Chapter 4 - Retirement and Other Insurance Concepts Flashcards
What is a Life Settlement
The owner sells an existing life policy to a third party
What type of insurance is Group Insurance?
Annually renewable term insurance. In group insurance, the master contract is for the employer, and certificates of insurance are for individual insureds.
What is the main advantage of converting from group life insurance to individual coverage?
Evidence of insurability is not required
Compare Traditional IRAs to Roth IRAs
Traditional IRAs:
- Contributions are pre-tax dollars and tax deductible
- Distributions are Taxed
Roth IRAs:
- Contributions are after-tax dollars and non-tax deductible
- Distributions are NOT taxed
What are 403(b)s?
TSAs (Tax Sheltered Annuity) for nonprofits and public-school systems
Are policy loans from the cash value income taxable?
No
How are lump-sum cash payment of life policy proceeds taxed?
They aren’t
How are installment settlement options of life policies taxed?
The principle is not taxed, the interest earned is
How do taxes on contribution vs distribution work?
You are taxed on one or the other, NEVER both
What does zero cost basis mean?
0$ from the perspective of the IRS - so contributions that are NOT taxed.
- All zero cost basis investments are taxed when they’re distributed
What are the four exceptions to the 59 1/2 distribution rule for annuities?
- Disability
- Catastrophic medical expenses
- Secondary education
- Down-payment on a house ($10K max)
No 10% penalty, still taxable
Group life insurance policies are written as what type of insurance?
Annually renewable term
What are the four personal uses of life insurance?
- Survivor protection
- Estate creation and conservation
- Cash accumulation
- Liquidity
What type of policy is typically issued without proof of insurability from the insured?
Group policy
Who would be considered a third-party owner?
An individual or an entity who is not the insured
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Tax deferred
What are the three types of Social Security benefits?
- Retirement
- Disability
- Survivors
What is estate conservation?
Using life insurance to pay taxes owed on inherited assets
What type of life insurance does group membership convert to?
Whole life
What is the penalty for excessive contributions to a traditional IRA?
6%
What is the best reason to purchase life insurance rather than an annuity?
To create an estate
- The death benefit creates an immediate estate should the insured die
Key person coverage can be funded by what type of life insurance?
Any type
What is a noncontributory group life plan?
Employees are non-contributors. Employers pay 100% of the premium.
What is a Cross-Purchase Plan?
Each partner buys insurance on the other partners to cover the cost of the buyout of the deceased partner’s ownership interest
How long does an employee have to be covered under a group plan in order to convert to individual insurance?
5 years
What is the official name for the Social Security program?
Old Age Survivor’s Disability Insurance
In order to be eligible for all Social Security Disability income benefits, what status must be achieved?
Fully insured status
40 quarters x 1 credit per quarter = 40 credits
Are the premiums for a key-person life insurance policy tax deductible as a business expense?
No
With an accelerated benefits rider, what portion of the accelerated benefit is taxable?
The portion up to a policy-defined limit is tax-free; the rest is taxable
- Unless terminally ill
What are the tax implications of the premiums of a business life insurance policy paid by the employer?
They are tax deductible
What percent of participants is required for a contributory group plan?
75%
Why does enrolling during the open enrollment period enable the participant to avoid evidence of insurability?
It mitigates the risk of adverse selection where only unhealthy individuals might opt for coverage outside of the open enrollment period
Is the key person life insurance benefit taxable?
No
In order to qualify for a Keogh plan, what amount of time must an employee work?
Half-time or at least 1000 hours per year
