Center for Financial Advisor Education

Transcription

1 Center for Financial Advisor Education FA 251 WORKBOOK Essentials of Business Insurance WB

2 THE AMERICAN COLLEGE The American College is an independent, nonprofit, accredited institution founded in 1927 that offers professional certification and graduate-degree distance education to men and women seeking career growth in financial services. The Center for Financial Advisor Education at The American College offers both the LUTCF and the Financial Services Specialist (FSS) professional designations to introduce students in a classroom environment to the technical side of financial services, while at the same time providing them with the requisite sales-training skills. The Solomon S. Huebner School of The American College administers the Chartered Life Underwriter (CLU ); the Chartered Financial Consultant (ChFC ); the Chartered Advisor for Senior Living (CASL ); the Registered Health Underwriter (RHU ); the Registered Employee Benefits Consultant (REBC ); and the Chartered Leadership Fellow (CLF ) professional designation programs. In addition, the Huebner School also administers The College s CFP Board registered education program for those individuals interested in pursuing CFP certification, the CFP Certification Curriculum. 1 The Richard D. Irwin Graduate School of The American College offers the master of science in financial services (MSFS) degree, the Graduate Financial Planning Track (another CFP Board-registered education program), and several graduate-level certificates that concentrate on specific subject areas. It also offers the Chartered Advisor in Philanthropy (CAP ) and the master of science in management (MSM), a one-year program with an emphasis in leadership. The National Association of Estate Planners & Councils has named The College as the provider of the education required to earn its prestigious AEP designation. The American College is accredited by: The Middle States Commission on Higher Education 3624 Market Street Philadelphia, PA The Middle States Commission on Higher Education is a regional accrediting agency recognized by the U.S. Secretary of Education and the Commission on Recognition of Postsecondary Accreditation. Middle States accreditation is an expression of confidence in an institution s mission and goals, performance, and resources. It attests that in the judgment of the Commission on Higher Education, based on the results of an internal institutional self-study and an evaluation by a team of outside peer observers assigned by the Commission, an institution is guided by well-defined and appropriate goals; that it has established conditions and procedures under which its goals can be realized; that it is accomplishing them substantially; that it is so organized, staffed, and supported that it can be expected to continue to do so; and that it meets the standards of the Middle States Association. The American College has been accredited since The American College does not discriminate on the basis of race, religion, sex, handicap, or national and ethnic origin in its admissions policies, educational programs and activities, or employment policies. The American College is located at 270 S. Bryn Mawr Avenue, Bryn Mawr, PA The toll-free number of the Office of Professional Education is (888) AMERCOL ( ); the fax number is (610) ; and the home page address is theamericancollege.edu. Copyright 2010 The American College Press All rights reserved 1. Certified Financial Planner Board of Standards, Inc., owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER, and CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements. W Workbook

3 CONTENTS The American College... W-2 Table of Contents... W-3 Essentials of Business Insurance Assignment Schedule... W-4 Special Notes to Agents... W-7 Course Overview and Expectations... W-8 Acknowledgment of Course Requirements... W-14 Essentials of Business Insurance Pre-Test... W-15 Quick Summary of Business Organizations... W-17 Breakout Class 1... W-19 Sales Planning Project 1... W-21 Quiz Classes 1 and 2... W-31 Check Your Understanding... W-35 Breakout Class 2... W-43 Breakout Class 3... W-45 Sales Planning Project 2... W-49 Quiz Class 3... W-51 Sales Planning Project 3... W-53 Action Project 1... W-69 Action Project 2... W-93 Sales Planning Project 4... W-97 Quiz Class 4... W-101 Sales Planning Project 5... W-105 Breakout Class 4...W-111 Quiz Class 5...W-113 Check Your Understanding...W-117 Breakout Class 5... W-123 Quiz Class 6... W-125 Breakout Class 6... W-129 Sales Planning Project 5... W-131 Quiz Class 7... W-133 Breakout Class 7... W-137 Action Project 1 Report... W-139 Action Project 2 Report... W-141 Quiz Class 8... W-143 Check Your Understanding... W-147 Breakout Class 8... W-151 Practice Test... W-153 Answers to the Practice Test... W Workbook W-3

4 ESSENTIALS OF BUSINESS INSURANCE ASSIGNMENT SCHEDULE This workbook contains quizzes, exercises, projects, and case studies that are intended to supplement the material in the LUTC 251 textbook, Essentials of Business Insurance. Class Assignments 1 Forms of Business Organization Read Chapter 1 Course Overview and Expectations (Read before Class 2) Acknowledgment of Course Requirements (Due Class 2) Essentials of Business Insurance Pre-Test Quick Summary of Business Organizations Breakout Partnership versus Corporation Sales Planning Project 1 Read All About It (Due Class 2) 2 The Business Owner s Perspective Read Chapter 2 Acknowledgment of Course Requirements (Due this class) Sales Planning Project 1 Read All About It (Due this class) Quizzes Class 1 and Class 2 Check Your Understanding Breakout One Approach to Business Owners and Financial Statements Sales Planning Project 2 Marketing Mobility (Due Class 3) 3 The Advisor s Perspective Read Chapter 3 Case History: The Value of a Cold Call and Frequent Contact Breakout Ideas I Can Sell Quiz Class 3 Sales Planning Project 3 How to Use "The List" as a Fact-Finder (Due Class 4) Action Project 1 Continuous Prospecting (Due Class 7) Certification of Understanding Action Project 1 (Due Class 4) Action Project 2 Continuous Approaches (Due Class 7) Certification of Understanding Action Project 2 (Due Class 4) 4 Common Problems for Business Continuation Read Chapter 4 Sales Planning Project 3 How to Use "The List" as a Fact-Finder (Due today) W Workbook

5 Class Assignments Certification of Understanding Action Project 1 (Due today) Certification of Understanding Action Project 2 (Due today) Sales Planning Project 4 Interview an Advisor Who Sells Business Insurance (Due Class 5) Quiz Class 4 Sales Planning Project 5 Tracking Prospecting Habits (Due Class 6) Breakout What do you need to do to be successful? 5 Business Continuation: The Buy-Sell Agreement Read Chapter 5 Sales Planning Project 4 Interview an Advisor Who Sells Business Insurance (Due today) Quiz Class 5 Check Your Understanding Breakout Funded Buy-Sell Agreements 6 The Family-Owned Business, Business Valuation and Disability Considerations Read Chapter 6 Quiz Class 6 Breakout Succession Planning, Disability, and Objections Sales Planning Project 5 Tracking Prospecting Habits (Due today) 7 Key-Person Insurance Read Chapter 7 Quiz Class 7 Breakout Key Person Insurance Action Project 1 Report (Due today) Action Project 2 Report (Due today) Practice Test From Facts to Sales (Due Class 8) 8 Estate Planning for the Business Owner Date Read Chapter 8 Quiz Class 8 Check Your Understanding Breakout Estate Planning Practice Test From Facts to Sales (Due today) Review Session for the Final Examination 251 Workbook W-5

6 Class Date Assignments Final Examination This is a closed-book exam. You cannot refer to your textbook or any other materials during the exam. The exam will consist of 50 multiple-choice questions. W Workbook

7 SPECIAL NOTES TO AGENTS WORKBOOK MATERIALS DISCLAIMER While every precaution has been taken in the preparation of this material to ensure that it is both accurate and up-to-date, it is still possible that some errors eluded detection. The authors and The American College assume no liability for damages resulting from the use of the information contained in this workbook. The American College is not engaged in rendering legal, accounting, or other professional advice. If legal or other expert advice is required, the services of an appropriate professional should be sought. CAUTION REGARDING USE OF ILLUSTRATIONS The illustrations, marketing ideas, and approaches in this workbook are not to be used with the public unless you have obtained approval from your company. Your company s general support of The American College s programs for training and educational purposes does not constitute blanket approval of the marketing ideas and approaches presented in this workbook, unless so communicated in writing by your company. ANSWERS TO THE QUESTIONS IN THE COURSE The answers to all essay and multiple-choice questions in this course are based on the text materials as written. COURSE COMMENTS The American College welcomes your comments about this course, particularly suggestions for its improvement. The blue comment cards at the end of this workbook can be used for this purpose. USE OF THE TERM FINANCIAL ADVISOR Use of the term "Financial Advisor" as it appears in this workbook is intended as the generic reference to professional members of our reading audience. It is used interchangeably with the term "Advisor" to avoid redundancy. Financial Advisor takes the place of the following terms: Account Executive Agent Associate Broker (stock or insurance) Financial Consultant Financial Planner Financial Planning Professional Financial Services Professional Financial Services Specialist Health Underwriter Insurance Professional Life Insurance Agent Life Underwriter Planner Practitioner Producer Property & Casualty Agent Registered Investment Advisor Registered Representative Senior Advisor 251 Workbook W-7

8 COURSE OVERVIEW AND EXPECTATIONS Welcome to LUTC 251, Essentials of Business Insurance. This introductory section begins with an overview of the course objectives. Then it discusses the components of the course, reviewing the various assignments and activities that will help you apply what you learn. Finally it closes with a discussion of what is expected from you. OVERALL FA 251 COURSE OBJECTIVES Over the years The American College s LUTC program has become synonymous with quality training, enabling thousands of students to gain the necessary skills associated with being a competent and ethical financial advisor (see the previous page for an explanation of the meaning of the term financial advisor or advisor as used throughout the materials of this course). This tradition lives on in the Essentials of Business Insurance course. By the end of the course you will be able to identify markets and prospects for business insurance and to approach them based on need incorporate business insurance questions in a fact finder design a customized business plan to meet the prospect s needs within his or her budget guidelines explain to a prospect the principal features and benefits of buy-sell agreements funded with life insurance and key employee insurance help a prospect work through any concerns and objections to purchasing the necessary protection Achieving these objectives depends on the time and energy you invest in completing the assignments in this course. The next section provides an overview of the course components and the assignments related to them. COURSE COMPONENTS AND ASSIGNMENTS The American College s LUTC and FSS courses offer practical on-the-job training. Therefore, they require students to take action and participate fully. Except for the final examination, each component of the course is designed to facilitate action and participation, which can translate into more new clients and better client relationships. The course components include the classroom the text the workbook the final examination The Classroom The classroom is where the idea sharing that gives FSS and LUTC courses their unique value takes place. Of course, the value you receive in the classroom depends on your preparation and participation. The students in an FSS and LUTC classroom represent various levels of knowledge and experience in the financial services industry. Sharing with one another gives everyone an opportunity to grow in proficiency, professionalism, and productivity. In fact, the classroom s "magic" happens only if everyone is prepared and participates. W Workbook

9 The Text The discussions in the classroom focus on applying the concepts discussed in the textbook. Thus, you are expected to complete the reading assignment before class. The Workbook The workbook contains an assignment schedule and all of the mandatory assignments that must be completed for each class. The assignments are primarily breakouts (discussion questions), quizzes, marketing planning projects, and action projects. Breakouts. For each class there is a breakout, a set of questions and/or exercises designed to focus your attention on the topics your moderator will most likely cover in class. The breakouts ask you to apply what you learn. For example, many ask you to explain a concept as you would explain it to a client or prospect. You may then be asked to participate in a role-playing exercise based on your answer to the breakout. You are expected to have breakouts completed prior to each class. Quizzes. A quiz must be completed for each chapter. The questions are multiple-choice, and are similar in content, style and difficulty to those on the final exam. They will serve as good review for the final exam. Quizzes are due at the beginning of each class. Sales Planning Projects. Sales Planning Projects focus on the behind-the-scenes activities that support and enable successful interaction with prospects. They explore the planning involved with marketing, prospecting, interviewing, and servicing financial services products. In addition, Sales Planning Projects also focus on the skills and techniques to use when working directly with a prospect. They explore contacting the prospect for an appointment, working with a prospect during an interview, and asking for referrals. Action projects provide learning experiences that sharpen your ability to inform prospects and design appropriate plans for them. Thus, possible activities could include market research, record keeping, interviews of other advisors and professionals, and so forth. Forms are provided for each project. You will be given 1 week or more to complete each assignment. Begin working on the project the day it is assigned. If you wait until the last minute, you can miss its purpose and lose a real benefit. Project Assignment Summary Sales Planning Project Title Assigned class 1 Read All About It Marketing Mobility How to Use The List as a Fact-Finder Interviewing an Advisor Tracking Prospecting Habits 4 6 Due class Action Projects. Action Projects focus on the skills and techniques you use when working directly with a prospect. They explore the areas of contacting the prospect for an appointment, working with a prospect during an interview, and asking for referrals. In every action project there will be a specific, brief assignment that calls for personal contact with a number of prospects for a definite purpose. Sometimes, an approach will be suggested. Action Projects will typically fit into a financial advisor s daily routine. Very little preparation or extra research is involved. Sales are inevitable, but they are not required for completion of the action project. 251 Workbook W-9

10 Project Assignment Summary Action Project Title Assigned class Due class 1 Continuous Prospecting Certification Continuous Prospecting Continuous Approaches Certification Continuous Approaches 3 4 Most Valuable Concepts. Reflection is an important part of the learning process. This activity is designed to allow you to think about what you have learned in each class and write the most valuable concept, marketing idea, marketing strategy, and so forth that you learned in the class. Your moderator may ask you to share those ideas with the class. Passing Requirements Read this section carefully so that you understand what you must do to pass this course. In general, there are three main components that determine your final grade: attendance moderator s grade final exam grade Attendance. In order to pass, you must attend at least six of the eight regular sessions. You are expected to arrive on time and stay for the entire class session. Missing part of a class could count as a half or a whole absence. A half absence is charged if you arrive more than 20 minutes late or leave more than 20 minutes before the class is scheduled to end. If you miss more than 40 minutes of class time, you will be charged with a full absence. If you end up with 2½ absences, you will have exceeded the maximum allowable limit of two even if the absence is due to illness or accident. You will not pass the class. The exam review does not count as a class. Moderator s Grade. The moderator s grade is the average of three separate grades: class participation weekly quizzes projects (as assigned) You will be graded on your class participation. Specifically, the moderator will evaluate over the course of several weeks whether: Your participation in class is appropriate (don t be a time-hog or a wallflower), insightful, and relevant to the discussion. You have completed any Breakout questions. You take role-playing seriously and give helpful feedback. You make positive contributions in any small group activities. W Workbook

11 In addition, your weekly quizzes will be graded, each worth 100 points. There will be eight quiz grades that will be averaged together to yield your quiz grade. A quiz is assigned for each reading assignment. Quizzes for classes 1 and 2 are due class 2. The last component of the Moderator s Grade is the grade you receive for the successful completion of each of your Action Projects. Each project also is worth 100 points. You will turn in your assignments before the class begins. Assignments handed in thereafter are deemed late. Late assignments up to one week will have 50 points deducted from the grade earned. If more than a week late, papers receive a zero. If you are going to be out of town or absent for other reasons, it is up to you to get the assignment to the moderator before the class. The moderator should give you his or her contact information. Write it here for future reference: Moderator s Name: Moderator s Address: Moderator s Fax Number: Moderator s Moderator s Phone Number: At the end of the course, the grades for these three areas are averaged to arrive at a Moderator s Grade. For example: 1. Weekly class participation: average grade Weekly quizzes: average grade Projects: average grade 90 The total is then divided by 3 to arrive at the Moderator s Grade: 85. The Moderator s Grade must be greater than 70 percent in order for you to pass the course. Final Exam Grade. At the end of the course, you will take a 50-question multiple-choice examination that consists of the three multiple-choice formats (straight answer, Roman numeral, and EXCEPT) similar to those in the quizzes in the workbook. All answers are based on the material in the text. The final examination will not be difficult if you have read the text and completed all of the quizzes and chapter reviews. In order to pass the course, you must pass the final examination with a score of at least 70 percent. As you can see, you will need to earn a 70 or better on both the Moderator Grade and the Examination Grade to pass the course. Passing Requirements Attendance Your participation in the classroom discussion is crucial to the effectiveness of an FSS or LUTC class. Therefore, your attendance is vital. To complete the course successfully, you must attend at least six of the eight regular classes. Lateness of more than 20 minutes is half an absence; so is leaving early. Missing more than 40 minutes is a full absence. Two absences are permitted. If you end the course with two and one-half absences, you have exceeded the allowable limit. Moderator s Grade The moderator records grades for quizzes, projects, and participation in class sessions. These grades are combined to obtain the average grade for all classroom-related work. This average grade is called the Moderator s Grade Workbook W-11

12 Examination Grade There is a 50-question final examination at the end of the course. The questions are multiple choice. A grade of 70 percent or higher is necessary to pass the exam. Three Requirements In summary, to qualify for successful completion of the course, you must meet each of the following three requirements: 1. Satisfy the attendance requirement for your course. 2. Score 70 percent or more on the final examination. 3. Score 70 percent or more for the term grade. Refund. All requests for refunds must be made in writing to the Office of Student Services, The American College, 270 S. Bryn Mawr Ave., Bryn Mawr, PA The American College will refund your tuition (less a cancellation fee) if a written request is received by the third week of class. Tuition does not include any applicable matriculation fee or shipping and handling. For more information go to TheAmericanCollege.edu. EXPECTATIONS Before Class Complete all assignments before the class meets. The average amount of time you should plan to spend on completing these activities is at least 2½ hours per class about the same amount of time spent in classroom discussion. Some classes will require more time, others less. Activities include the following: Read and study the assigned pages in the text. Complete any breakouts. Complete the class quizzes. Complete any sales planning project assigned. Complete any action project assigned. Complete all other assignments required by the moderator. During Class Students. Turn in your assignments at the beginning of each class. The moderator has been directed to penalize late assignments by 50 percent. If more than a week late, papers receive a zero. Participate in class. Moderator. The moderator is an individual nominated by The American College. He or she is not a teacher by profession, but a full-time agent or manager. The moderator shares with you the demands of self-discipline and the constant pressure of time. Consequently, the moderator cannot afford the luxury of catering to anyone who is negligent about completing work on time, maintaining reasonable order, or respecting the rights of others. The moderator needs and deserves the full cooperation of every student. W Workbook

