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CHAPTER 14
Professional Financial Planning
I. SUGGESTED CLASSROOM TIME: 100–120 MINUTES
II. CHAPTER OVERVIEW
This chapter places the life insurance and annuity purchase squarely in the realm of the
financial planning process. The chapter focuses on the financial problems that life
insurance and health insurance products can solve given the life contingencies individuals,
businesses and families meet. The process of financial planning considers financial goals,
available assets and future income and expense projections.
The chapter begins with a discussion of human life value and the needs-based
approach with the intention of dealing with two major questions: 1) should I purchase life
occurred and the extent of these changes to update the material in the text.
III. LECTURE OUTLINE
A. Introduction to Financial Planning and the Financial Planning Process.
1. Life and health insurance products should be viewed as a way of solving financial
problems that occur based on life’s contingencies.
B. Financial Planning: Steps in the Process
1. Motivate and educate clients
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4. Implement plans
5. Review and update plans
C. Financial Planning Strategies
1. Follow life stages, no specific
D. Early Adult Years: The Needs-Based Purchase of Life Insurance
1. “What financial problems arise if death occurs immediately?” We develop some
2. Distinguish permanent needs from temporary needs.
3. Evaluate assets available to meet the needs.
a. Social Security
4. Purchase life insurance to meet unsatisfied needs.
5. Life insurance is purchased primarily to protect against financial problems caused
by premature death.
6. Death is assumed to be immediate.
7. Discuss case study—Louis and Marie Burton.
9. Financing a college education
a. Tax advantaged funding strategies
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E. The Middle Adult Years
1. Characteristics include: independent children, mortgages repaid, and savings
accumulated.
F. The Later Adult Years
1. Focus turns to estate planning and the liquidation of assets
H. The Federal Estate Tax
1. Uniform Transfer Tax—property exemption increases currently until 2009, 2010
repealed, and 2011 all is set back to 2001 rates due to sunset provision.
4. Gift tax exclusion—can give annually an amount (currently 13,000) adjusted
annually to as many donees as you want. Given sufficient time and donees, can
distribute large amounts of property without eroding at-death exclusion. Married
couples can give $26,000 jointly.
I. Business Uses of Life Insurance
1. Provide fringe benefits
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2. Protect firm from loss of key employee
J. The Taxation of Life Insurance
1. Premium payments are not tax deductible for individual life insurance. Individuals
are not taxed on the first $50,000 of life insurance supplied as an employee
benefit.
2. Death proceeds
a. Incidents of ownership—if insured had an incidence of ownership at death, face
3. Living benefits—benefits of the contract during life.
a. Dividends—not taxable because considered a return of premium
IV. ANSWERS TO REVIEW QUESTIONS
1. List and explain the different categories of needs life insurance can fill in
the event of a premature death. Separate your list into permanent and
temporary needs. The following is a list of needs categorized by type: 1) A burial
fund to pay for funeral expenses (permanent); 2) an education fund to pay for
2. Other than life insurance, what assets are available to most American
families at death? Other than life insurance, Social Security benefits, employer-
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3. Identify the five steps in the life insurance planning process.
1) Motivate people to take steps to identify problems and proceed with reaching a
4. What are the advantages of saving for college through a Section 529 plan?
The contributor owns the account and makes the initial investment selection when
5. What purposes are served when businesses purchase life insurance for
their employees? Businesses are assumed to be profit-making institutions. Life
6. Describe key employee life insurance. Key employee insurance is life (or
disability) insurance designed to indemnify a firm against the loss of income associated
with the premature death or disability of a key employee. If the key employee’s services
7. What is a buy-and-sell agreement, and what role does life insurance play
in such a plan? A buy-and-sell agreement is a contract that forces an estate to sell
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8. What is the purpose of a will? What happens if a person dies without a
valid will? A will is a legal document in which a person directs the disposal of his or
9. Define the term gross estate, and indicate how it differs from a taxable
estate. Gross estate is the sum of the date-of-death (or alternate six-month valuation
10. Describe a second-to-die life insurance policy. What purpose does it serve?
A second-to-die life insurance policy covers two lives and pays a death claim when the
11. Explain the purpose of life insurance in an estate plan. Life insurance
proceeds are used to supply liquidity, or cash, to an estate. Death creates the need for
12. Define the term split-dollar life insurance. The split-dollar life insurance plan
allows two parties, typically an employer and employee, to pay a part of the premium
for a whole life insurance policy. The employer’s share typically equals the annual
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13. Explain the difference between the cross-purchase plan and the entity
plan. Cross-purchase plans and entity purchase plans are used with business buy-sell
agreements to fund the purchase and sale of an individual’s share of a business. If
14. Does the federal income tax apply to life insurance death proceeds? Are
there exceptions to the general rule? Life insurance proceeds generally are not
15. When does the federal estate tax apply to life insurance proceeds? Life
insurance proceeds are subject to estate taxation when the insured has an incidence of
ownership or the policy proceeds are directly used to pay obligations of the estate.
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V. ANSWERS TO OBJECTIVE QUESTIONS
1. The first step in the financial planning process is to
2. The need for postdeath financial resources includes all except which of the following
categories?
3. Which of the following categories of assets does the text NOT identify as often available
to meet postdeath financial needs?
4. The process of planning the transfer of wealth from one generation to another
generally is called
5. The needs-based purchase of life insurance is based on which equation?
6. Assuming that none of the following individuals currently own life insurance, which
would be most likely to need it?
7. The court-supervised process for transferring property at death is called
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VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Enter into a discussion concerning how a family’s life insurance needs might change
2. Focus on the value of a homemaker/spouse to the ongoing activities and functions of
3. Most students have a difficult time separating the federal estate and gift tax from the
federal and state income tax. Have your students mentally sum up the value of their
parents’ assets. (Some students may not have any understanding of their parents’
4. Have students calculate the impact of inflation on a financial plan. What are the results
of a 3 percent inflation rate on purchasing power, life insurance death benefits, as well
as saving over 10-, 20-, or 30-year periods?
5. Explain how the use of computers and spreadsheets makes the needs-based calculation
of life insurance requirements more realistic. The use of computers allow the planner
to realistically project income, expenses, taxes, and growth in investments and saving,
6. Is it wise for college students to buy life insurance while they are still in college? What
are some arguments on both sides of this issue? The author’s objections are: 1) On a
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7. How large is the annual gift tax exclusion? How can it be doubled? The annual gift tax
exclusion is equal to $13,000 per person per donee in 2012. This amount is now