Insurance

Question 1

NAIC life insurance illustrations

Answer 1

Apply only to non-variable life insurance policies:

1: all illustrations must be certified annually by an illustration actuary
2 copies of the illustrations must be sent to the insurer along with the policy application
3 copies of the illustration must be signed by the applicant and by the agent
4 in addition to the illustrations provided at the time of sale, the insured must be given an annual report on the insurance company
5 the policy cannot be represented as anything other than a life insurance policy
6 the model prohibits the use of the term “vanish” or “vanishing premium”

Question 2

Illustration must include the following

Answer 2

Name of insurer
Name and address of the producer
Name, age, sec of proposed insured
Underwriting and rating classification
Initial death benefit

Question 3

COBRA: each part-time employee counts as a fraction of a full-time employee

Question 4

COBRA condition-participating

Answer 4

Employee has to be participating in the health insurance plan. If he is not participating, then not elect COBRA

Question 5

COBRA covers group dental and vision
COBRA DOES NOT cover group disability

Question 6

Health reimbursement arrangements (only C corp can use it)

Answer 6

HRA:

-solely employer funded and,
-reimburses employee for substantiated medical expenses up to a maximum amount per coverage per period.

Eg: reimburse out-of-pocket cost of an HDHP

Question 7

Question 8

Provision
Residual benefit rider
Partial disability rider
Disability waiver of premium provision
Social insurance substitute benefit

Answer 8

Question 9

Taxation of premiums and benefits

Answer 9

Individual owns the contract and pays the premium:
Premium NOT deductible;
Benefits tax-free

Employee owns contract and employer pays the entire premium under a bonus arrangement like section 162 disability insurance
Premiums deductible by employer as bonus—employee recognize premiums in income
Benefits are tax free to employees

Employee owns contract, employer pays the entire premium under a salary continuation plan (group plan)
Premiums are deductible to employer. Paid with pre-tax dollars.
Benefits are entirely taxable to employee

Question 10

Partnership and S corp shareholder taxation rules on disability insurance

Answer 10

Can deduct the premiums paid for coverage for a partner or a greater-than-2% shareholder of an S corporation. The deduction is based on the premium cost being included in the taxable income of the partner or shareholder(conduit income) . Disability insurance benefits are then excludable from taxable income ( employee pays premium)

Question 11

Question 12

Non-tax qualified

Answer 12

Traditional long term care insurance include a “trigger” called “ medical necessity”.
Doctor must certify that the patient needs care and the policy will pay.
The premiums are not deductible.

Question 13

Partnership qualified long term care insurance policies (PQs)

Answer 13

Partnership between a state, an insurance company and state residents who buy policies.
With PQ, an individual can apply for Medicaid with asset disregard (also called dollar for dollar).
This allows the applicant to keep assets that would otherwise be disallowed under Medicaid rules.

Question 14

Life insurance and annuities May now be exchanged tax-free for a qualified long-term care policy or for a life insurance with a long term care benefit

Question 15

1035 exchange CANNOT be done if the insured changes.
Be careful on the exam!

Question 16

APL provision

Answer 16

Automatic premium loan- applies to whole life only. If the insured does not pay the premium by the due date, the company automatically will pay the premium and charge it against the cash value of the policy

Question 17

Reinstatement

Answer 17

Provides for a policy to reinstated within a specific time period after the date of premium default. (With proof of insurability)

Question 18

Conversion

Answer 18

Exchange term for a permanent -type plan without having to prove evidence of insurability

Question 19

If a whole life insurance policyholder does not pay the premium due(no APL) or wishes to stop paying the premium after 10 years, the policy provides three options :

Answer 19

1. Surrender for a cash value (policy ceases)
2. Receive a paid-up reduced amount of coverage( no additional premium due).
3. Receive a paid-up term policy (also called extended term) with the same face value as the original contract (no additional premium due)
   Note: if the policyholder outlives the term, the policy is terminated s

Waiver of premium; while life premium is waived, but with UL/VUL: two options:
1: the disability income benefits pays either the charges for mortality and it’s administrative expenses or,
2: the full amount of premium.