13 PERFORMANCE OF ACTION PROJECTS BY NON-MARKETING STUDENTS AND MANAGERS You are expected to complete the action projects. This applies to students who are not in personal production and to those in management. It includes, for example, students who are office staff, home office executives, finance officers on a military base, and others who may not be licensed to market insurance. If you cannot do the projects yourself, you are expected to handle them in one of the following ways (listed in order of preference): 1. Select an FSS or LUTC student who is with your company or in your community to work with on the project. Base your reports on your joint work. 2. If there is no local FSS or LUTC student from your company to work with, do joint work with one of your company s agents who is not taking the course. This can be a former FSS or LUTC student or someone without any FSS or LUTC experience. 3. If you are in management and it is not possible to work with an agent/student, assign the project(s) to one or more of the agents under your supervision, and report these results. 4. If you have no agents to work with and none under your supervision, arrange to interview one or more agents each week, and use the interview as the basis of the project report. Write what the agent did on the project reporting form. 5. If the four preceding options are unworkable for you, it is up to you to suggest alternative options on which you and your moderator can agree. For example, you may develop two presentations to write or present to the class during the course. These may be on special topics or you may research a particular insurance marketing topic to write about. Give photocopies to all class members. Topics can include state laws, statistical information about insurance, actuarial studies, articles in insurance magazines, self-improvement topics, relationship insights, or a question that came up in class that needed research. Keep in mind that these five alternatives are special options for isolated instances. In almost all situations, every student in the class is expected to complete the action projects as assigned for a passing grade. You are expected to do the field activity and make the follow-up approaches yourself. Most projects can be done in a meaningful way by persons who are not producers. If you need to do the projects in one of the ways suggested above, discuss it in advance with the moderator and reach agreement on how to proceed. As a safeguard, put your agreement in writing, include both of your signatures, and file the agreement. NOTE TO FSS AND LUTC STUDENTS Please read the following page carefully, sign at the bottom, and return it to your moderator in class. Occasionally, there are misunderstandings concerning the requirements for the successful completion of the course. The purpose of this memorandum is to ensure that the requirements and the ground rules laid down by the moderator are clearly understood. Failure to sign this form does not relieve you from these requirements. 251 Workbook W-13

14 ACKNOWLEDGMENT OF COURSE REQUIREMENTS - To be signed by student - It is my understanding, from the explanation received in the first class session and outlined in the Course Overview and Guidelines section of the workbook, that successful completion of this course requires meeting the attendance requirements, achieving a passing examination score (70 percent), and earning an overall average (term grade) of 70 percent on all work for the course. Specifically, I understand that 1. Credit for the course will not be given to any student who fails to attend at least six of eight class sessions. The maximum number of absences is two. Missing more than 20 minutes of class is a half-absence. Missing more than 40 minutes of class is a full absence. It does not matter whether absences are due to illness, injury, business appointments, company or agency meetings, vacations, or conflicts in personal schedules. No attendance credit is given for attendance at an exam review session. I further understand that neither the local NAIFA officers nor the moderator has authority to excuse absences because the requirement applies impartially to all students. 2. Grades are assigned during the course by the moderator. Grades for participation in class discussions (and preparation for them), and scores made on action projects, marketing planning projects, and quizzes are averaged. That number is then averaged with the final examination to arrive at the Term Grade. 3. Written assignments are to be handed in at the beginning of the class session in which they are due. Papers up to 1 week late are automatically reduced by 50 percent and to zero after that. 4. To receive credit for the course, I must sit for and receive a passing grade on a final examination acceptable for any course offered by The American College. The correct answers to the final examination questions are based solely on the information found in the text. The American College reserves the right to set aside the final examination of any class and require another examination. 5. Course results will be mailed out within 4 weeks after the final exam date, assuming all course requirements have been met, including payment of tuition. These reports will indicate a "passing" or "not passing" status only. No numerical grade is assigned. I have read the course requirements and understand them. I further understand that recruiting or attempted recruiting of personnel of another company is not permitted in any American College course or in connection therewith. Finally, I understand that any student whose behavior adversely affects reasonable order and harmony in the classroom will not be allowed to continue with the course. There will be no tuition refund, and the student may be barred from future participation in FSS and LUTC courses. Print your name Date Sign your name W Workbook

15 Name: Date: ESSENTIALS OF BUSINESS INSURANCE PRE-TEST This quiz will not count as part of your grade. Its purpose is to help you see some of what this course covers and what you already know. Toward the end of the course, your moderator may administer the exam again so that you can see how much knowledge you have learned. 1. Section 303 of the Internal Revenue Code offers a life insurance sales opportunity. Section 303 deals with income taxation of 2. When the life insurance in a buy-sell agreement is owned by the partnership, the plan is normally referred to as 3. The accumulated earnings tax applies to what form of business? 4. How many life insurance policies would be needed to fund a cross-purchase agreement among four partners? 5. When an existing life insurance policy on Jones is bought by Smith, part of the death proceeds may eventually be subject to federal income tax under the rule called 6. A financial statement that shows assets, liabilities, and owner s equity is called 7. For estate tax purposes, what is the dollar limit on the marital deduction? 8. Briefly state one fact about federal income taxation of partnerships. 9. A partnership with no limited partners is called 251 Workbook W-15

16 10. Name one important fact about the dividend-paying policy of most closely held corporations. 11. What percent of the premiums paid for buy-sell insurance are generally deductible for federal income tax purposes? 12. The federal tax on the transfer of property at death is called 13. A corporation that is taxed as a partnership is called 14. The beneficiary of an insured stock redemption agreement would be 15. True or False: Premiums paid for key person insurance are normally income tax deductible by a corporation. W Workbook

17 QUICK SUMMARY OF BUSINESS ORGANIZATIONS Sole Proprietorship From Chapter 1 Forms of Business Organization A sole proprietorship is where one person goes into business for profit. The proprietor can have any number of employees. No written papers are needed for legal purposes, except the normal business license from the local jurisdiction. If the proprietor dies, the business is usually dissolved. Legally, the business "dies" at the death of the owner. However, the proprietor s estate or the proprietor s heirs may decide to operate it. If that occurs, it is no longer the business of the deceased proprietor. The sole proprietor has sole unlimited liability in the business. For federal income tax purposes, the proprietorship, as such, is not a taxpaying entity. Rather, the proprietor is taxed on the business income and pays it with the regular individual 1040 tax return. This is known as pass-through income. General Partnership A general partnership is essentially two or more individuals operating a business for profit. As with other forms of business, they can have any number of employees working for them. Most partnerships have an attorney draw up a partnership agreement that puts the working arrangement in writing. Death of a general partner means that the business is automatically dissolved, unless there is a written agreement to the contrary. The general partners have unlimited liability for the business. A partnership is not taxed, but does have to file an "information return." All partners are then taxed as individuals and report their income on their regular individual 1040 tax return. Owners are known as partners. Again, as in sole proprietorships, the business income passes through to the partners. Limited Partnership A limited partnership is like a general partnership, except that the limited partners are limited in their liability. They are limited to the amount of their investment. Limited partners are more like people who have loaned money to the general partner, and they are not allowed to participate in the day-to-day management of the business. The general partner (must be at least one) has unlimited liability and responsibility for the management of the partnership. Professional Partnership Laws differ from state to state, but in general, a professional partnership is like a general partnership, except that the partners are in the same profession (e.g., all are dentists, physicians, accountants, architects, or another profession). The owners are known as partners. Family Limited Partnership (FLP) A family limited partnership is a limited partnership with membership allowed only for family members. The parents are the general partners. Its basic purpose is to help families pass the business along to their children without losing control of the business 251 Workbook W-17

18 until death. It also provides substantial savings for federal gift and federal estate tax purposes. So, in essence, it is a legal agreement that helps with business-succession planning and with estate planning in family-owned businesses. Limited Liability Company (LLC) Owners of limited liability companies are called members. LLCs are designed to permit small business owners to shield themselves from unlimited liability and to gain the favorable tax treatment enjoyed by partnerships. As with partnerships, members are taxed, but the LLC itself is not a taxpaying entity. When a member dies, most LLCs allow the other members to vote to continue the business. C Corporation C corporations are taxpaying entities. Contrast this with proprietorships, partnerships, LLCs, and S corporations, which are generally referred to as pass-through entities. That is, income passes through to the individual owners for tax-reporting purposes. The entity itself is not taxed. Becoming a corporation requires submitting articles of incorporation to the state authorities for approval and for being granted a charter. Compare this with the sole proprietor who can simply start, without any approval from the state. When a C corporation owner dies, the business can legally continue. The owners of a corporation are known as owners, shareholders, or stockholders. Typically, at death, the stockholder s shares are either passed along to the deceased s heirs or bought by the other owners, or by the corporation itself. Corporations can easily transfer ownership, unlike proprietorships and partnerships. S Corporations S corporations are like partnerships in some respects and like corporations in other respects. They are like partnerships for purposes of federal income taxes. That is, they are pass-through businesses wherein the owners are taxed, not the S corporation itself. They are like C corporations in that the business can legally continue despite the death of an owner. In addition, they are like C corporations in their ease of transferring ownership to others, both during life and at death. Only domestic corporations are eligible to make the S election. S corporations are limited by law to no more than 100 shareholders and no shareholders may be nonresident aliens. Personal Service Corporations Personal service corporations are a tax category for federal income tax purposes. In essence, a personal service corporation is a C corporation in which the principal business activity is performing personal services, and where the personal services are substantially performed by the owner-employees. They pay a high flat tax rate on all income. Professional Corporations Professional corporations are a subcategory of personal service corporations. In many states, professional corporations are called professional associations. They are essentially C corporations owned and operated by professionals in the same field, such as all dentists, or all physicians, or all architects, and so on. Compared to regular C corporations, however, transfer of ownership of professional corporations is restricted in that the new owner must be someone in the same profession. W Workbook

19 BREAKOUT CLASS 1 Partnership versus Corporation You are preparing to do a fact-finding interview with Jane Foster and Maria Healey, owners of Foster and Healy Real Estate, this afternoon. Your initial contact revealed that they are thinking about incorporating after several years as a successful partnership. Answer the breakout questions and be prepared to discuss them in class. 1. What would they gain by incorporating, and what would they lose by not being a partnership? 2. What questions would want to ask to help determine what may be best for them? 3. Are there any other business forms you may recommend? 251 Workbook W-19

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21 SALES PLANNING PROJECT 1 Read All About It (or How to Get into Business Insurance) (Assigned Class 1 Due Class 2) Completion of this project has three requirements: 1. Read the following questions and answers. 2. Then read them again. 3. Submit Report Form. This project is comprised of a series of questions and answers. They tell you what to expect in the business insurance market and how to get into it. This project tells, in brief terms, what you can expect and what will be expected of you during this course. It is important for you to grasp these procedures as soon as possible. When you have read these questions and answers two times, complete the "Read All About It" certification form (located on page W-29) and submit it to your moderator at the beginning of class session 2. A good start on this project will help you move into the business insurance market. 1. What are the advisor s biggest challenges in entering the business insurance market? a. Advisor doesn t have any procedures to follow for prospecting for business owners, getting to see them, or conducting fact-finding/feeling-finding interviews with them. b. Advisor fails to recognize the insurance-related problems of the business owner. c. When beginning to grasp the problems of business owners, the advisor does not understand the priority of these problems for the owner. d. Advisor does not know how to solve the problems, once identified. e. Advisor allows him/herself to be put in a low image and status profile, because neither the advisor nor business owner understand or appreciate how insurance really provides money when most needed. f. Advisor tries to sell by telling instead of by asking questions. g. Advisor doesn t keep any records so doesn t know what to improve or how to improve. 2. What can you do that s quick and practical to overcome or minimize many of these problems? Develop a checklist of insurance ideas the prospect is most likely to be receptive to and take the list to the prospect for a fact finder. Advisors starting to enter the business insurance market should consider setting a minimum goal of these first-time face-to-face interviews. 3. What subjects should you know about? You should eventually know about Funding Buy-Sell Agreements (including disability buyouts), Key Person, Split Dollar, Disability Insurance, Group Life and Medical, Retirement Plans, Salary Continuation, Business Mortgage Insurance, 251 Workbook W-21

22 Group Long-Term Care, Personal Life Insurance, Business Overhead Expense Insurance. 4. What s a good way to present these subjects to your prospects? Hand the prospect a list of ideas that you can review in detail with the prospect. This is a total-needs approach. (There is a 15-item "Areas of Possible Interest" list on page W-24, that is the subject of Sales Planning Project 4.) 5. What procedures should you follow in record keeping, etc.? a. Prospecting: Keep records that show where your best and worst prospects come from, and when your best and worst prospecting days and times are. b. Sales ideas and procedures: Keep track of what sales ideas and procedures work best for you. We are terrible creatures of habit, and unless we know what preapproaches, approaches, presentations, etc. don t work and which do, we re not likely to try new things or change bad ways. (A form called "How-do-I-know-if-it-works" is included later in the workbook.) c. Activity Results: Keep records to show your sales ratios, that is, the number of calls it takes to get an interview, the number of interviews it takes to have a fact finder, the number of fact finders it takes to open a case, the number of cases opened to generate commission. At the end of a few months you will know what the commission is per interview. To adjust your income, you will merely need to adjust your number of interviews. (Form 2, called "Weekly/Monthly Business Insurance Market Activity Worksheet," appears later in the workbook. It can help you keep track of your activity results. To compile it all at year s end there s a similar form (Form 1) called "Annual Work Plan Results." (If you are already keeping activity records on some other forms, you can continue using the other forms. You don t have to use ours. Just tell your moderator what forms you are using.) 6. What attitudes should you be nurturing? a. Realize that you will not sell everyone you meet. b. Patience. c. Resolve to understand the personal, human dynamics of each business organization, and work within that relationship. d. Realize that one good business insurance client can generate more new commissions per year than working five nights a week, fifty weeks a year in the personal market. 7. How can you get started in prospecting for business insurance owners? Drive or walk through business districts (or office buildings) wholesale, industrial, assembly, production, research, professional, service, possibly retail, although they might be called on quite frequently and record names and addresses of three business establishments a week that a. you think you might want to sell to b. have local owners, not managers, who can be interviewed in their offices 8. How else can you get started quickly with business insurance prospecting? a. Find out from your clients where they work. W Workbook

23 b. Ask your non-clients where they work. c. Get directories (Chamber of Commerce, Jaycees, etc.) that show businesses in your area. d. Other methods are available but it s slow getting started with them. 9. What should you do after getting names of businesses? a. If you don t already know the owner s name, you or your secretary can call and get the owner s full name and correct spelling. Just say, "I am writing a letter to the owner and want to get the correct spelling." b. Write at least three new letters a week (see accompanying sample letters) along with a copy of your "Areas of Possible Interest." Whatever letters you use, be sure you get approval of them from your home office. As much as possible, keep the letters for each week in the same geographic area. This will let you be efficient with your time when you go see them. c. Two or three days after writing the letter, go by and see the owner in person; no phone appointments. Go by and see them. Remember, you are making interviews happen, not waiting for them to happen. If the owner does not wish to see you, you will get the message when you get to the business. If you send three letters in the same geographic area, you should be able to get to all three businesses in an hour or so. 10. What do you do when you get to the owner s place of business? a. When you get into the owner s personal office, conduct your business fact finder on the checklist of ideas. Make notes right on the checklist sheet. b. If not able to find the business owner in after third call, dead-file that prospect. c. Once in the business and while talking to the owner, if not able to hold an interview at that time, schedule an appointment for a later date. d. Repeat this procedure over the length of this course. Continue after the course is finished. If the owner s secretary asks what you want or whether you have an appointment, say, "I wrote to Business Owner two days ago saying I d contact him/her." Then give the checklist of ideas to the secretary and say, "This is what I want to talk to him/her about." They ll eventually say yes or no to you. 11. How do you use the "Areas of Possible Interest" as a fact finder? There are a few ways to use the checklist. A later project (Sales Planning Project 3) will tell you questions you can ask and things you can say. Also start now to build yourself a presentation book (a ring binder book) for business insurance. For starters, make photocopies of charts and illustrations from this textbook, if approval is obtained from your Company. 12. Are there other preapproaches, approaches, and fact finders you can use as alternatives to the procedure just described? The text and other workbook projects will give you additional ideas to choose from. Your agency and company will have more. 13. Will these prospecting and selling procedures change as I progress in business insurance? 251 Workbook W-23

24 Yes. For example, calling on prospects, as recommended in 9c above, is a hard way to proceed over the long haul. But in the short run it is a way of making things happen. Eventually you will want to build yourself into a referral system where getting to see prospects isn t so punishing on your ego and doesn t require such sheer grit and determination. Some advisors prefer to get into business insurance by sending massive quantities of direct mail letters to businesses one or two hundred a week perhaps and then phone them for appointments. Your company may have procedures you will want to use for prospecting and selling in the business market. Telephone Procedure to Get Name of Owner Hello, my name is I am calling for Chris Advisor, a financial advisor here in Your City. (Advisor) wants to mail a letter to (name of company) to see if you might have an interest in the financial ideas he/she works with. What s your mailing address? (Advisor) wants to address this letter to the owner of the company. What is the owner s name? How is it spelled? Thank you very much. Areas of Possible Interest 1. Group Medical Insurance, Group Life Insurance 2. Buy-Sell Funding 3. Key Person Indemnification 4. Split Dollar Insurance 5. Disability Income 6. Disability Buyout 7. Tax-Deductible Retirement Planning 8. Personal Estate Planning with Corporate Dollars 9. Salary Continuation 10. Business Debt Liquidation 11. Personal Life Insurance 12. Business Mortgage Insurance 13. IRC Section 162 Bonus 14. Group Long-Term Care 15. Business Overhead Expense Insurance W Workbook

