponsored retirement plans and IRAs are two ways to leverage your retirement dollars.
  • Determining an appropriate asset allocation — how you divide your money among stocks, bonds, and cash — is a time-tested strategy for helping you pursue your financial goal.
  • It’s essential to determine an appropriate annual withdrawal rate of your assets during retirement so you don’t outlive your money.
  • After age 70 ½, you must begin making an annual required minimum distribution from certain tax-deferred retirement accounts. Preparing for this phase ahead of time may help reduce your tax burden.
  • Developing an appropriate estate plan is the important final stage of crafting an effective retirement plan.

Split-Dollar Arrangement

Also known as a “Split-Funded Defined Benefit Plan” this is a traditional defined benefit
plan that may direct a percentage of its annual contributions to purchase life insurance. Often, these plans are layered on top of a profit-sharing plan, 401(k), or both.

Underwriting Guidelines

Underwriting guidelines are the health and lifestyle criteria for the proposed insured that insurance companies use to determine the appropriate rate classification upon which to base the premiums for the coverage. These criteria typically include age, gender, tobacco use, height/weight build, family history of heart disease or cancer, cholesterol levels, blood pressure levels, specific health conditions, driving record, hazardous occupation or activities, military service, aviation, foreign travel or residency, U.S. citizenship and felony criminal activity. It is important that all of these underwriting guidelines are taken into consideration when evaluating any premiums quoted for life insurance coverage.

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