Insurance Lesson 2 Flashcards
Needs Approach:
Income replacement & lump sum needs
*Any future cash or income needs should be discounted using the PV of that future cash flow
Human Life Value Approach
Future earnings minus self-maintenance costs
Term Life Insurance:
Types:
Pure insurance
Annual Renewable Term
Level Term
Decreasing
Appropriate Uses of Term Life Policies:
Temporary needs: education funding, debt payments, grieving process expenses
Appropriate Uses of Whole Life Insurance:
Lifetime/permanent needs
Estate planning purposes for liquidity
Investment like performance/returns
Types of Whole Life Insurance:
Ordinary (Whole) Life
Limited Pay Life
Variable Life
Current Assumption Whole Life
Current Assumption Whole Life:
Insurer can __?
Lo CAWL:
Hi CAWL:
Insurer reserves right to adjust premium once
Lo: low premium assuming higher interest rate (interest sensitive/creates demand)
Hi: assumes lower interest rate resulting in higher premium
Example Exam Question:
30 years old. Single mom (age 9). $25,000 income. Zero net worth. 2 objectives: provide for child in event of her death, invest for retirement.
Which should she purchase?
A. Whole Life
B. Universal Variable
C. Variable Whole Life
D. Term Life
D
First to Die vs Last to Die
First: provide for survivor, life expectancy less than either single life
Last: estate needs, life expectancy greater than either single life
Participating (pay dividends):
Dividend Options:
CRAPO
Cash
Reduce premiums
Accumulate at interest: company invests dividends
Paid up additions: purchases additional insurance
One-Year Term: adds term insurance to policy face amount equal to cash value of policy
Annuity Payment Options:
Fixed Amount Life Income Fixed Period Life Income with Period Certain Joint & Last Survivor Income
Nonforfeiture Options:
Cash Surrender Value
Reduced Paid-up Insurance
Extended Term Insurance
Accelerated Death Benefits:
Terminally ill (<24 months) Lump sum or monthly income
Universal Life Insurance:
Adjustable?
Who invests?
Premium payment option?
Yes, flexible
Insurer
Cash value can be used to pay premiums
Universal Life A:
If cash value gets high enough, death benefit will increase
Universal Life B:
Death benefits vary directly with cash value
DB = face amount + cash value
Variable Universal Life:
Investment options directed by insured
No minimum guarantee
Example Exam Question:
35, 2 kids (3&5), high income. Little savings. Risk averse. Which would provide savings component, permanent protection, & match risk tolerance?
A. Level term
B. Variable universal
C. Variable life
D. While life
D
Non Direct Recognition vs Direct Recognition:
Non: dividends not adjusted based on loan
Direct: dividends reduced by loan outstanding
Grace Period:
__-__ days
31-61
Pay death benefit minus premium due
Example Exam Question:
45, says 30. Buys $1M term. Premiums $1 per thousand. Premiums should be $2.5 per thousand. Which is correct?
A. Benes will collect $0 but get premiums back since Cindy died
B. Benes will collect $1M as long as death was accidental
C. Benes will collect $400k which is policy value with premiums adjusted for actual age
D. Policy is voidable up to 2 years by insurance company for fraud
C
Assignment:
Absolute:
Collateral:
Absolute: all policy ownership rights
Collateral: limited ownership rights, terminates when debt satisfied, use direct recognition reducing dividends & interest for portion of cash value used as collateral
Group Term Life: First $\_\_\_ of coverage is tax free? Premiums paid by employer are \_\_\_? Premiums paid by employee are \_\_? Income must be \_\_?
$50,000
Tax deductible
Paid with after tax dollars
Imputed based on excess coverage
Group Whole Life:
If premiums paid by employer __?
Taxable income to employee
Cons to Annuities:
Not appropriate to leaving assets for heirs
Not a hedge against inflation
Types of Annuities:
Immediate Deferred Flexible Premium Deferred Annuity (FPDA) Single Premium Deferred Annuity (SPDA) Fixed Annuity Variable Annuity Equity Indexed Annuity
Equity Indexed Annuity: Form of \_\_? Linked to \_\_? Limits \_\_? Index Term? May have \_\_\_ rate or \_\_ rate or \_\_ rate? Indexing Methods?
Fixed annuity Index (usually S&P500) Limits downside risk 1-10 years (interest credited at end) Participation or Cap or Floor Crediting Annual reset/ratcheting method, high watermark approach, point to point method
Which is taxable when exchanging?
Annuity for Life Insurance
Modified Endowment Contracts:
Becomes a MEC if __?
Withdrawal penalty is __% before age __?
Withdrawals & loans taxed from __ basis?
Fails 7 pay test
10% penalty before age 59.5
LIFO
Transfer of Policy for Value:
DB taxable to transferee to extent __?
Exceptions:
Proceeds exceed basis
Transferred to insured/business partner, partnership, corporation in which insured is shareholder or officer, transfer results in carryover basis from transferor to transferee
Taxable Income for Life Insurance/Annuity
Calculate exclusion/inclusion ratio
Example Exam Question: Principal paid: $200,000 Annuity valued at $360,000 Annuity payment calculated at $24,000/year Retire @ 65, IRS multiplier is 15 What amount is excluded from tax?
A. $1,111 until principal amount exhausted
B. $889 for life of annuitant
C. $1,111 for life of annuitant
D. $889 until principal amount exhausted
A
Activities of Daily Living:
Eating Toileting Transferring Bathing Dressing Continence
Example Exam Question:
Walter terminally ill. 20 year term policy. Face amount $500,000. Paid $15,000 premiums over last 10 years. Sells to Viatical for $400,000. What is tax impact to Walter & Viatical company at Walter’s death?
A. Walter: $385,000. Company: $100,000
B. Walter: $400,000. Company: $100,000
C. Walter: $0. Company: $100,000
D. Walter: $0. Company: $500,000
C
Taxation of Annuities:
Before 1982:
After 1982:
FIFO
LIFO
Example Exam Question:
62. Annuity worth $100,000. Purchased 35 years ago for $15,000. Needs additional insurance on husband. Which is most appropriate strategy to provide additional life insurance on husband using annuity?
A. Annuitize & purchase life insurance on husband
B. Surrender annuity & purchase life insurance
C. Exchange annuity for post1987 annuity then exchange for life insurance
D. Exchange annuity for life insurance
A