25 Letter A (Sent when you have no referral or no newspaper article.) Mr. John Jones 1234 Fifth Avenue Your Town, State Dear Mr. Jones: I have been looking for a mutual friend who might introduce us but have not been successful, so I have decided to introduce myself. I have no reason, Mr. Jones, to presume you might be in the market for any financial or insurance ideas, but in the next couple of days I would like to call or drop by to meet you. The purpose of my calling will be to meet you and see what interest you may have in financial planning ideas. I am enclosing a list of those ideas that you might wish to look over. Sincerely, Chris Advisor Note to student: If your company requires that all sales letters receive their approval, send these letters through your normal procedures to your home office compliance department or marketing department for such approval. 251 Workbook W-25

26 Letter B (Sent to a referral of a client of yours.) Mr. John Senoj 5678 Ninth Avenue, Your Town, State Dear John, Recently I was speaking with a mutual friend of ours and your name came up. I thought you might like to know. The comment was made that you might be able to benefit from the insurance-related business ideas we have been working with, so I m sending along a list. It you have an opportunity, I wish you would review it. Possibly we can meet soon to talk about your areas of interest. I am looking forward to meeting with you and getting to know you. Very best regards, Chris Advisor W Workbook

27 Letter C (Sent to a referral from a person who is not a client of yours.) Mrs. Janet O Hara 3456 Seventh Avenue Your Town, State Dear Janet, Your name came up recently in a conversation I was having with and he suggested I call you. I have been working with business owners regarding insurance and risk planning and am enclosing a copy of those ideas for your study. If you have the opportunity, please review this list, and possibly we can meet soon to talk about your areas of interest. I am looking forward to meeting with you and getting to know you. Very Best Regards, Chris Advisor 251 Workbook W-27

28 Letter D (Sent to a person whose name you have seen in a newspaper article.) Grace Gonzalez 8765 Fourth Avenue Your Town, State Dear Miss Gonzalez: Recently I ve been reading some nice articles about your company. I have been assisting business owners such as yourself with business insurance planning ideas. I am enclosing a listing of these ideas, and if you have the opportunity, I wish you would review these subjects. Possibly we can meet soon to talk about your areas of interest. I am looking forward to meeting you and getting to know you. Very Best Regards, Chris Advisor W Workbook

29 Name: Date: Sales Planning Project 1 Read All About It Report Form (Assigned Class 1 Due Class 2) I certify that I have read all the questions and answers, sample telephone procedure, sample preapproach letter, and list of ideas of this project. I certify that I have read it twice. Signed Please respond to the following questions: 1. What do you think is (or will be) the hardest part of selling business insurance? 2. How do you feel about the prospecting suggestions made in this project? 3. What prior experience have you had in selling or studying business insurance? 4. Have you ever interviewed an advisor who sells business insurance? (This is a good way to learn a lot in a short time. Sales Planning Project 4 requires you to interview an experienced advisor who sells business insurance.) 251 Workbook W-29

30 5. How do you feel about the recordkeeping suggestions made in this project? 6. How do you feel about the approach method suggested in this project? 7. Do you have an alternative business insurance prospecting system you d like to use? If yes, describe it. 8. Would you like to use an alternate recordkeeping system for your business insurance activity? If yes, please describe it or attach a copy of it. W Workbook

31 Name: Date: QUIZ CLASSES 1 AND 2 (Due Class 2) Instructions: This Quiz covers the reading material found in Chapters 1 and 2. Study the reading assignments. Then answer the following questions. Each question is worth 4 points (100 points total). True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. For federal income tax purposes, partnerships are pass-through businesses. T F 2. The sole proprietor and the sole proprietor s business are taxed as a single unit. T F 3. For federal income tax purposes, C corporations can deduct dividends they pay to shareholders. T F 4. For federal income tax purposes, S corporations are pass-through businesses. T F 5. A C corporation can deduct the cost of fringe benefits on its employees, including the owner-employees. T F 6. A limited partner is one who owns less than 50 percent of a business. T F 7. A C corporation itself is a taxpaying entity. T F 8. A C corporation legally dies with the death of a controlling or majority owner. T F 9. Corporate owners who work in the company are considered employees for tax purposes, but partners are not. T F 10. Partners can pass their ownership interest to a family member, even if not approved by another partner. 251 Workbook W-31

32 T F 11. The footnotes of a balance sheet often list any buy-sell agreements. T F 12. Retained earnings are earnings that must be paid as dividends. T F 13. Accounts payable are listed in a firm s balance sheet as current liabilities. T F 14. The accumulated earnings tax applies to closely held corporations and partnerships. T F 15. The accumulated earnings tax is a tax on excessive compensation. Multiple Choice 16. Salaries of owner-employees of C corporations are generally paid out of after-tax dollars income deductible by the corporation treated as dividends for federal income tax purposes 17. Which of the following statements about general partnerships is correct? The partnership must have at least one limited partner. Only managing partners have liability for the partnership debts. All partners are accountable for the firm s operation and management. They provide an investment opportunity for people who do not want to be actively involved in the operation of the business. 18. When a creditor makes a claim on a sole proprietor s assets, one benefit of cash value life insurance ownership is that both the cash value and death benefit are generally untouchable by creditors the cash value is generally untouchable by creditors although the death benefit can be attached by creditors the death benefit is generally untouchable by creditors although the cash value can be attached by creditors both the cash value and death benefit can be attached by creditors W Workbook

33 Name: Date: 19. Which of the following statements regarding partnerships is correct? In a general partnership, the partners bear no personal liability for the firm s obligations. A general partnership is essentially two or more individuals operating a business for profit. A partnership can be incorporated or unincorporated depending on the number of partners. A limited partnership is simply an unincorporated nonprofit organization. 20. Which of the following statements regarding the liability of general partners in a partnership is correct? Each partner is subject to unlimited liability for the firm s obligations. Each partner is subject to unlimited liability for the personal obligations of all other partners. Each partner s obligation is limited to his or her investment in the firm. Each partner s obligation is limited to his or her share of the firm s unsecured assets. 21. Which of the following is a characteristic of a limited partner? The partner has unlimited liability for the firm s obligations. The partner participates in general management decisions. The partner has unlimited liability for the personal obligations of other limited partners. The partner is not liable for the firm s financial obligations beyond his or her investment in the firm. 22. Which of the following is a characteristic of a C corporation? It is a separate taxpaying entity. It is a pass-through entity for tax purposes. The business is automatically dissolved at the death of an owner. The owners are personally liable for the debts of the business. 23. Which of the following is one characteristic of a C corporation that distinguishes it from a sole proprietorship? Corporate creditors can claim the personal assets of stockholders. Stock cannot be sold outside the firm at the death of an owner. C corporation losses can be deducted against the personal income of a shareholder. The shareholders have limited liability in the event of business failure. 251 Workbook W-33

34 READ THE FOLLOWING DIRECTIONS BEFORE CONTINUING The questions below differ from the preceding questions in that they all contain the word EXCEPT. So you understand fully the basis used in selecting each answer, be sure to read each question carefully. 24. All of the following are the right of a stockholder EXCEPT the right to sell or transfer shares of stock the right to automatically participate in the management decisions the right to receive dividends, if declared, in proportion to the number of shares owned the right to share assets in proportion to the number of shares owned in the event of liquidation 25. All of the following are a characteristic of a general partnership EXCEPT The partners share in the firm s profits. The partnership permits the pooling of capital and the sharing of risk. The partnership is a separate taxable entity that automatically reduces the tax liability of the individual partners. Partnership profits pass directly to partners as personal income for federal tax purposes. W Workbook

35 CHECK YOUR UNDERSTANDING Chapters 1 & 2 These additional questions provide an extra opportunity to "Check Your Understanding." They do not count toward your grade for the course. Use them to test your knowledge of the chapter content. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. Corporate owners can pass their ownership interest to a family member, even if not approved by another owner. T F 2. In a professional corporation, ownership is limited to licensed practitioners in a given profession. T F 3. Most closely held corporations pay at least some dividends each year. T F 4. An owner of a corporation is necessarily a stockholder of the corporation as well. T F 5. An owner of a C corporation is necessarily an employee of the corporation as well. T F 6. Using LIFO inventory accounting, goods most recently bought or made are treated as those that are first sold. T F 7. A balance sheet is a picture of the company at a specific point in time, whereas an income statement is a summary of what has taken place over a period of time. T F 8. Life insurance cash value can be included as an asset on a company s balance sheet. T F 9. Owner s equity is the excess of assets over liabilities. T F 10. Net working capital is the total cash of the company 251 Workbook W-35

36 T F 11. The number of shareholders in an S corporation is limited to 100. T F 12. A sole proprietorship must have more than one employee. T F 13. The sole proprietor and the sole proprietor s business are taxed as a single unit. T F 14. Joint ventures resemble partnerships in some ways. T F 15. C corporations have a top tax bracket of 31 percent. T F 16. Personal service corporations are taxed at 15 percent, 25 percent, and 34 percent. T F 17. For federal income tax purposes, the reasonable compensation provision allows the government, in effect, to force a corporation to treat a portion of an owner s salary as a dividend. T F 18. A key reason to form a business as an S corporation is to pay tax-deductible dividends. T F 19. All corporations must have at least two stockholders. T F 20. Many professional corporations are also personal service corporations. T F 21. Corporate stockholders have limited liability for debts of the corporation. T F 22. The basic distinguishing feature of a sole proprietorship is the unlimited and unshared financial responsibility of the owner. T F 23. When a general partner withdraws from the firm, the general partnership is legally dissolved. T F 24. Limited partnerships have at least one limited partner and one general partner. T F 25. Heirs can become partners by way of the deceased partner s will. W Workbook

37 T F 26. Heirs can become stockholders by way of the deceased stockholder s will. T F 27. Corporations automatically dissolve when a stockholder dies. T F 28. If there is no agreement for continuation, a partnership is dissolved automatically by law when a partner dies. T F 29. The formation of a corporation always involves the filing of documents with the state. T F 30. Limited partners are often employees of the partnership. T F 31. Corporations are managed under the direction of a board of directors. T F 32. General partners share in liability in proportion to the size of their partnership interest. T F 33. A general partnership is required to file an informational tax return (form 1065). T F 34. The death of a shareholder in an S corporation terminates the legal status of the business. T F 35. Corporate income paid out as reasonable salaries to shareholder-employees is taxed only once because the corporation deducts the salaries from its gross income for federal income tax purposes. T F 36. A sole proprietor s debts must be satisfied solely from business assets. T F 37. A sole proprietorship terminates at the death of the proprietor. T F 38. A sole proprietor s business expense deductions reduce the taxable income of the proprietor. T F 39. The sole proprietor can deduct the amount paid for group term life insurance premiums for coverage on the proprietor s life. 251 Workbook W-37

38 T F 40. A partnership agreement must be in writing to be enforceable. T F 41. Each partner individually owns partnership assets in proportion to the size of his or her partnership interest. T F 42. General partners typically have the authority to seek new business for the partnership following the dissolution of the partnership. T F 43. A partner s distributive share of partnership income is the measure of his or her taxable income from partnership operations for the year. T F 44. A professional can generally split income with other family members by making such family members partners in his or her professional practice. T F 45. Member of an LLC have unlimited liability for business operations. T F 46. Stock in professional corporations is generally freely transferable. T F 47. The accumulated earning tax was enacted to encourage corporations with significant accumulated earnings to declare dividends. T F 48. S corporations are organized as partnerships under most state laws. T F 49. Stock of closely held corporations is not traded on stock markets. T F 50. A person cannot be the owner of a corporation and an employee of the corporation at the same time. W Workbook

39 Multiple Choice 51. A partnership may legally be created only by conversion of successful proprietorship written agreement between two owners an oral or written agreement legislative action 52. Which of the following is a true statement regarding federal taxation as it applies to corporations? Dividends are paid out of profits that have already been taxed as corporate income. All undistributed earnings are taxed at capital gains rates. Proceeds of key person life insurance are normally considered as income for income tax purposes. Corporations receiving death proceeds from life insurance are normally taxable. 53. Corporate federal income tax rates from 2009 range from: 15% to 38% 20% to 45% 25% to 50% 20% to 35% 54. An unincorporated business owned by one person is called a partnership C corporation S corporation sole proprietorship 55. Which of the following is an advantage of a sole proprietorship? business start-up is simple separate tax status of the business limited liability of the sole proprietor disability protection offered by the Small Business Administration 56. A disadvantage of a sole proprietorship is double taxation at both the individual and business levels the autonomy because there is no boss to criticize the sole proprietor s work the detailed annual reporting to the Small Business Administration to maintain sole proprietorship status the loss of income at the death of a sole proprietor 251 Workbook W-39

40 57. At the death of a sole proprietor under the provisions of state law the business is automatically managed by the employees the business is automatically managed by the state surrogate all business activities continue unless the sole proprietor s will expressly states that the business will cease all business activities cease unless the sole proprietor s will expressly states that the business may be continued 58. The term S corporation is derived from state incorporation regulations federal securities regulations the Internal Revenue Code the Uniform Commercial Code 59. Which of the following statements concerning a closely held corporation is (are) correct? I. Shares of a closely held corporation may be bought on public stock exchanges. II. There is a clear separation between ownership and management in closely held corporations. I only II only Both I and II Neither I nor II READ THE FOLLOWING DIRECTIONS BEFORE CONTINUING The questions below differ from the preceding questions in that they all contain the word EXCEPT. So you understand fully the basis used in selecting each answer, be sure to read each question carefully. 60. All of the following are characteristics of a closely held C corporation EXCEPT There is a union of ownership and management. There is a ready market for the stock. Limited liability may be meaningless. Compensation as salary must be reasonable. W Workbook

41 Answers to Check Your Understanding Chapters 1 & 2 1. T 26. T 2. T 27. F 3. F 28. T 4. T 29. T 5. F 30. F 6. T 31. T 7. T 32. F 8. T 33. T 9. T 34. F 10. F 35. T 11. T 36. F 12. F 37. T 13. T 38. T 14. T 39. F 15. F 40. F 16. F 41. F 17. T 42. F 18. F 43. T 19. F 44. F 20. T 45. F 21. T 46. F 22. T 47. T 23. T 48. F 24. T 49. T 25. F 50. F Multiple Choice 51. C 56. D 52. A 57. D 53. A 58. C 54. D 59. D 55. A 60. B 251 Workbook W-41

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43 BREAKOUT CLASS 2 One Approach to Business Owners 1. This portion of the class turns from providing information to discussing selling ideas. Read the section titled, "One Approach to Business Owners" regarding the possible need for a buy-sell agreement. Read over this section carefully. We will discuss this approach and role-play it in class. "What do you want to happen to your business when you die or retire?" There are only three alternatives available to business owners regarding disposition of a business at the death of one owner: Keep it. Sell it. Liquidate it. 2. Financial Statements a. What sales opportunities might stem from the advisor s knowledge of financial statements? b. How important is it to know the language of financial statements? c. Name three insights you have gained about business finances as a result of reading this chapter, and briefly tell how this knowledge can help you as you talk with business owners. 251 Workbook W-43

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45 BREAKOUT CLASS 3 Ideas I Can Sell This project requires you to do the following two things: 1. Develop a checklist of at least five business insurance ideas to which your prospects will likely be receptive. The list can be similar to the one on the accompanying page, entitled "Areas of Possible Interest." 2. Learn a brief description of each idea. The descriptions can be similar to the ones below, entitled "Descriptions of Business Insurance Ideas." Be prepared to give an oral presentation of at least five of these descriptions in class. The main idea is to know these well enough to describe them to your prospects. You can use this as a total-needs or "hot-button" (single need) approach. Descriptions of Business Insurance Ideas Not all of the following ideas are discussed in this course. This activity can be used as an approach or, as we will cover later, as a fact-finder. It gives you a format and something to talk to business owners about to open a case. 1. Group medical insurance: Any group insurance that covers employees for one or more of many health-related expenses. 2. Buy-sell funding: Any business with more than one owner is likely to establish a formal ownership transfer plan that takes effect when one owner dies. Under this plan, the decedent s heirs receive cash from the surviving owners in exchange for the decedent s ownership interest. This buy-sell agreement requires money to make it work. Life insurance is the most common method of funding buy-sell plans. 3. Key person indemnification: Every business has at least one person who is the key profit maker. Companies very often protect themselves against loss of this profit maker through death by insuring his or her life. 4. Split dollar: A way for a corporation to pay for an owner s personal life insurance, or for any business to pay for personal life insurance on any key employee. Much IRS scrutiny and law changes have occurred over last few years. 5. Disability income: This is disability income insurance purchased by a business owner or other key employees to provide a reliable source of family income when disability strikes. 6. Disability buyout: This is identical to number 2, above, except that the event that triggers the transfer of ownership is total or permanent disability, as compared with the death of an owner. 7. Tax-deductible retirement planning: United States tax laws encourage business owners to institute retirement plans for employees by offering tax deductions to the company and tax-free build up of the accumulations. 8. Personal estate planning with corporate dollars: Section 303 of the Internal Revenue Code allows corporate dollars to be used to pay certain death-related expenses on an income tax-free basis. Life insurance is often used to provide this money. In essence, it is the proceeds of key person insurance used to redeem a 251 Workbook W-45