Question 20

Dividend options for insurance

Answer 20

1 cash
2 reduce premium
3 accumulated with interest
4 paid-up additions
5 one-year term
(5th dividend)

Question 21

Insurance settlement option(other than cash, these are annuity options)

Answer 21

Cash
Refund
Pure life
Specific period
Period certain and life
Specific income

There is “interest only “ option. It might be an answer if the owner/beneficiary didn’t know what they wanted to do with the proceeds. It gives beneficiary time (flexibility) to decide

Question 22

No forfeiture options

Answer 22

Cash
Paid-up reduced amount
Extended term/paid-up
Term

Question 23

NAIC (executive branch, do not pass laws). Model regulation

Answer 23

Applies only to non-variable life insurance policies:
-copies of the illustration must be sent to the insurer along with the policy application
-copies of the illustration must be signed by the application and by the agent
-the policy cannot be represented as anything other than a life insurance policy
-the model prohibits the use of term “vanish” or “vanishing premium”

Illustrations which must be labeled life insurance illustration must include:
1 number of insurer
2 name and address of the producer
3 name, age, sex of the proposed insured
4 initial death benefit, underwriting and rating classification

Question 24

Question 25

Life settlement - look for the LTCG answer

Answer 25

Usually a transaction involving an insured who is not terminally or chronically ill and is generally over 65.

Since not made to terminally I’ll person, the participants in a life settlement transaction are taxed as part of the settlement and will be treated as Long term gain.

Question 26

Surrender of a life insurance

Answer 26

Subject to ordinary income and in some cases an additional 10% penalty except for life settlement(LTCG)

Question 27

MECs

Answer 27

—LIFO, once a MEC, always MEC, single premium is always a MEC
— taxable distribution which is not part of an annuity Ed distribution, is received under the contract before 59 1/2 and the policy owner is not disabled, it is also subject to 10% penalty
—dividend paid by mutual life insurance companies under MEC are taxable as income if they are used as follows:

1) if they are received in cash or to reduce the premiums due

2) if they are retained by the insurer in repayment of a policy loan

Question 28

Question 29

Question 30

qualified longevity annuity contract (QLAC)

Answer 30

Deferred fixed annuity funded from an IRA or qualified retirement plan designed to keep the client/spouse from outliving their retirement savings.
As a deferred annuity, QLAC provides a guaranteed monthly stream of income later in life. The longer you defer the start date, the higher your payments will be.

QLAC can degree income tax by reducing RMDs.

Question 31

Annuity owned by non-natural person (corporation)

Answer 31

Ordinary income or ordinary loss

Question 32

Voluntary employee’s beneficiary association (VEBA)

Answer 32

501(c)(9) allows employers to establish. VEBA to fund certain benefits for its members. Benefits can include :
-death benefits
-medical expenses
-disability benefits
-child care benefits
-severance benefits
-education benefits
-legal expense benefits
-unemployment benefits

Contributions (within limits) are deductible expenses for the employer except for deferred compensation arrangements

Question 33

Company May deduct a limited amount of interest paid on contracts covering a “key person” to the extent that each loan does not exceed 50K

Question 34

VEBA benefits do not include any choices similar to a pension or annuity at the time of mandatory or voluntary retirement.

Question 35

Parts of insurance contract

Answer 35

Declarations : factual statements that identify the specific person, property, or activity being insured and parties to the transaction. —specifically printed, not pre-print like others

Definition: key policy terms

Insuring agreement. Spells out the basic promises of the insurance company

Conditions: spells out in detail of duties and right

Explication: circumstances when insurer will not pay

Question 36

terminately ill—receive the proceeds from sale of his or her insurance , tax free.

Question 37

Question 38

Question 39

Question 40

Question 41

Split dollar plan

Answer 41

If designed spouse as named beneficiary, she is a virtual secondary beneficiary.

Question 42

Absolutely assignment means insured gives up the right to change the beneficiary, there fire no incidents of ownership and benefit from policy are removed from estate. 3-year tule is applicable from time the absolute assignment is signed