chapter 4

Question 1

what is a life settlement?
+
define the following :
- business of life settlement
- life settlement broker

Answer 1

Life Settlement = when a policy owner sells their policy (absolute assignment) for compensation to a life settlement provider

_____

life settlement broker = an individual who represents the owner for compensation and solicits, negotiates life settlement contract

Question 2

describe the characteristics of group life insurance :
- type of plan,
- insurability proof,
- which information does policyowner, policy holder and insured have
- characteristics of group considered by an underwriter
- how cost is determined,
- conversion privilege for employees
- contributory vs noncontributory plans

Answer 2

• ART
• no insurability proof required
• the employer is the policyowner/policyholder and THEY have the policy; insureds have a certificate of insurance
• characteristics considered about group when underwriting : financial strength, nature/purpose of group (purpose can’t be to obtain group life insurance), size of group, turnover (young healthy employees getting added, older employees leaving)
• cost is determined by the ratio of men to women and the average age of the group
• conversion — employees can, without proof of insurability, convert to an individual plan with the same face amount but higher premium. they are insured for 31 days after termination before policy lapses
• contributory = employer pays 100% of premium & 100% of eligible employees must be signed up, noncontributory = employer and employee share costs, and 75% of eligible employees must sign up

Question 3

list the two common aspects of traditional and roth IRAs

Answer 3

both retirement accounts allow earners to contribute 100% of income up to an IRS-specified limit, and excess contribution penalty is 6% per year

Question 4

for traditional IRAs and roth IRAs, describe :
- taxation w relationship to how the accounts grow
- tax-deduction status for contributions
- when distributions can occur and if they are taxable
- required age for payouts

Answer 4

Traditional IRAs :
- Grows tax deferred
- Contributions are tax deductible
(Made with “pre-tax dollars”)
- 10% penalty for early nonqualified distributions prior to age 59 ½ (some exceptions apply)
Distributions are taxable
- Payouts must begin by age of 73

Roth IRAs :
- Grows tax free (if account open for at least 5 years)
- Contributions are not tax deductible
(Made with “after-tax dollars”)
- Qualified distribution cannot occur until account is open for 5 years and owner is 59½
Distributions are not taxable
- No required minimum age for payouts

Question 5

describe :
- rollover and direct rollover
- (direct) transfer
HR-10 / Keogh Plan

Answer 5

• rollover = distribution of cash from one retirement plan to another; direct rollover = to avoid 20% withholding when paying distributions directly to participant, “direct” is when the distribution goes from first plan to custodian of new IRA plan
• transfer = tax-free transfer of funds from retirement program to traditional IRA or transfer of interest in traditional IRA from one trustee to another
• functions like a traditional IRA for self-employed people

Question 6

for each of these plans, describe the eligibility and who contributes :
- Simplified Employee Plan
- SIMPLE plans
- 401k
- 403(b) Tax-Sheltered Annuities

Answer 6

• Simplified Employee Plan = small employer or self employed eligible, employer only contributes
• SIMPLE plans = small employers less than 100, employer matches employee’s contribution
• 401k = any employer eligible, employer matches employee contribution
• 403(b) Tax-Sheltered Annuities = nonprofits are eligible, employer and employees contribute

Question 7

describe the taxation rules that apply to premiums and death benefits for individual life insurance policies.

Answer 7

Premiums are not tax deductible; and
Death benefit:
Tax free if taken as a lump-sum distribution to a named beneficiary; and
Principal is tax free; interest is taxable if paid in installments (other than lump sum).

Question 8

list the tax treatment for each of these :
- premiums
- cash value
- policy loans & lump sum death benefits
- policy dividends
- dividend interest

Answer 8

• premium = not tax deductible
• cv = taxable at surrender
• policy loans & lump sum death benefits = not income taxable
• policy dividends = not taxable
• dividends = taxable in the year earned

Question 9

what is an MEC and how does a policy qualify?

Answer 9

A MEC is an overfunded life insurance policy = failed the 7-pay test. Once a MEC, always a MEC!

Question 10

how does social security determine whether or not an individual qualifies? what does the term “fully insured” and “currently insured” mean?

Answer 10

Social Security uses the Quarter of Coverage (QC) system to determine whether or not an individual is qualified for Social Security benefits.

The term fully insured refers to someone who has earned 40 quarters of coverage (the equivalent of 10 years of work)

An individual can attain a currently insured status (or partially insured), and by that qualify for certain benefits if he or she has earned 6 credits