46 portion of the decedent s stock. The redemption is treated as a tax-free sale of stock rather than as a taxable dividend. 9. Salary continuation: This is a special retirement plan that doesn t have to be provided to all employees. It can cover just the owners or any select few. There is often a pre-retirement death benefit associated with it as well. 10. Business debt liquidation: This is much the same as life insurance on the life of any individual with outstanding indebtedness. Here, however, the insured would be a key person in the business so that the debt would be liquidated at his or her death, thanks to the proceeds of a life insurance policy. 11. Personal life insurance: In examining insurance needs pertaining to the business, the business owner should look at personal and family insurance needs as well. This would not be a business expense. 12. Business mortgage insurance: This is a specialized form of business debt liquidation. It is comparable to "mortgage insurance" on a homeowner s life. Here, however, the mortgage is the place of business. The key owner and possibly other key employees are insured with the business as policy owner, premium payer and beneficiary. 13. Section 162 bonus: In some situations a corporation may want to pay an employee an annual bonus equal to the premiums on a life insurance policy. The bonus is deductible to the corporation under IRC Section 162 and is reportable as income to the employee. 14. Group long-term care is insurance designed primarily to cover expenses incurred from long stays in a nursing home. 15. Business overhead expense insurance is designed to cover some of the overhead expenses of the business when you are disabled. The premiums are generally tax deductible. I am prepared to present these descriptions orally if I am called on in class to do so. Following are the ideas I can describe (list at least five) W Workbook

47 Areas of Possible Interest 1. Group Medical Insurance, Group Life Insurance 2. Buy-Sell Funding 3. Key Person Indemnification 4. Split-Dollar Insurance 5. Disability Income 6. Disability Buyout 7. Tax-Deductible Retirement Planning 8. Personal Estate Planning with Corporate Dollars 9. Salary Continuation 10. Business Debt Liquidation 11. Personal Life Insurance 12. Business Mortgage Insurance 13. IRC Section 162 Bonus 14. Group Long-Term Care 15. Business Overhead Expense Insurance 251 Workbook W-47

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49 Name: Date: SALES PLANNING PROJECT 2 Marketing Mobility (Assigned Class 2, Due Class 3) Your personal background and history have a lot to do with where you are going to be most comfortable in your marketing efforts. To insure that you use your personal background as effectively as possible in identifying potential business insurance target markets, go through the mobility checklist. Once you have completed your list, go back and see if any items overlap, have members in common, share your time and interests, or are predominant in your current activities or personal history. This will help you get ideas about businesses where you may have your best chance to market and sell most productively. Thinking about cross-referencing these potential markets may also bring up other ideas for you to consider, so treat this as a creative process. 1. What professions and businesses have I worked well with in the past? 2. In what civic and social organizations or associations have I been active? 3. With what types of people do I enjoy working? 4. What types of businesses do I know pretty well especially how they operate? 5. What are the organizations, businesses, and associations where I am recognized by the most people? 6. In what kinds of businesses would I feel most comfortable? 7. In what kinds of occupations are my friends, neighbors, and acquaintances engaged? 251 Workbook W-49

50 8. What businesses come to mind as a result of my education and my prior occupations? 9. Which of my personal insurance clients do I feel most at ease with, and what are their occupations? In what industries do they work? (Do not use their full names on this sheet. Use only their initials or some other way of hiding their identity.) W Workbook

51 Name: Date: QUIZ CLASS 3 (Due Class 3) Instructions: Study the reading assignments first, then answer the questions. Indicate whether each of the following statements is true (T) or false (F). Each question is worth 5 points (100 points total). T F 1. The "Rule of Eight" states that the sale is often won or lost in the first 8 seconds of the approach by the first eight words you speak, and by the eight feet of floor space crossed to shake hands with the prospect. T F 2. Appearance is far too important to indulge in carelessness or eccentric dress. Proper attire can be very important to the business insurance approach. T F 3. The primary goal of the preapproach in business insurance is to establish rapport and begin a business friendship. T F 4. Unlike the personal insurance market, in business insurance it is not critical that you believe that you have something to offer a prospect. T F 5. A good business approach should help to unsettle the prospect s complacency, create concern, or arouse curiosity. T F 6. Cold calls are never successful in business insurance markets and should not be used for prospecting in this field. T F 7. Tips clubs are composed of local sales persons from a diverse group of industries and are formed for the exchange of information on business prospects. T F 8. The local library often contains reference books and directories that can be effective tools for identifying good prospects. T F 9. Third-party influence refers to your social connections. T F 10. People generally find it easier to say no on the phone than they do in person. 251 Workbook W-51

52 T F 11. The main objective of telephone prospecting is to introduce yourself. T F 12. The skillful use of questions is the most effective way to keep the focus of discussion on your prospect. T F 13. When a sole proprietor dies, a forced liquidation can result in the sale of business assets at less than half their going-concern value. T F 14. When a partner dies, the partnership automatically is dissolved by law. T F 15. When a closely held shareholder dies, the corporation is automatically dissolved. T F 16. The first step in the sales cycle is to approach the prospect. T F 17. Good record keeping is too time consuming to be worthwhile. T F 18. A center of influence should always be a client who knows those people he refers to you. T F 19. You should wait until you have adequate experience and knowledge to approach business owners. T F 20. The purpose of a preapproach letter is to obtain an appointment with the prospect. W Workbook

53 SALES PLANNING PROJECT 3 How to Use "The List" as a Fact Finder (Assigned Class 3 Due Class 4) This project requires you to know a procedure for using the list "Areas of Possible Interest" as a fact-finder. Items A through E below describe several ways you can use the list as a fact finder. Some of the ways are explained in more detail on the following pages. In Class 4, submit the "Certification Statement" to the moderator. It attests to the fact that you are learning one or more ways to use the list as a fact finder. You ll find the "Certification Statement" at the end of this project. Ways you can use "The List" 1. Learn a line of questioning about each item. A series of such questions appears on the following pages under the title "Line of Questioning for Fact (and Feeling) Finding." 2. Describe each item and its benefits. Ask if the business has such coverage and if not, would the business owner like to examine these items further. (Sales Planning Project 2 "Ideas I Can Sell," provides a brief description of each item.) 3. Show and tell and ask. Develop a brief visual about each item and use it as the focal point. Items such as one-page flow charts, quotes from court decisions, other printed third-party influences, typed list of benefits or tax advantages, other visual explanations, company and agency marketing materials can be used, with Compliance approval. Some specific ideas you can use are included later in this project. Use these materials to help your prospect be open to possible areas of concern. As you go, ask if there are questions, if clarification is needed, and so on. This allows you to get a feel for the business owner s interest in each item. 4. A variation of these procedures is simply to ask the business owner if he/she looked at the list you mailed a few days before. If the owner says yes, ask if there are any things on the list he/she has questions about. If so, focus on those items. If the answer is no to either question, revert to your item-by-item questioning procedure. 5. Describe each item and go to a formal fact finder. After describing each item, tell the business owner that to make recommendations you want first to analyze the needs of the business, and therefore you want to obtain pertinent information from him/her. Depending on how you feel about the situation, ask to gather information right then, or ask for a later interview. Your best bet is to learn the questions mentioned above in item A. Practice the questions until they become second nature to you. Then practice them some more. As you learn more facts about businesses and taxes, and so on, you will become more comfortable with the fact-finding questions. To attest to your growing proficiency, sign the "Certification Statement" located at the end of this project. It is to be given to your moderator in the next class session. The "Areas of Possible Interest" list is duplicated below. This list could also be referred to as a "Menu of Services." 251 Workbook W-53

54 This project continues on the following pages. You will find a variety of ideas to use with prospects. As usual, check with your company compliance procedures or agency manager to be sure you have their approval to use these ideas. Do you have products or markets that do not appear on the list? If so, type up your own list of "Areas of Possible Interest," adding your specialties. For example, do your products include tax-deferred annuities for teachers and 501(c)(3) organizations, or payroll deduction plans? Areas of Possible Interest 1. Group Medical Insurance, Group Life Insurance 2. Buy-Sell Funding 3. Key Person Indemnification 4. Split Dollar Insurance 5. Disability Income 6. Disability Buyout 7. Tax-Deductible Retirement Planning 8. Personal Estate Planning with Corporate Dollars 9. Salary Continuation 10. Business Debt Liquidation 11. Personal Life Insurance 12. Business Mortgage Insurance 13. IRC Section 162 Bonus 14. Group Long-Term Care 15. Business Overhead Expense Insurance Line of Questioning for Fact (and Feeling) Finding Following is a line of questioning to use with each of the 15 items on the list "Areas of Possible Interest." The important thing is not to memorize each question, but rather to gain a feel for the thrust of the line of questioning for each item. Through questioning you are trying to expose problem areas to the business owner and to lead to the conclusion that planning is necessary to reach objectives. Be sure to get your company s approval to use these ideas. 1. Group Medical Insurance "Do you have group medical coverage here at work?" Wait for response. If the answer is no, ask the owner if he/she has been thinking about it, and ask if you can shop around for some coverage for him. Then complete a census form provided by your company for this purpose. If the answer is yes [that he has group medical coverage], find out if he/she is interested in having you shop around for different coverage when it next comes up for renewal. Ask if it will be worthwhile for you to do this. That is, do you stand a chance of getting the new business, or is the owner wedded to the current advisor or company? Here are words to use after the owner says, "Yes, I have group medical coverage:" "I find that most competitive businesses do have some kind of group medical coverage. Let me ask this: W Workbook

55 1. "Have you included dental and vision care insurance in your plan? (If not, are these of interest?)" 2. "What about group life and group disability coverage?" 3. "How satisfied are you with your group coverage?" 4. "When was the last time you changed your coverage? Why did that come about?" 5. "Do you shop around for new coverage at renewal time?" 6. "Would it be worthwhile for me to shop around for you at renewal time? Then you re not necessarily locked into your current advisor or company? When is your renewal date for the group insurance?" 2. Buy-Sell Funding "As you may know, this has to do with written transfer-of-ownership agreements. "Do you have any formalized plans for transferring your ownership of this business at death?" (If no:) "Have you ever thought about making such plans?" (After he answers:) "Has your attorney ever talked with you about the consequences when no plans are made in advance?" (Wait for response.) "This is extremely important. Can we pursue this a bit further right now?" (If yes, and if the owners already have an agreement, however outdated, do this: Find out how current the buy-sell agreement is, whether it is funded, how it is funded, how much it is funded for, who are the parties, how many owners there are, whether the agreement includes all owners, if it is funded with life insurance, when the policy amounts were last increased, whether the value in the agreement matches the current value of the business, and whether the owner would like to review the existing buy-sell agreement. (If the owner has no existing buy-sell agreement but is willing to talk now, ask the following:) "What do you want to happen to your business when you die?" "What do you want to happen to the business when a co-owner/partner dies?" "Do you think your co-owners/partners want the same sorts of things to happen?" "Have you considered the practical, legal, and financial roadblocks that might prevent this from happening when one of you dies?" "Are you equal owners/partners?" (If not, what percentages?) "What are your ages?" "What s the market value of your business if you sold it today?" "May I meet with you and the other owners early next week?" 3. Key Person Indemnification "Do you have insurance on any of the key profit makers... to make up for lost profits and added costs you will have if one dies or becomes disabled?" (If no:) "Have you ever thought about doing this?" (Wait for reply.) "Have you ever looked into it?" (Wait for reply.) "Has your CPA ever talked with you about the consequences of your death-or another key person s death or the consequences of a disability-on the financial viability of the business?" "This is extremely important. Most business owners insure virtually every asset on their balance sheet but tend to forget about insuring the human moneymakers, the key people responsible for the bottom line on the income statement. I can t urge you too strongly to take the first step in exploring this as soon as possible. Can we do that?" 251 Workbook W-55

56 (If yes to the initial question of "Do you have key person insurance?" then ask: "Who is covered? For how much? What other key people are there? What about the other owners? When was the coverage provided? When was it last reviewed? When was it last increased? Is any of the coverage primarily debt coverage? Has your debt level risen since then? By how much? Has the level of insurance been increased too? Are there other key people you should consider insuring?" 4. Split Dollar "Do you provide split dollar insurance on any of the owners or other key people? Would you like to have more information about it?" If he or she wants more information right now, you can say, "Split dollar insurance is a fringe benefit that enables key employees and owners to obtain life insurance at a favorable cost. You can be as selective as you want in who gets this benefit. A corporation s outlay for this is eventually recouped from either the policy s cash values or its death benefits." 5. Disability Income Individually Owned "Do you have any group disability income insurance provided by the business?" If no, make a note to pursue this later. If yes, ask: "How long does it pay? Does it discriminate against the highly paid employees?" The owner may not know what you are talking about. The fact is: all tax-qualified group plans have rules against discriminating in favor of highly compensated employees. The purpose of these nondiscrimination requirements is to encourage business owners to provide coverage for rank-and-file employees and not simply themselves, their executives, and key employees. "Would you like to see how the business could help you pay for benefits without violating the nondiscrimination rules?" (See number 13, below. It describes a life insurance bonus plan, but the identical rule applies to disability income policies wherein the premium is paid to the employee as a bonus by the business. Individual insurance like this, superimposed on top of a group plan, is referred to as an "executive carve out," as in carving a couple of pieces of wood to fit together, and as in carving out a piece of something for your own benefit. If the answer to the earlier group insurance question were no instead of yes, ask: "If you had become seriously disabled last night, what would you expect your company to do regarding your income?" Most owners would expect (a) to receive the same salary level, and (b) to receive it for as long as the owner were disabled and as long as the company could afford it. What they don t know is that the IRS does not consider such payments to a disabled person to be salary at all. Instead they are considered, for this particular employee, as ad hoc payments that are NOT tax deductible by the business. To be tax deductible, all that must be done is to establish a plan for such payments prior to any disability. Not setting up such a plan in advance is foolish. After the plan is set, the question is how to fund it. Disability insurance always wins that contest, hands down. Moving to an extension of the above theme, ask: "How long could your company continue to pay both your salary and your replacement s salary?" W Workbook

57 Whatever the answer, ask: "Have you considered that by insuring yourself with adequate disability income insurance you could thereby free up what would have been your salary and use it instead to pay your temporary replacement?" 6. Disability Buyout "Disability buyout: This pertains to ownership of your business following an owner s extended disability. It is similar to number two on this list. "What would you want to happen to this business if your business associate had become disabled last night?" (Or, if this were a one-owner business, "What would you want to happen to this business if you had become disabled last night?") "Do you have a written agreement that spells out what will happen when one owner is stricken with a long-term disability that prevents him/her from working?" Wait for a response. If no: "Have you ever talked with your attorney or CPA to see what kind of a legal and financial bind the business would be in if you or another owner is disabled and can t function?" Wait for a response. "The chances of being disabled are very high compared with the change of dying at any one age, so this is an area where the odds say we should at least find out what problems will face us." "What kind of priority do you want to give this?" If there is already a disability income buy-sell agreement, find out how current the buy-sell agreement is, whether it is funded, how it is funded, how much it is funded for, who are the parties, how many owners there are, whether the agreement includes all owners, when the policy amounts were last increased, whether the value in the agreement matches the current value of the business, and whether the owner would like you to review the current buy-sell agreement. 7. Tax-Deductible Retirement Planning "Do you have a business-sponsored tax-deductible retirement plan?" If yes: "What kind of a plan is it? Are you satisfied with the proportion of benefits going to you and the other owners, compared with the portion benefiting your other employees?" If there is dissatisfaction or uncertainty, you will eventually want to pursue this area further to see if there is any way to skew the benefits more toward the highly paid employees. "Does the plan have a pre-retirement death benefit?" If no, make a note to pursue this. Literally translated, a pre-retirement death benefit is a life insurance death benefit associated with the retirement plan. "Are you satisfied with the number of dollars going into the plan for you personally (compared with the proportions mentioned in an earlier question)?" 8. Personal Estate Planning with Corporate Dollars "Has your attorney or accountant ever talked with you about using Section 303 of the Internal Revenue Code a tax-free, partial stock redemption used to pay probate costs and death taxes and certain other expenses?" (If yes:) "Did you pursue it? Did you implement such a stock redemption plan? Do you have life insurance to provide the funds for the redemption?" 251 Workbook W-57

58 (If no:) "A section 303 stock redemption is one of the very few ways an owner of a closely held corporation can get some money out of the corporation without being taxed. Have you ever heard of it?" (Wait for a response.) "Can I bring you more information about Section 303 tax-free stock redemptions?" 9. Salary Continuation "This refers to continuing your salary for a number of years when you retire, or paying it to your family if you die before retirement. It is paid in addition to normal retirement and insurance plans, and is also called deferred compensation." "Do you have anything like it on yourself or on your key people?" (Wait for a response.) "This is one of the few ideas left that lets you pick and choose who will be covered and for how much. It doesn t have to cover everyone. It can cover just one or two people. Is this something you d like to hear more about?" 10. Business Debt Liquidation "Would I be correct to assume that you have ongoing business loans?" Assume a yes answer is given: "How constant is the amount?" "Who signed the notes?" "Who guaranteed the notes?" Usually the owners of small corporations have to personally guarantee repayment of loans by their corporation. This means that they are personally on the hook for the loan, and are responsible for the corporate debt if the corporation cannot pay it. "Will your spouse be comfortable in paying off these notes?" "Would you want to pass your business on free of that debt if you died?" "Have you any insurance on your life that will cancel those debts when you die?" "Can I show you some specific figures on what premium it would take to cancel that debt?" "What s your age? How much does the debt average? How much of the business do you own?" 11. Personal Life Insurance "When you die, what would you want your family s financial situation to be? Would you want to maintain their standard of living?" "If you had died last night, what would your family s financial situation be like? How long has it been since you have analyzed it? Shall we put that on our list of things to do soon?" 12. Business Mortgage Insurance (If the owner was interested in pursuing item 10, there is no need to pursue this. However, this might be a debt bypassing the corporation. If so, this might be different from 10. Also, some business owners not interested in item 10 may nonetheless be interested in business mortgage insurance.) "This is like number 10, but it covers an amount equal to the mortgages on the buildings. Do you have mortgages on any buildings?" "Can I work up some mortgage insurance figures for you? This is the kind where if you die we pay your surviving heirs (or surviving owners) enough to pay it off." 13. IRC Section 162 Bonus "This is another way of using business dollars to help buy your personal life insurance. Do you have any Section 162 Bonus plans in effect?" W Workbook

59 If no: "Do you know how it works?" The company pays for your insurance and deducts it as salary. You treat it as income for tax purposes. You own the policy personally. All the policy values and rights belong to you. "I will work up some dollar illustrations for you, if you would like." 14. Group Long-Term Care Insurance "This is insurance that pays some of the heavy expenses of things like nursing home care. Do you have any of this coverage? Do you know how it works?" 15. Group Overhead Expense Insurance "For some reason, this is one of the insurance world s best kept secrets. It covers some of the overhead expenses of the business when you are disabled. The premiums are usually tax deductible for federal income tax purposes. Would you like to see how it works?" 251 Workbook W-59

60 Show-and-Tell Suggestions for "The List" Following are some "show-and-tell suggestions" for the items on the list. When used this way, the list of ideas is used less as a fact finder and more as a feeling-and-interest finder. Review them with your manager and get compliance approval before using any of them. 1. Group Medical and Group Life Insurance. Most business owners do not know all that is available in group insurance. Show your prospect one of your company s brochures and point out the main features. 2. Buy-Sell Funding. Here s what a judge has to say about insured buy-sell agreements. Statement by Judge Taylor: The Value of Buy-Sell Agreements "When an estate involving an interest in a business comes before me for probate, I shudder unless I find a written agreement backed by life insurance. Then I smile." "Why in the world so many business owners leave it for a probate judge to guess what he had better do is more than I know. Surely two or more business owners ought to know more about how best to settle their business than a judge who never heard of it until the day he s compelled to liquidate it." Judge Robert R. Taylor, Omaha, Nebraska 3. Key Person Indemnification. The following decision of a U.S. Court of Appeals is strong testimony to the legal and financial wisdom of insuring the lives of key people in a business. Statement About Key Person Insurance: U.S. Court of Appeals "What corporate purpose could be considered more essential than key person insurance? The business that insures its buildings and machinery and automobiles from every possible hazard can hardly be expected to exercise less care in protecting itself against the loss of two of its most vital assets managerial skill and experience." (From a unanimous decision, U. S. Court of Appeals, 3rd Circuit; The Emeloid Co., Inc. v. Commissioner, 189 Fed. 2nd 230, 1951.) 4. Split Dollar. You can use illustrations like A & B to show that split dollar can involve splitting the premium and the death benefit (typically) between a corporation and an employee. Illustration C is a reminder that the corporation gets the cash value if the plan is stopped while the insured employee is alive. Use Illustration D to show that at death the corporation gets back what it puts in; the beneficiary gets the rest. W Workbook

61 *New regulations on split dollar arrangements were enacted in September Extreme care must be taken to follow IRS guidelines for tax reporting. Here is an alternate idea for split dollar. It tells an intriguing story to business owners who want to get away from high cost and federal red tape. Fringe Benefits Covering Business Owners Themselves: Two General Problems 1. High Cost Meaningful fringe benefits generally carry a high price tag. Split-dollar insurance is a low-cost alternative. 2. Federal Law A. Extensive Reporting: Most fringe benefits require extensive Labor Department and Treasury Department reports by the corporation. No such reporting is needed for split-dollar coverage. B. No High-Salary Discrimination: Law requires that businesses provide a benefit for all employees or none. This is done to prevent businesses from favoring only the owner-employees or other highly paid employees. These nondiscrimination rules do not apply to split-dollar insurance. 251 Workbook W-61

62 5. Disability Income Individually Owned. Both death and disability bring about a need for replacement income. In fact, the more serious financial threat is the danger of long-term disability during what should be a client s most productive years. As the table below shows, the statistical incidence of serious illness or injury during normal working years has been substantially greater than premature death. Probability of Occurrence per 1,000 Persons Age Disability Death Disability Buyout. Here s a chance to refer to Judge Taylor s statement (see #2) about the desirability of an insured buy-sell agreement and couple it with the chart showing the increased incidence of disability compared to life insurance (see number 5, above). 7. Tax-Deductible Retirement Planning Tax Advantages 1. Contributions are tax deductible. 2. Money accumulates free of current income tax. Other Advantages 1. Increased employee loyalty 2. Chance to purchase life insurance with untaxed dollars 3. Meet the competition 4. Add to your own retirement plans W Workbook

63 8. Personal Estate Planning with corporate dollars. The illustration below points out how your ideas and products affect the owner s estate. Control the Ownership of the Estate Insured buy-sell agreement Split-dollar plan Provide Liquidity to the Estate Section 303 plan Split-dollar plan Buy-Sell Section 162 bonus Provide Income and/or Increase the Estate Size Split-dollar plan Salary continuations Pension Profit sharing 401(k) Group insurance Section 162 bonus 9. Salary continuation. Use the following to explain what salary continuation is and how it works. Salary Continuation: How It Works a. Agreement between key person and corporation b. Insurance purchased by corporation on key person c. Tax-free payout to corporation at key person s death or retirement d. Deductible payment by corporation to key person at retirement or to key person s beneficiary at death. Payments to the key person are included in the taxable income of the key person. 10. Business Debt Liquidation. Charts like this help you to discuss whether the business owner s debt is generally level or decreasing. The point to make is that although each individual debt generally decreases in time, the overall effect of a business that constantly takes on new debt while paying off the old is that it has a rather constant level of outstanding debt. This would call for a level amount of "debt cancellation life insurance." 251 Workbook W-63

64 11. Personal Life Insurance. Following is a list of typical family needs for life insurance. It provides talking points for you. Establishing Objectives Final Expenses Dependency-Period Income for the Family Emergency Fund Education for the Children and/or Spouse Income to the Surviving Spouse after Children are Grown The Mortgage Special Needs Insurance Needs of Other Family Members Special Bequests to Children/Grandchildren Charitable Bequests 12. Business Mortgage Insurance. The business owner may not be interested in covering the entire level of business debt, but may nonetheless want to purchase life and/or disability insurance to cover the mortgage on the premises, plant or office building. Buying it like this is much more economical than credit insurance purchased through a bank. W Workbook

65 13. Internal Revenue Code Section 162 Bonus. A flow chart such as this one is intrinsically interesting. It allows you to explain, and helps the prospect understand, express interest, and ask questions. 14. Long-Term Care Insurance. As people live longer and longer, they tend to end up in nursing homes. Even the most economical nursing homes cost at least a few thousand dollars a month. Many people find their life savings gone in just a couple of years. Long-term care insurance is designed to cover the expenses of nursing home care. 15. Business Overhead Expense Insurance. Many business owners are caught by surprise when they become disabled, cannot work, and realize too late that the overhead expenses keep coming in and must be paid. Unfortunately they cannot insure against it after it happens. One of the best kept secrets in insurance is a policy called business overhead expense coverage. 251 Workbook W-65

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67 Name: Date: Sales Planning Project 3 How to Use "The List" as a Fact Finder (Assigned Class 3, Due Class 4) To student: Sign certification A or B, whichever one applies to you. Certification Statement "A" I have read all of Sales Planning Project 3. I am becoming more proficient in being able to use "the list" as a fact finder. If called on in class by the moderator, I will demonstrate my growing proficiency. Signed -or- Certification Statement "B" I will not be using "the list" as a fact finder. Instead, I will be using a fact finder I obtained from. A copy of my replacement fact finder is attached. If called on in class by the moderator, I will demonstrate my growing proficiency in using my fact finder. Signed 251 Workbook W-67

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69 ACTION PROJECT 1 Continuous Prospecting (Assigned Class 3 Report 1 is due in Class 7) (Certification of Understanding on page W-91 is due in Class 4) This is a prospecting project. It will be a continuing project each week from now till the end of the course. The next 27 pages are part of this project, ending with the "Certification of Understanding" on page W-91. Instructions: 1. Get names of businesses. Each week, beginning the day after this class session, by whatever means you want, obtain an average of three names and addresses of nearby business establishments that: you think you might want to work with as clients have local owners (not managers who don t own the business) who can be interviewed in their offices Pick one, two or three prospecting methods that work best for you. Then work those methods. Some ways to obtain these names are: Ask current clients, friends, and prospects. Ask clients and non-clients where they work. Page W-82 offers suggestions on how to go about this and why it is advantageous to do so. Referrals are the best method, but it takes time to build a large list of names. Observe business names when you are driving or walking around. Consult building lobby directories. Review association directories and other lists. Read the telephone book. Obtain a Chamber of Commerce directory. 2. Get the name of the owner. This can often be obtained from the Chamber of Commerce directory, or at the library, or the county/local economic development department. You can inquire in person at the place of business or by phone. Just say you want to mail the owner some information and you want his/her name to do this. If you are getting the names of businesses from clients and non-clients, ask them for the owner s name. Record the names of the businesses and of the owners in an orderly manner as you would any prospect. Keep these names segregated from your personal insurance prospects so that you can a. pay special attention to them once or twice a week, and 251 Workbook W-69

70 b. track your progress with them on Forms 2 and 3 (see below). 3. Keep records as you work these names. Another action project will require you to contact these prospects and actively follow through with them. It is important to track your activity in the business insurance market to find out which ideas work well for you and which do not. Keep and improve the ones that work. Drop those that do not. This is the only way you will be sure to improve, and it will also let you know the dollar value of the time you devote to business insurance activities over these next few months and beyond. Keep track of your activity by using the following forms faithfully from now until this course is over. Use them only for business insurance activity. Form 2: Three copies are included. Form 2 will help you keep track of how much business insurance activity you are having. It is called the "Weekly/Monthly Business Insurance Market Activity Worksheet." Make a tick mark in the appropriate place when you do something related to business insurance. The form has space for 5 weeks of activity, but you only need to complete 3 weeks of activity before turning in the form in Class 7. Form 1: Just one copy is provided. Make photocopies if you want more. This sheet tells you how to determine such things as the money value of your time, your calls, and so on. Another accompanying sheet defines specific activities such as "selling call," "seen call," "interview," and so on. Form 3: This form is called "How Do I Know If It Works?" Five copies are included. As the name implies, this form lets you see how well your various methods (of preapproach, approach, fact finding, closing, and so on) work or do not work. In time it will help you know what ideas and procedures to drop, which to keep and improve, and to test new ones. Each Form 3 sheet has space for 14 prospects. Form 3 is tight on space, so consider using abbreviations in columns E, H, and J. 4. Certification of Understanding: Sign the following "Certification of Understanding" to acknowledge that you have read this project assignment and know that you are to begin this project the day after Class 3. The certification appears on page W Submit reports later: In Class 7 you will be asked to submit a signed form stating that you are (or are not) meeting the requirements of this project. You will also need to hand your completed Form 2 to your moderator for his or her review. W Workbook

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74 How to Prospect Through Your Clients Calling or visiting your personal insurance clients cannot only provide you with names of businesses and names of owners, but it can also help you in other ways discussed below. Here s what you can say when you contact your clients to find out where they are employed and who the owner is: "Client? Hello. This is Chris Advisor." (Have some informal conversation if you want, then:) "I m expanding my insurance operation to include businesses as customers, in addition to families and individuals. I want to write a letter to the owner of the company where you work, but I need to know the owner s name. Can you help me?" After getting the name of one or more of the owners, or arranging for the client to call you back when he finds out the full name, spelling, and so on, ask some other questions if it is appropriate: What is the full name of the business? What address should I use to reach the owner? What kinds of things does the business do? Does the owner have any other businesses? (If yes, get details.) Who are your competitors in the area? (You may want to call on them too.) What is your function with the company? Are you a key person? Do you know any of the owners personally? (If yes, "Could you introduce me?" Or, "Could I say I know you?" Take detailed notes of all the pertinent and helpful information about this company. Use a separate notebook page or file card for each company. Also, make notes in your client s file regarding when you called and why. In addition to getting the kind of information described above, here are some other possible benefits of contacting clients to get prospects. You may discover that your friend can be of help in obtaining an interview with the owners, or that your client is one of the owners, is a key person, or that the business is considering new group insurance, and so forth. This project provides you with a good reason to contact existing policy owners about something other than their insurance. There is strong psychological value here. People feel closer to you if you ask them to help you. And they feel even closer yet if they can actually help you. In short, even if you are not able to get the business information you want, you will benefit by having closer ties to personal insurance clients. Your client may ask you about more personal insurance or about some friends who are thinking about buying more insurance. Your prestige may increase when your client knows that you are selling insurance in business situations. This can lead to more referrals, a center of influence, or a repeat purchaser. W Workbook

75 How to Prospect Through Acquaintances Who Are Not Your Clients Here s what you can say when you contact your acquaintances to get business insurance prospects: "Acquaintance? Hello. This is Chris Advisor. Yes, Johnny Fifth Grader s parent... the one who works in insurance and other financial matters. I m not especially calling about your insurance or financial situation, however. I m expanding my insurance operation to include businesses as customers, in addition to families and individuals. I want to write a letter to the owner of the company where you work, but I need to know the owner s name. Can you help me?" After getting the name of one or more of the owners, or arranging for the acquaintance to call you back when he or she finds out the full name, spelling, and so on, ask some other questions if it is appropriate. Depending on how well you know the person, here are some other questions to ask: (It is easier to get answers if you have just picked up the lunch tab.) What is the full name of the business? What address should I use to reach the owner? What kinds of things does the business do? Does the owner have any other businesses? (If yes, get details.) Who are your competitors in the area? (You may want to call on them too.) What is your function with the company? Are you a key person? Do you know any of the owners personally? (If yes, "Could you introduce me?" Or, "Could I say I know you?" Carefully take notes of all the pertinent and helpful information. This is a simple, nonthreatening way to remind your friends, relatives, acquaintances, and neighbors that you sell insurance for a living. Yet you should not bring up the subject of their insurance needs unless they encourage it. Rather, develop them as referrers or centers of influence. If you are looking for quick sources of names to call, go through your personal phone number booklet or your holiday mailing list (local area). More Prospecting and Selling Ideas Call on people you know who own a business. Talk in terms of risk management. Insurance is a well-accepted risk management tool for businesses. You might find it comfortable to talk to these people about covering their outstanding loans. This is the business debt liquidation idea on the checklist of ideas. Another prospecting area is to ask your clients about their parents. Some of the parents might be in business. Raise questions with the clients or parents about business continuation plans. Finally, consider doing joint work on the action project... at least initially. It is usually helpful to have someone to work with when you enter new markets. 251 Workbook W-75

76 Definitions Regarding Form 2 Following are definitions of terms used on Form 2 which is part of the "Ongoing Action Project: Continuous Prospecting." Form 2 is intended to help you keep track of your activity on a weekly basis. If you re already using some other recordkeeping system, continue to use it. Just let your moderator know what other system you are using. You can get additional insights into Form 2 on the page titled, Form 1: "Annual Work Plan With Sample Results." It shows the annual version of this form. Another page explains the various columns on the form. A Selling Call is virtually identical to a seen call, except that some people stand you up, so seen calls are generally fewer than selling calls. Sometimes, however, it can work the other way. For example, you might make a selling call on a business and end up having two or more seen calls as a result of discussing personal insurance with two or more of the owners. A Seen Call is where you are face-to-face with a prospect and talk at least a little about insurance or your services. An Interview is a face-to-face presentation in which you ask the prospect to buy a specific proposal now. Fact-finding sessions and other conversations do not count as interviews. To be counted as an interview, there must be a concerted effort to close the sale now. A New Case Opened is an interview situation where you got enough facts to feel that you now have an open case to come back and close. A Sale is a signed application with the first premium paid by a prospect who has agreed to a medical examination, if necessary. Cash-on-delivery applications or cases that may not qualify for standard issue should not be counted until delivered and paid for. Commissions are the annualized first year commissions, assuming no first-year lapses. Field Hour is an hour spent calling on prospects, servicing clients, and prospecting all activities directly designed to produce life insurance sales either immediately or in the near future. Maintaining Records and Control Records track the past, and knowledge of the past helps us make decisions about the future. If you don t know what you are doing poorly, how will you know how to improve? If you don t know what you are doing well, how will you know what not to change? What would you think of your doctor, dentist, accountant or attorney if he/she did not keep records? A survey of members of the Million Dollar Round Table shows that keeping records is an extremely important function for these super producers. Faithful record keeping lets them work more effectively and productively. Whereas goal setting is critical to knowing where you wish to go, organized record keeping lets you know your status in attaining those goals. This knowledge, in turn, allows you to make any necessary adjustments to seek these goals. W Workbook

77 Records do more than serve as scoreboards. For example, simply by recording your daily sales activities in a structured way you will be able to determine (week by week, month by month, and year by year) many of your strengths and weaknesses in the business insurance market. By knowing your strengths and weaknesses in the various steps of the selling process, you will be in a position to predict what results you will likely obtain based on certain levels of activity take corrective action on your weaknesses take advantage of your strengths Your strengths and weaknesses in selling in the business insurance market might differ from those you find in selling personal insurance. For example, perhaps you know from experience that you must identify eight personal insurance prospects in order to close one sale. Extending this assumption to business insurance may prove invalid. You can only hypothesize your performance characteristics in the business market after you have had sufficient exposure to this new field. You may find that your closing ratio is better in the business markets than in your personal markets. Or just the opposite may prove true. If so, don t assume any personal deficiency. You are no different; your market is different and it calls for different responses from your current selling characteristics. Lacking appropriate records, you cannot identify your problems, and you will be frustrated by your inability to take precise corrective actions. With the necessary records, however, you can implement specific strategies to solve identified problems. Continued monitoring will tell you quickly if the solutions you have introduced are working. If they re not, you can try different solutions until your records indicate that you are achieving your goals. Insurance companies and industry organizations have developed a wide variety of recordkeeping methods or tools for use by agents. In fact, you probably already have established a good recordkeeping system for your personal insurance practice. As you venture into the business insurance market, you may find it very helpful to record your activity levels specifically for this market. Your company or your manager can recommend a recordkeeping form that will serve this purpose well. As an example, Form 1, included later in this workbook, is used by one agent who says that recordkeeping activity affects behavior favorably and dramatically. Although the data is shown on a monthly basis, the form could be used just as easily for recording data on a daily or weekly basis. Form 1 is described column-by-column on the next page. Form 2 shows the weekly worksheets that this agent used as input to the Form 1 summary monthly report. The forms you use probably won t have as many categories as those shown here. But these sample forms show just how comprehensive these records can be, and how well they can identify your strengths and weaknesses. Some people like keeping records, enjoy analyzing them, and love figuring out what to do as a result of the analysis. On the other hand, some people hate to keep records, don t like to analyze them, and dislike change. Regardless of your tendencies, try to focus on the fact that records are important to your efficiency, your effectiveness, and your success. Records can be motivational too. For example, knowing the dollar value of each prospecting telephone call can offer strong motivation for making telephone calls. Qualifying for the Million Dollar Round Table doesn t seem like too much if you break it down to a weekly amount. 251 Workbook W-77

78 Do not try to get out of record keeping. Just tell yourself it s part of your job and that you are going to keep records faithfully. Decide what forms you need, get them, establish a procedure, and follow it week after week, month after month. Why should you do this? Consider this example. On an accompanying page you will see records of an agent who increased his first year commissions by 215 percent without working any longer or harder (Form 1). He had studied his records for the prior 4 years and realized that about 67 percent of his commissions came from business owners and business executives. Yet he had spent only about 35 percent of his time working in these markets. He was spending 65 percent of his time in markets that produced only 33 percent of his commissions. He tentatively decided to devote almost all of his time to business owners, dropping virtually all other activity with his other categories of clients. He estimated that his first-year commissions would double. He checked his ideas and facts with his general agent, who agreed that changing his focus would be smart. During the following year, the agent s first-year commissions more than doubled to 215 percent. It happened because the agent kept records and used them. His records had showed his strengths, and he capitalized on them. Many agents are using computers to facilitate record keeping and evaluation for their business insurance markets. These agents claim that computer record keeping has helped them to enhance their sales significantly. Asking for a Meeting Establishing long-term relationships with business owners sometimes means trying to make an initial face-to-face meeting that is brief, nonthreatening, and low key. Try this approach: "When I meet with you I want to do only three things: introduce myself, leave you with a brochure that tells you about me, and give you my business card. Fair enough?" The Products You Sell Almost all of the sales opportunities described in this text are available to virtually all agents. That is, most of these opportunities do not require special policies; regular term and permanent insurance will do. However, not all agents have group insurance, pension and profit sharing plans, and salary deduction administrative support. Don t worry if you don t offer these products; learn about them anyway. An understanding of these products can help you to advise clients and stay competitive. W Workbook

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80 Form 1 Described Here is an explanation of the columns in Form 1, which can be found on an adjacent page. Column 1: Notice that this "annual" chart is actually based on 13-month averages (December through December). This is simply because the agent who developed it liked the idea of tying 2 years together. All of the monthly averages are obtained by dividing by 13, not 12. Columns 2 and 3: This agent wanted to see what percent of his new prospects were from referrals, so instead of making just one column for new prospects, he made two: one for referred-lead prospects and one for prospects obtained differently. The agent obtained an average of 45 new prospects per month last year. About one-third of them were from referrals. Why do you think it is helpful to keep records and determine the percent of new prospects coming from referrals? Column 4: This column shows how many telephone contacts were made by this agent. Contacts are telephone calls where someone answered the phone. Busy signals and no-answer calls are not counted as contacts. Column 5: This shows appointments made as a result of telephone calls. Column 6 and 7: These columns show selling calls made. Column 6 shows only night selling calls because this agent wants to know what percent of his calls were made at night. Total selling calls are shown in Column 7. Selling calls are virtually the same as seen calls (Columns 8 and 9) except that some people stand you up, or sometimes you may unexpectedly have interviews with two people when you had expected only one. Columns 8 and 9: A Seen Call is where you are face-to-face with a prospect and talk at least a little about insurance or your services. These two columns could easily be made into one column, but the agent wanted to know what portion of his seen calls were to new prospects. Column 9 is previously seen prospects, where you go back a second time for additional information, sales presentation, or a closing interview. For example, this agent went back to see 41 previously seen prospects. If you wanted to reduce the number of columns on Form 1, you could combine Columns 6, 7, 8 and 9 into one column titled Seen Calls. Columns 10 and 11: Interviews are defined as face-to-face presentations in which you ask the prospect to buy a specific proposal now. Fact-finding sessions or other conversations do not count as interviews. To be an interview, there must be a concerted effort to close the sale now. Column 12: A New Case Opened is an interview where you obtained enough facts to feel that you now have an open case to come back and close. Column 13: This New Sales column shows how many of the Column 11 people (closing interviews) actually bought insurance. For example, 9 of 15 people bought in December a year ago. W Workbook

81 Column 14 and 15: These columns simply record the total number of policies issued in a particular month and the annualized commissions that relate to those policies. Columns 16, 17 and 18: This is a record of the agent s phone time, office time and field time. The completed Form 1 is the record of a real-life agent. If the agent s high level of activity and high level of success makes you think he is super agent, you are not alone in your thinking. 251 Workbook W-81

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91 Name: Date: Action Project 1 Continuous Prospecting (Due Class 4) Certification of Understanding I have read "Ongoing Action Project, Continuous Prospecting." I acknowledge that I am to obtain an average of three names of business prospects each week from now till the end of the course. I am to submit Action Project Report 1 in Class 7. I acknowledge too that I am to complete Forms 2 and 3 on a regular basis from now until the course is finished, and submit them to the moderator in Class 7. This report will count as part of my grade for the course. Additional Forms 2 and 3 for this project are located on the preceding several sheets. Report on your initial prospecting plan: 1. Who will you contact? Identify a target market or specific businesses. 2. Why will you contact them? What is your approach? 3. When will you contact them? What is your prospecting schedule? Student s signature Note to moderator regarding this prospecting project form: This certification of understanding is not a part of the student s grade, but please keep a record to be sure that all students have submitted this certification of understanding to you. The subsequent report, however, is counted as part of each student s grade and passing status for the course. The report is due in Class 7, numbered as Report 1. All students must do the project. This applies not only to students who are advisors, but also to students who are supervisors, managers, and so on. Read the next page if you are a manager or a non-sales student. 251 Workbook W-91

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93 Name: Date: ACTION PROJECT 2 Continuous Approaches (Assigned Class 3 Report 2 is due in Class 7) ("Certification of Understanding," due in Class 4, can be found on the page W-95) Mission This project is the second of two continuous action projects in this course. The first deals with prospecting. This one pertains to making approaches. It requires you to go see an average of three business owners each week and either begin a fact-finding interview, or try to make an appointment for a fact-finding interview at a later date. Procedure The preferable procedure is to make these in-person visits as a follow-up to sending an individualized letter to the owner along with a list of ideas. The list of ideas will then be the basis of your fact finder. This procedure is explained in Sales Planning Project 1, called "Read All About It." If your company or your agency has another equally effective or better method of seeing three business owners each week, you may use that other method and report the details of it on the reporting form you are to submit in Classes 7. Referrals Are Best Students are recommended to see three prospects each week with a referral, or, better yet, a "power referral," or personal introduction after the referror has written a letter or made some other strong recommendation or personal introduction of you to the prospect. At this stage, most new advisors in business insurance are not able to get large, continuing numbers of referrals to business owners. But if you can, do use them. Build your preapproach and approach around the referral. The most you can hope for on any call is to meet with a prospect on a favorable basis. Referrals allow that to happen. Cold Call If you find yourself making cold calls, try asking the following question of the owners. It has been a good one for many advisors: "May I talk with you about your group insurance?" If the owner is receptive and talks with you about group insurance, you can usually broaden the discussion later to cover other needs. Make Things Happen You will not be successful in all of your attempts to meet business owners. Few may let you conduct a fact-finding interview, but every effort is worthwhile. Be aware of this and tell yourself to keep going. Getting your first business insurance sale will be an important milestone. It will give you the determination to keep at it. Eventually, your averages will improve and you will start doing very well financially. 251 Workbook W-93

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95 Name: Date: Action Project 2 Continuous Approaches (Due Class 4) Certification of Understanding I have read the "Ongoing Action Project, Continuous Approaches." I acknowledge that I am to call on an average of three business prospects each week from now till the end of the course. I acknowledge that I am to keep records of my activity on Forms 2 and 3. I will submit these forms and the certification report in Class 7. This report will count as part of my grade for the course. Approach Strategy 1. How will you contact prospects? What is your preapproach and approach strategy? 2. What will you say to prospects to get an appointment? What is your approach? Student s Signature *Note to moderator regarding this approach project form: This certification of understanding is not a part of the student s grade, but please keep a record to be sure that all students have submitted this statement of understanding to you. The report due in Class 7 is, however, counted as part of each student s grade and passing status for the course. All students must do the project. This applies not only to students who are advisors, but also to students who are supervisors and managers. For alternate projects to be done by any non-sales student and any unlicensed managers, see the suggestions on the workbook page titled, "Performance of Action Projects by Non-sales Students and Managers." 251 Workbook W-95

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97 Name: Date: SALES PLANNING PROJECT 4 Interview an Advisor Who Sells Business Insurance (Assigned Class 4 Due Class 5) Purpose As an advisor who is interested in marketing and selling to business owners, it is important to gain the perspective of experienced advisors who are doing it successfully. The information you gain from interviewing them will better prepare you to penetrate the business market. Tapping into experience and knowledge should help you gather ideas to increase your business marketing efficiency and improve your selling effectiveness. Assignment Interview an advisor in your office, agency or association who has a business case rate. The advisor should ideally be working with business owners on business continuation planning and key employee insurance. If such a person cannot be located, a second choice would be an advisor who works with business owners in other areas of insurance and/or employee benefit planning. Suggested Procedure Identify an advisor who is successful in business sales. Contact the advisor and tell that person that you are interested in learning how to be successful in selling business insurance. Ask him or her if they would be willing to share constructive ideas and discuss their experience in working with business prospects. Make an appointment with him or her to do a face-to-face interview if possible. Use the questions provided on the report form on the next page as a guideline to your discussion. Add relevant questions that will be helpful to you. Complete the questions, record the responses and turn them in to your moderator at the beginning of Class Workbook W-97

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99 Name: Date: Sales Planning Project 4 Interview an Advisor Who Sells Business Insurance (Due Class 5) Report Form Questions for Discussion 1. Why are you in the Business Market? 2. How did you get into the Business Market? 3. What are the financial benefits and rewards of business insurance, compared to other product lines? 4. What obstacles or challenges do you find in this market? 5. What prospecting methods do you use? 6. What market segments (target markets) do you work with? 251 Workbook W-99

100 7. How do you deal with competition in this market? 8. What are your sources of information about business insurance and related topics? 9. What advice would you give to an agent entering this market? 10. Summarize your interview. What key points did you learn? W Workbook

101 Name: Date: QUIZ CLASS 4 (Due Class 4) Each question is worth four points. Total = 100 points. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. One of the goals of the fact-finding interview is to build prestige and confidence. T F 2. It is desirable to make specific product recommendations during the fact-finding interview. T F 3. Business life insurance is bought when your prospects understand and acknowledge their needs and want solutions. T F 4. An advisor should turn to a fact-finding form or questionnaire when he or she feels that the prospect is ready to openly and frankly discuss his or her own situation. T F 5. If there is no will, the executor of a sole proprietor s estate is prohibited from liquidating the business. T F 6. At a sole proprietor s death, the business may be transferred by will to a specified family member or other individual. T F 7. Liquidation may be a viable planning option for some sole proprietors. T F 8. In considering business continuation, the options available to a sole stockholder are like those of a sole proprietor. T F 9. The need for a buy-sell agreement in most closely held corporations generally arises from the fact that there is no ready market for the stock. 251 Workbook W-101

102 T F 10. Owners of closely held corporations are entitled to salaries even if they are not employees of the corporation. T F 11. If the deceased was a majority stockholder, the executor or heirs now control the company. T F 12. An executor who receives consent from the heirs to continue the decedent s proprietorship business is free from liability for any losses. T F 13. The majority shareholders have a fiduciary relationship to the minority shareholders. T F 14. The heirs of a deceased partner cannot be added as new partners to continue the partnership business. T F 15. The heirs of a deceased partner or shareholder with a majority interest in the business can force liquidation of the partnership or corporation in the absence of a prearranged agreement. Multiple Choice 16. A forced liquidation of a sole proprietorship typically brings more money than selling the business as a going concern increases the amount received by heirs above capitalized value results in the issuance of publicly traded stock to heirs means bringing business activity to a halt 17. Which of the following statements concerning the role of an executor managing the affairs of a business interest is correct? A business owner should not name an executor in his or her will. Federal law requires an executor to establish a business trust. An executor can be held liable for business losses. State law requires an executor to establish a business trust. 18. Leaving the ownership of a business, which represents the major asset of an estate, to an adult child under the provisions of a will guarantees creditor protection automatically invalidates the will guarantees continuing income to other family members can result in an election against the will by a surviving spouse W Workbook

103 Name: Date: 19. When a partner dies, the deceased partner s heirs want income while the surviving business associates typically want to pay a special dividend to the estate of the deceased favor reinvesting profits within the business want to incorporate the business favor liquidating the business 20. Minority shareholders in a corporation are entitled to a salary under state law a year-end bonus under federal law information about the company s financial affairs automatically convert their stock into interest-bearing bonds 21. A minority interest in a company is generally valued at a discount valued at a premium deemed to be worthless for estate tax purposes deemed to be worthless for income tax purposes 22. Which of the following statements about the role of life insurance in business continuation planning is correct? It is inappropriate for a sole proprietorship. Proceeds can facilitate the orderly liquidation of a sole proprietorship. Premiums are tax deductible by a corporation but not by a partnership. Premiums are tax deductible by a partnership but not by a corporation. 23. What is the decision style of a business owner who resolves problems or makes decisions using information available at a given point in time without outside participation? democratic consultative participative authoritarian 24. The immediate and most urgent problem of heirs to a closely held business is typically to liquidate the business interest without probate payment of federal estate taxes within 3 months of death a need for current income to replace the salary of the deceased owner a need for current income to replace the dividends paid on the deceased s stock 251 Workbook W-103

104 25. Which of the following statements about social style is (are) correct? I. A driver social style is forceful and direct, will not waste time on small talk, and wants to be in control. II. An amiable social style is easygoing and dependent, enjoys personal relations and wants to be accepted. I only II only Both I and II Neither I nor II W Workbook

105 Name: Date: SALES PLANNING PROJECT 5 Tracking Prospecting Habits (Assigned Class 4-Due Class 6) This project will help you discover how and when you get your prospects. It will help show what sources you may be overlooking and what days of the week indicate a lack of prospecting activity. With analysis and planning you can discover your prospecting strengths and weaknesses. You are to use the accompanying sheets (Form 4) to record your prospecting activity for the next 2 weeks. In Class 6 you are to submit an analysis of what you have learned about your prospecting habits as a result of using Form 4. Use the Sales Planning Project 5 reporting form to submit your written analysis. If you find this a beneficial process and want to continue with it, feel free to make and use photocopies of Form Workbook W-105

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111 BREAKOUT CLASS 4 What do you need to do to be successful? What do you see now as the five most important things you must do to be good at selling business insurance? Be as specific as possible. Think about the five most important problems you will have to overcome in selling business insurance. Or, what five things concern you as you look ahead in the area of selling business insurance? Workbook W-111

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113 Name: Date: QUIZ CLASS 5 (Due Class 5) Instructions: Study the reading assignment first, then answer the questions. Each question is worth 4 points, for a total 100 points. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. If there has been a transfer for value, part of the proceeds of a key person life insurance policy may be subject to federal income taxation. T F 2. As soon as a small business owner dies, suppliers are likely to suspend deliveries, customers to cancel orders, and banks to refuse to extend additional credit. T F 3. Business owners are typically alert tat would arise in the event of their death or the disability of one of their key employees. T F 4. Buy-sell agreements do not establish the price of a business or a formula to obtain the price. T F 5. A corporation can legally continue, despite the death of one of the owners, even though there is no buy-sell agreement in effect. T F 6. The surviving partner s cost basis for their partnership interest will be the same whether a cross purchase or entity agreement is selected. T F 7. A cross-purchase buy-sell agreement with 11 partners would require 110 policies if all partners are parties. T F 8. The accumulated earnings tax is potentially applicable to a properly designed cross-purchase agreement. T F 9. A first-offer provision is generally included in a corporate buy-sell agreement to prevent the lifetime transfer of the affected stock to outsiders. 251 Workbook W-113

114 T F 10. A corporate buy-sell agreement should generally contain a provision for endorsing the stock certificates to indicate that they are subject to an agreement that restricts transfer. T F 11. A stock redemption agreement should be favorable if the number of shareholders is sizable. With each of the following statements, indicate whether the statement applies to a cross-purchase buy-sell plan or to an entity buy-sell plan. Cross Purchase-Entity Buy-Sell 12. Policy values are not subject to claims of corporate creditors. cross-purchase buy-sell plan entity buy-sell plan 13. Use the plan to gain the advantage of the stepped-up basis in a later-lifetime sale. cross-purchase buy-sell plan entity buy-sell plan 14. If a buy-sell agreement has questionable business purposes, use this plan to avoid the possibility that there will be an accumulated earnings tax. cross-purchase buy-sell plan entity buy-sell plan 15. Simpler (fewer policies), if there are more than a few owners. cross-purchase buy-sell plan entity buy-sell plan 16. It avoids the heavy premium burden that exists under a cross-purchase plan on the youngest stockholder. cross-purchase buy-sell plan entity buy-sell plan 17. Cash values have an impact on the corporation s financial position. cross-purchase buy-sell plan entity buy-sell plan 18. It is possible that a corporation might not be able to legally purchase its own stock because its retained earnings account is too small. cross-purchase buy-sell plan entity buy-sell plan W Workbook

115 Name: Date: 19. In general, stockholders pay premiums on the life of each other stockholder in an amount equal to his or her share of the purchase price. cross-purchase buy-sell plan entity buy-sell plan 20. The business is the policy s beneficiary. cross-purchase buy-sell plan entity buy-sell plan Multiple Choice 21. What is the objective of a cross-purchase buy-sell agreement funded with life insurance? provide protection to offset financial losses to a business due to death of a mid-level employee disposal of business interest upon death of an owner, by having the business purchase the deceased s interest disposal of business interest upon death of an owner, by transferring ownership to surviving co-owners who continue the business transfer stockowner s interest at stockholder s death to his or her heirs, and have partial stock redemption, providing estate with cash to pay settlement costs 22. This is the person(s) or entity that purchases the stock of a deceased owner under a stock redemption buy-sell plan. the estate the business the surviving co-owners in equal percentages the surviving co-owners in unequal percentages 23. Smith and Jones enter into a cross-purchase buy-sell agreement. When Smith dies, this is the person who purchases the business interest. Jones the business Smith s estate Smith s spouse 24. If Able and Baker enter into a cross-purchase buy-sell plan and Able is older than Baker, this is what occurs regarding premiums. Baker will pay lower insurance premiums to fund the plan than Able. Baker will pay higher insurance premiums to fund the plan than Able. Baker will be able to depreciate the premium differential. Baker will be able to deduct the premium differential. 251 Workbook W-115

116 25. Cash is generally not used to fund a buy-sell agreement for this reason. It is illegal under state law. There may be insufficient funds. Cash reserves for this purpose are tax-exempt. Cash reserves for this purpose are tax deductible. W Workbook

117 CHECK YOUR UNDERSTANDING Chapter 5 These additional questions provide an extra opportunity to "Check Your Understanding." They do not count toward your grade for the course. Use them to test your knowledge of the chapter content. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. In order to avoid the accumulated earnings tax, the beneficiary of a stock redemption should be the insured s estate. T F 2. The surviving shareholders bases in their stock is increased by the amount distributed by the corporation in the stock redemption. T F 3. A trustee may be used in a corporate buy-sell agreement to hold the policies funding the agreement. T F 4. The transfer of an existing life insurance policy to a corporation in which the insured is a shareholder will result in adverse income-tax consequences because of the transfer-for-value rule. T F 5. Premiums paid for an insured stock redemption plan are income-tax deductible by the corporation. T F 6. Premiums paid for an insured cross-purchase plan are income-tax deductible by the participating shareholders. T F 7. The IRS views cross-purchase plans as a sale of stock, rather than as a corporate dividend. T F 8. Inherited property receives a stepped-up basis when the stockowner dies and the stock is inherited by the spouse. T F 9. A lower cost basis generally means less tax will be paid when it is sold. 251 Workbook W-117

118 T F 10. The accumulated earnings tax is a penalty imposed on the unreasonable accumulation of earnings of a corporation. T F 11. Cross-purchase plans sometimes cause an accumulated earnings tax problem. T F 12. Stock redemption plans may cause an accumulated earnings tax problem, especially if it is a partial redemption of a majority shareholder s stock. T F 13. Under the transfer-for-value rule, some portion of life insurance death proceeds may be subject to federal income taxation. T F 14. Net life insurance death proceeds increase current earnings for purposes of calculating the corporate alternative minimum tax. T F 15. The transfer of an existing life insurance policy from a corporation in which the insured is a shareholder, to another shareholder, when changing from an entity to cross-purchase plan, will result in adverse income tax consequences because of the transfer-for-value rule. Multiple Choice 16. At the death of a shareholder, a stock redemption plan requires the business to buy the deceased s shares from his or her estate at a price stipulated in the agreement all interested parties to examine the situation and make a decision on the best way to proceed surviving shareholders to buy a deceased owner s shares from his or her estate individually the estate to sell the deceased s shares to a key employee 17. Using the wait-and-see approach, corporate shareholders agree to a series of buy-sell options that may result in the use of either a stock redemption or cross-purchase plan. agree at each fiscal year end whether or not to deduct accumulated earnings and profits enter into a buy-sell agreement after it is determined which shareholder will die first agree to transfer policies to each other to avoid the transfer-for-value rule. W Workbook

119 18. The cross-purchase form of buy-sell agreement is advantageous because it is less likely than a stock redemption plan to be subject to legal challenge by dissatisfied family members premium payments are tax deductible on individual Form 1040 it requires fewer policies to fund than a stock purchase plan it increases the surviving owner s cost basis in the business 19. Which of the following buy-sell forms is always treated as a sale of stock rather than a dividend? entity purchase cross-purchase plan stock redemption plan wait-and-see buy plan 20. Unless a sole proprietor leaves specific instructions in a will, the final disposition of his or her business interest rests with federal tax court the surviving spouse the executor of the estate surviving family members 21. If money is borrowed to fund an entity buy-sell agreement interest costs can be carried as a business asset on the balance sheet interest costs can be carried as a business asset on the income statement state law requires co-owners to personally guarantee loan repayments a significant amount of future earnings will be committed to debt repayment 22. Which of the following statements is correct regarding the installment purchase of a deceased s business interest by the surviving owners? The installment payments are tax deductible by the surviving owners. The installments payments are tax deductible by the business entity. The deceased s heirs are creditors of the surviving owners. The deceased s heirs are creditors of the business entity. 23. Which of the following statements concerning the accumulated earnings tax is correct? It applies to the annual cash value build-up of life insurance at the rate of 15 percent. It applies to the annual cash value build-up of life insurance at the rate of 39.6 percent. It permits annual tax-exempt accumulations up to one million dollars. It is a penalty tax imposed on the accumulated earnings of C corporations. 251 Workbook W-119

120 24. The Internal Revenue Service will generally accept the value of a business interest specified in a buy-sell agreement if different valuation criteria are used for lifetime and death time sales there is an arms-length transaction it omits a first-offer provision there was a step transaction 25. When a disabled owner sells a business share, the difference between the sale price and the owner s basis is treated as a taxable gain stepped up so there is no taxable gain not taxed if there is an installment sale deducted from any disability buyout benefits available W Workbook

121 Answers to Check Your Understanding Class 5 1. F 14. T 2. F 15. T 3. T 16. A 4. F 17. A 5. F 18. D 6. F 19. B 7. T 20. C 8. T 21. D 9. F 22. C 10. T 23. D 11. F 24. B 12. T 25. A 13. T 251 Workbook W-121

122

123 BREAKOUT CLASS 5 Funded Buy-Sell Agreements 1. ABC Corporation is owned equally by Able, Baker, and Charles. They would like to enter into a buy-sell agreement. Able is uninsurable. What funding approach would you recommend, based on the information provided in the text or your own experience? a. What are the options for Able? b. What are the options for the business? c. Able is age 55, Baker age 45, and Charles age 30. Assume all are insurable at standard rates. What buy-sell options would you recommend? What problems may you encounter? 251 Workbook W-123

124 2. Which form of business, the partnership or the corporation, provides more advantages when it comes to funding a buy-sell agreement with life insurance? Explain your answer. W Workbook

125 Name: Date: QUIZ CLASS 6 (Due Class 6) Each question is worth 4 points, for a total of 100 points. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. Section 303 of the Internal Revenue Code pertains to stock redemptions at death. T F 2. To be categorized as a family-owned business, all employees must be related to the owner. T F 3. To be categorized as a family-owned business, all day-to-day managers must be owners of the business. T F 4. In general, Section 303 stock redemptions are allowable in most partnership situations. T F 5. Attribution rules and constructive ownership rules are simply two names for the same thing. T F 6. The items that can be included in determining the amount of stock that can be redeemed via a 303 redemption are funeral expenses, administrative expenses, federal estate taxes, and state death taxes. T F 7. What happens under Section 303 is that a stipulated portion of a stock redemption is treated as a dividend rather than as a sale stock. T F 8. A partnership is automatically dissolved if one of the partners becomes disabled. T F 9. Under partnership law, a disabled partner has a continued right to an equal share of any profits. 251 Workbook W-125

126 T F 10. Under corporate law, a disabled corporate owner-employee has a legal right to continue to receive a salary even though the disability prevents him/her from working. T F 11. Implementation of a disability buyout agreement is generally mandatory when the waiting period expires. T F 12. In essence, Section 303 of the Internal Revenue Code allows a certain amount of a decedent s stock to escape federal income taxation. T F 13. One "buying signal" is when the prospect starts to ask specific questions about your proposed solution to his/her problem. T F 14. Business Overhead Expense policies are limited in duration to periods such as 12, 18 or 24 months T F 15. Business Overhead Expense insurance compensates a business owner for the expense of maintaining an office or place of business as well as for loss of income while the owner is disabled. Multiple Choice 16. The straight capitalization method of valuing a closely held business averages a company s balance sheet value over 5 years divides a company s historical assets by current liabilities divides a company s earnings by a reasonable rate of return averages a company s publicly listed stock value over 2 years 17. In order to qualify for a tax-favored redemption under Section 303, the value of the stock owned by a decedent must be worth 35 percent or more of the taxable estate 50 percent or more of the taxable estate 35 percent or more of the adjusted gross estate 50 percent or more of the adjusted gross estate. 18. A Section 303 stock redemption is a method of withdrawing estate settlement funds from a corporation a method of withdrawing income tax funds from a partnership a way to convert capital gain into ordinary income a way to convert capital gain into capital loss W Workbook

127 Name: Date: 19. To derive an estimate of future earnings, past earnings for 5 or more years should be disregarded because past performance is not a guarantee of future results averaged, with greater weight given to earnings from recent years added together for an estimate of annual future earnings added together and multiplied by five 20. Which of the following statements about the ownership of a family held business is correct? It is best to split the business equally among all heirs. There is a desire to transfer ownership outside the family. There is a desire to retain ownership within the family. Closely held stock pays high dividends. 21. Mr. Smith owns a successful business. His two children participate in the business. His wife does not have an active role in the business. What is the most appropriate way to balance the needs of the spouse and children at Mr. Smith s death? Leave the entire business interest to the spouse. Leave an undervalued business interest to the children. Leave an overvalued business interest to the children. Leave a fairly valued business to the children and insurance to the spouse. 22. Which of the following statements about buy-sell agreements drafted for family-owned businesses is correct? Such agreements are invalid under state law. Such agreements are invalid under federal law. The Internal Revenue Code specifically permits under valuation of gifted business interests to family members. Such agreements cannot simply be devices to transfer the business to family members for less than full value. 23. In planning a Section 303 stock redemption, a business owner should be aware that corporate control may shift as a result of the redemption stock ownership must equal no less than 10 percent of the estate stock dividends must generate no less than 20 percent of annual income corporate control must remain static for 10 years after the redemption 251 Workbook W-127

128 24. Which of the following statements about redeeming business ownership shares is correct? In most states, a corporation must have retained earnings to redeem its shares. In most states, a corporation must borrow from a bank to redeem its shares. A corporation can deduct premiums on life insurance used to redeem its shares. A partnership can deduct premiums on life insurance used to redeem 25. Selling a business interest under a disability buyout agreement avoids capital gains taxation for the disabled seller can generate significant tax obligations for the disabled seller must be funded to avoid imposition of the alternative minimum tax must be unfunded to avoid imposition of the accumulated earnings tax W Workbook

129 BREAKOUT CLASS 6 Succession Planning, Disability, and Objections 1. Maria is the sole owner of a successful, closely-held corporation. She has three children. Maria s oldest daughter, Barbara, manages the financial aspects of the business. Her son, Adam, has chosen to pursue an engineering career outside the business. Clara, her younger daughter, works part-time in the sales and marketing aspects of business. What additional questions would you need to ask Maria so that she can plan for the orderly transfer of the business at her death? 2. Able, Baker, and Charles own ABC Partnership. Name two problems that will arise if one of the partners is disabled for one year. What problems could this cause for the business and the business owners? 3. This is a second meeting with business owner Chris Segal. During your first meeting, Chris agreed with your assessment that there was a need for key person insurance. In the middle of this second meeting Chris says: "The premium seems pretty high to me." Do you see Chris Segal s statement as a buying signal or as an objection? In light of your previous answer, what steps might you take to close the sale? 251 Workbook W-129

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131 Name: Date: SALES PLANNING PROJECT 5 Tracking Prospecting Habits (Assigned Class 4-Due Class 6) 1. I (have) (have not) kept track of my prospecting habits for the last 3 weeks. 2. I am turning in a copy of my Form Following is an analysis of what I have learned from tracking my business insurance prospecting habits. (Be as complete as possible in sharing significant findings. Include your difficulties and areas needing improvement, as well as any strengths you noted.) Prospecting sources: Best results: Worst results: Adequacy of prospecting activity: (Enough contacts?) Best times: Worst times: Best days: 251 Workbook W-131

132 Worst days: Best approach talk: Worst approach talk: Strengths: Areas needing improvement: Summary of this activity: (What did you learn?) W Workbook

133 Name: Date: QUIZ CLASS 7 (Due Class 7) Each question is worth 5 points. Total = 100 points. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. Premiums paid by a corporation for key person life insurance are not income tax deductible. T F 2. Premiums paid by a partnership for key person life insurance are income tax deductible. T F 3. Premiums paid by a sole proprietorship for key person insurance are not income tax deductible. T F 4. In general, proceeds of a key person life insurance policy, paid to the business at the insured s death, are free from federal income taxation. T F 5. Corporate proceeds from a key person policy may be subject to the corporate alternative minimum tax. T F 6. In general, cash values of key person policies accumulate free from federal income taxation. T F 7. Key person life insurance is generally owned by the insured employee. T F 8. Key person life insurance can cover employees who are not owners of the business. T F 9. Death proceeds of a key person life insurance policy are generally received by the corporation on a tax-free basis. T F 10. The beneficiary of a key person life insurance policy is generally the insured s spouse or the insured s estate. 251 Workbook W-133

134 T F 11. Premiums for a key person life insurance policy are generally paid by the insured. T F 12. Premiums paid by a business on a key person life insurance policy are treated as an economic benefit to the insured, and are therefore reportable by the insured as taxable income. T F 13. The only right of the insured key person in a policy is a limited right to change the beneficiary. Multiple Choice 14. Key person life insurance should be made payable to the spouse of the insured estate of the insured employer stockholders 15. Which of the following statements about key person life insurance is correct? Premiums are tax deductible by the business. Premiums are tax deductible by the insured. Postdeath borrowing can be easily substituted for life insurance. Key person life insurance indirectly strengthens a company s credit position. 16. Which of the following statements about the income taxation of key person life insurance is correct? Internal cash value build-up is taxed annually at the rate of 15 percent. Internal cash value build-up is taxed annually at the rate of 28 percent. Premiums are deductible by partnerships but not corporations. Premiums are generally not reportable by the key person. 17. In order to underwrite a key person life insurance policy an insurer generally requires the business to have an insurable interest in the key person when the policy is issued have an insurable interest in the key person for the contract duration be organized as a corporation be organized as a partnership W Workbook

135 Name: Date: 18. When a key employee leaves a company, the company must surrender the policy because insurable interest no longer exists may keep the policy because insurable interest existed when the policy was established must transfer the policy to the employee must transfer the policy to the employee s replacement 19. A salary continuation plan will allow for tax-deductible salary to be paid to disabled I. owner/employees and key employees of a C Corporation II. owners of sole proprietorships and partnerships I only II only Both I and II Neither I nor II READ THE FOLLOWING DIRECTIONS BEFORE CONTINUING The questions below differ from the preceding questions in that they all contain the word EXCEPT. So you understand fully the basis used in selecting each answer, be sure to read each question carefully. 20. All of the following are benefits of key person life insurance EXCEPT provides indemnification to the business due to the death of a key employee provides for a lifetime reserve fund for the business provides funds to pay the salary of a key employee in case he or she is disabled provides for a strengthening of the general credit position of the company 251 Workbook W-135

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137 BREAKOUT CLASS 7 Key Person Insurance 1. A business owner has indicated interest in key person life insurance in response to your approach. In words you would use with the prospect, what would you say next? 2. A business owner objects to purchasing key person life insurance because the premiums are not deductible. How would you respond? Write what you would say to the prospect. 3. XYZ Corporation intends to purchase a key person policy on Will Wright, one if its executives. Will Wright earns $75,000 per year. Profits have gradually risen over the last 5 years that Will has been employed at XYZ. Last year company profits amounted to $200,000. Will is responsible for generating approximately half of these profits. Agent Dan Durkin recommends the purchase of a policy with a face amount of $75,000. Do you agree or disagree, and why? 4. ABC Company s profits are dependent on two key people: its president and marketing officer. They indicate that they want to self-insure by accumulating funds. Is this a good idea? Why or why not? 251 Workbook W-137

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139 Name: Date: ACTION PROJECT 1 REPORT Continuous Prospecting (Assigned Class 3 Due Class 7) Read the following certification. If you have completed the prescribed activity, sign your name. Complete the reverse side. Also, please discuss this project with your supervisor. I am on course in obtaining an average of three names of business prospects each week since Class 4. I am also completing Forms 2 and 3 on a regular basis. Forms 2 and 3 covering the last three weeks are attached. (If you re using some other recordkeeping system for keeping track of your prospecting and selling activities, please submit copies of those alternate records to your moderator.) Student s signature Moderator: Count this as the first action project, and mark your Attendance and Grade Record booklet accordingly in the first column under Action Projects. Describe your experience in business insurance prospecting. Include your difficulties and areas needing improvement, as well as any strengths you noted. Difficulties: Successes: Strengths: Areas for improvement: Comments on using forms 1, 2, and 3: 251 Workbook W-139

140 Summary of your prospecting experience: W Workbook

141 Name: Date: ACTION PROJECT 2 REPORT Continuous Approaches (Assigned Class 3 Due Class 7) Read the following certification. If you have completed the prescribed activity, sign your name. Complete the reverse side. Also, please discuss this project with your supervisor. I am on course in visiting an average of three business prospects each week since Class 4. Student s signature * * * * * * * * As part of this project, answer the following. 1. Describe the hardest part of your business insurance activity. 2. Tell about three of your approach attempts over these last few weeks. About each of the three, specifically tell a. what approach you used b. whom you talked with c. what that person said and how you responded d. the current status and future of the case e. what you learned (or an insight obtained, or what you would do differently) or what difficulty you experienced Situation #1 (Answer the five points above.) 251 Workbook W-141

142 Situation #2 (Answer the five points above.) Situation #3 (Answer the five points above.) Moderator: Count this as the second Action Project, and mark it as such in your Attendance and Grade Record booklet. W Workbook

143 Name: Date: QUIZ CLASS 8 (Due Class 8) Each question is worth four points, for a total of 100 points. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. Estate planning is an organized process designed primarily to minimize a person s current income taxes and maximize current investment income. T F 2. The main focus of estate planning is on what prospects want to happen at their death. T F 3. Financial planning focuses primarily on what will happen while the client is living. T F 4. In sizable estates, the federal estate tax often represents the primary liability of the estate. T F 5. Determining goals is part of the analysis phase of estate planning. T F 6. Business owners are often prospects for estate planning because they want to pass the business on to the next generation. T F 7. If two individuals own an asset in joint tenancy with right of survivorship, each is said to own 50 percent of the property. T F 8. A member of a joint tenancy with right of survivorship can transfer by will his or her interest in the joint tenancy. T F 9. Most states require two witnesses to a will. T F 10. The law generally allows a testator to completely disinherit a spouse. T F 11. A will, by its very nature, is revocable. 251 Workbook W-143

144 T F 12. An irrevocable trust is one which the grantor cannot alter, modify amend, or revoke. T F 13. The grantor of a trust is treated as the owner of the trust if he or she has any incidents of ownership in the property. T F 14. The federal estate tax is imposed on the beneficiary of an estate. T F 15. The federal estate tax is measured by the original cost of property in the estate. Multiple Choice 16. Which of the following statements is correct about the phases of estate planning? The accumulation phase begins at death. The accumulation phase is also called asset structuring. The disposition phase is limited to transfers at death. The disposition phase includes lifetime gifts and transfers at death. 17. What happens to an individual s property if he or she dies without a will? The property is distributed according to the rules of the Internal Revenue Code. The property is distributed according to the rules of intestate succession. The individual s property becomes the property of the federal government. The individual s property becomes the property of the state. 18. Which of the following statements describes a codicil? an illegal will alteration a formal written addendum to a will an informal oral addendum to a will an informal oral addendum to a living trust 19. The parent of a minor should do which of the following when executing a will? give primary consideration to the reduction of estate taxes disinherit the child until the age of majority give primary consideration to the selection of a guardian defer to the state rules of intestacy W Workbook

145 Name: Date: 20. Which of the following statements concerning property held in joint tenancy is correct? Property can be transferred by a will to a third party. Property can be transferred by trust to a third party. Property automatically passes under the rules of intestacy. Property automatically passes at death to the other joint tenant(s). 21. What happens to property held as tenants in common at death? It can be transferred by will to a third party. It cannot be transferred by will to a spouse or child. It automatically passes at death to the joint tenant(s). It automatically passes at death under the rules of intestacy. 22. Which of the following statements concerning joint ownership is correct? Joint tenants own individual and specific shares of property. Tenancy in common can be established only at the time of property purchase. Individuals may become tenants in common regardless of when they acquired ownership. A parent and child holding title as joint tenants by the entirety own individual and specific shares of property. 23. Another name for a trust that is created through a will is living trust grantor trust perpetual trust testamentary trust 24. Mary and Mark Harris own their home as tenants by the entirety. Each contributed equally to the cost of the home. If Mark dies first, what percentage of the home s value will be included in his gross estate? 0 percent 25 percent 50 percent 100 percent 25. John Williams bought XYZ stock for $50 a share. The XYZ stock is worth $125 a share when John dies. How much of each share s value is included in John s gross estate for federal estate tax purposes? $50 $75 $125 $ Workbook W-145

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147 CHECK YOUR UNDERSTANDING Chapter 8 These additional questions check your understanding of the material in Chapter 8. They do not count toward your grade for the course. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. Under tenancy by the entirety, a married person can transfer away his or her interest without the written consent of the other spouse. T F 2. Tenants in common may not pass on their shares of ownership by will. T F 3. The federal estate tax has graduated rates and therefore takes a proportionately bigger bite out of larger estates than it takes from smaller estates. T F 4. In general, only the first $625,000 of an estate s value is subject to federal estate taxation. T F 5. A $50,000 estate tax credit is less valuable than a $50,000 estate tax deduction. T F 6. One way to avoid over-qualifying the marital deduction is to leave enough in the first estate to create a tax equal to the amount of the Applicable Credit Amount. T F 7. Estate taxes generally must be paid in cash within 9 months after the date of death. T F 8. The gift tax is calculated from a table using the same "exemption equivalent" amounts as those used for estate taxes. T F 9. The gift tax is imposed on the donor and, in effect, is a tax on the privilege of giving away one s property. 251 Workbook W-147

148 T F 10. The annual gift tax exclusion allows anyone to give unlimited amounts to a relative tax-free. Multiple Choice 11. Which of the following statements about federal gift and estate taxes is correct? The same tax rate applies to both gifts and estates. The federal gift tax rate is lower than the federal estate tax rate. The federal estate tax rate is lower than the federal gift tax rate. The federal gift tax credit is lower than the federal estate tax credit. 12. Which of the following statements about the marital deduction is correct? No more than 50 percent of a decedent s estate can qualify for the deduction. Interest earned on marital deduction property is exempt from income tax. Property left to a surviving spouse is exempt from future estate tax. Leaving an entire estate to a surviving spouse can lead to a future estate tax trap. 13. Lillian Winters, a single individual, died in 2009, leaving an estate of $1,500,000. The applicable credit at the time of her death was $780,800. How much estate tax was paid? none $102,200 $237,000 $719, A QTIP trust can best be described as a trust that bypasses the probate process can be used to preserve the estate tax marital deduction can be used to fund bequests to heirs other than a spouse automatically disclaims a spouse s rights to gifted property 15. Allowable statutory deductions for federal estate tax purposes include funeral expenses life insurance premiums bequests to minor children bequests to adult children W Workbook

149 16. Which of the following statements about state death taxes is correct? They are calculated at 60 percent of the federal estate tax payable. State death taxes can be payable even if no federal estate taxes are due. If federal estate taxes are not payable, there are no state death taxes due. State inheritance taxes are a statutory deduction against the federal gross estate. 17. Federal estate taxes are due and payable within 3 years and 6 months after the date of death 6 months after the conclusion of probate 3 months after the date of death 9 months after the date of death 18. Internal Revenue Code Section 6166 permits an extension of time to pay the federal estate tax. In order to qualify for this extension, a closely held business interest must exceed 10 percent of the gross estate 20 percent of the taxable estate 35 percent of the adjusted gross estate 50 percent of the adjusted gross estate 19. In order to qualify for the annual gift tax exclusion, a gift must consist of tangible personal property be a gift of a present interest be a gift of a future interest made in cash 20. The applicable credit amount can be used to offset I. gift tax. II. estate tax I only II only both I and II neither I nor II 251 Workbook W-149

150 Answers to Check Your Understanding Class 8 True/False 1. F 6. T 2. F 7. T 3. T 8. T 4. F 9. T 5. F 10. F Multiple Choice 11. A 16. B 12. D 17. D 13. A 18. C 14. B 19. B 15. A 20. C W Workbook

151 BREAKOUT CLASS 8 Estate Planning 1. Brenda and Bob Mathers own a small business. They have been your clients for several years. Last week they mentioned that they intend to buy a new home. Explain three ways they could take title to the new home. 2. Leslie Russell is a single business owner with three adult children. Two children participate in the business. One does not. Leslie lives in a state where the intestacy rules provide for an equal division of property between a decedent s children. What are the implications of the disposition and future of the business if Leslie fails to execute a will? 3. You are visiting with a successful business owner who says she does not understand what is meant by estate planning. How would you respond? 4. A wealthy, happily married couple is considering an estate plan that leaves all property to the surviving spouse. Is this a good idea? Why or why not? 5. John Dwyer is a widower. Recently, John made three gifts within one year. First, he transferred $25,000 to his daughter, Jane. Second, he made a gift of $15,000 to his sister, Martha. Third, he made another gift to his daughter, Jane, in the amount of $12,000. Calculate the amount of the taxable gifts made by John. Provide your answer and explain how you calculated it. 251 Workbook W-151

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153 Name: Date: PRACTICE TEST From Facts to Sales (Assigned Class 7 Due Class 8) Selling requires knowledge and skill. This practice test is a review of some of the information you need to know to sell business insurance. The test is optional and you will not be graded on it. Answer the questions on the following pages. You may use your text to find the answers if necessary. Bring the questions and answers with you to Class 8. Your moderator may review at least some of the questions during class. You will find answers to these questions on the page after the test. True/False Indicate whether each of the following statements is true (T) or false (F). T F 1. Owners of S corporations are called members. T F 2. A partnership can be dissolved only by written consent of all partners. T F 3. The life span of a close corporation is legally limited to the lifetimes of the original stockholders plus 99 years. After that the company must become a public corporation. T F 4. The estate of a deceased partner is not liable for a general partnership s debts beyond her original contribution to the business. T F 5. If a close corporation stockholder dies while actively engaged in the business, his widow is entitled to receive his salary unless she sells the stock. T F 6. Officers and directors of a corporation must be stockholders. T F 7. A corporation can purchase life insurance on its officers, own the policies, pay the premiums, and name itself as beneficiary. T F 8. Limited liability companies may legally have more than 75 members. 251 Workbook W-153

154 T F 9. The accumulated earnings tax is a tax imposed on the unreasonable accumulation of corporate retained earnings. T F 10. In essence, Section 303 of the Internal Revenue Code allows a certain amount of a decedent s stock to escape federal estate taxation. T F 11. Most stockholders in close corporations derive their major income from stock dividends. T F 12. The partnership pays income tax as figured on a partnership return, just as a corporation pays tax on a corporate return; only details of rates are different. T F 13. Premiums paid to fund an insured buy-sell agreement are not tax deductible, even when paid by the business itself. T F 14. Federal income taxation of professional corporations is essentially identical to taxation of sole proprietorships. T F 15. An S corporation is a partnership that elects to be taxed as a corporation. T F 16. For federal income tax purposes, if shareholder Able sells her corporate stock to shareholder Baker, the transaction will generally be treated as a capital gains transaction. T F 17. It is not legally possible for a one-owner business to be incorporated. T F 18. Under an insured stock redemption plan, death proceeds are generally taxable for federal income tax purposes. T F 19. Life insurance premiums are deductible as a business expense if a corporation is the beneficiary, but they are not deductible if the beneficiary is an unincorporated entity. W Workbook

155 Name: Date: Match the type of business with the corresponding description. Enter a zero (0) in questions where there is no match. (1) Sole Proprietorship 20. The number of owners is limited to 100. (2) C Corporation 21. A group of one or more persons acting as a legal entity and taxed as an entity. (3) Limited Partnership 22. The stockholder s shares pass to surviving associates upon his death. (4) General Partnership 23. Not permitted to engage in interstate business. (5) S Corporation 24. An unincorporated business enterprise owned by one person. 25. A corporation that is taxed as a partnership. 26. An unincorporated association of two or more persons actively managing a business. 27. An obsolete form of ownership, not legal today. 28. A business in which one or more associates have limited liability while others have unlimited liability. 29. Not subject to state regulation because it is created by federal charter. 251 Workbook W-155

156 Match the types of businesses or business associate to the statement that best defines its liability. (1) Partner 30. Generally not personally liable to business creditors even if serving as an executive of the corporation. (2) Sole Proprietor 31. Unlimited and unshared personal liability. (3) Limited Partner 32. Financial liability of the business does not normally extend to any owner s personal assets. (4) Stockholder 33. Fully liable for the acts of associates in the ordinary course of business. (5) Corporation 34. Not liable to creditors; cannot participate in day-to-day operations. W Workbook

157 Name: Date: Multiple Choice 35. A partnership may legally be created only by conversion of successful proprietorship written agreement between two owners an oral or written agreement legislative action 36. Which life situation below most urgently calls for life insurance coverage? Mr. Braunschweiger becomes a stockholder of General Motors. A stockholder personally guarantees his corporation s note for a $100,000 loan. A business executive signs a will leaving his Kodak stock to his son and government bonds of equal market value to his daughter. Smith purchases 5 percent of the stock in a small corporation but continues to work for General Motors as a line foreman. 37. Which of the following is true regarding key person life insurance? Cash values can be used by the business. Death benefits are taxable income if payable to the business. The policy must be sold to the key person upon leaving the firm. None of the above. 38. Which of the following characteristics of a sole proprietorship does not point directly to a need for life insurance? The sole owner is usually the manager of the business and the only person completely familiar with its operation. A sole proprietorship expires with the death of the owner. There are no associates who must be consulted on major decisions. The owner does not usually have the full range of fringe benefits available to an owner of a corporation who serves as an employee. 39. Upon the death of a partner, the surviving partner is charged with the specific duty of continuing the business to help support the widow buying out the heirs within 6 months notifying the newspapers of the firm s new status winding up the firm s business and accounting for the remaining assets 251 Workbook W-157

158 40. Select the most important reason why close-corporation stock is usually an unsuitable investment for a deceased stockholder s family. It is usually too expensive for the average investor. Ordinarily the other stockholders comprise the only market for the stock, and there is not likely to be much return except through a sale. Stock ownership and management of a close corporation are separate. Dividends are subject to income tax at surcharge rates. 41. Some portion of a life insurance death benefit may be subject to federal income tax if the insured had any incidents of ownership the death benefit exceeds the value of a business interest as established in the buy-sell agreement the transfer-for-value rule is applicable all of the above 42. The most valuable thing that any business can have is plenty of capital for expenses skilled management a good credit rating recognizable trade marks and valuable patents 43. How much capital is required to produce $10,000 a year at a capitalization rate of 15 percent? $150,000 $ 66,667 $ 15,000 $ 1, Laws of Descent and Distribution become effective when a person dies without having made a valid will distributes property by trust to his or her heirs executes an insured buy-sell agreement none of the above 45. Which of the following statements about sole proprietorships is true? The sole proprietorship form is advantageous for small firms; incorporation is advisable in any case where the business is large enough to qualify for a charter. Operations are more restricted than in the case of a limited partnership. Sole proprietors are not eligible for qualified retirement plans. The sole proprietor s financial liability is unlimited and unshared. W Workbook

159 Name: Date: 46. An S Corporation is a corporation that is taxed as an unincorporated business any business that elects to have earnings taxed as a distribution of dividends a subsidiary corporation with a nonprofit tax status normally owned by 90 or more stockholders 47. Retained earnings, accumulated earnings, and retained income are terms variously used interchangeably with current assets or fixed assets surplus intangible assets unreasonable compensation 48. Which of the following is characteristic of limited liability companies? They are taxed as corporations. They allow only one class of ownership. Members cannot be active in the management of the business. They have no restrictions on foreign ownership. 49. Which of the following is a characteristic of a wait-and-see buy-sell agreement? It is the same as a cross-purchase plan. All surviving stockholders are required to buy the stock of the deceased stockholder. Purchase options must be exercised at least 30 days before the death of a stockholder or the agreement is void. If options to purchase are not exercised, the corporation is required to purchase the interest of the deceased owner. 50. What is the maximum amount of the estate tax marital deduction? $155,800 $192,800 $600,000 unlimited 251 Workbook W-159

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161 ANSWERS TO THE PRACTICE TEST 1. F F F F F F T T T F 35. C 11. F 36. B 12. F 37. A 13. T 38. C 14. F 39. D 15. F 40. B 16. T 41. C 17. F 42. B 18. F 43. B 19. F 44. A D A B D D D 251 Workbook W-161

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