Insurance Planning Flashcards
What is the self-employed health insurance deduction for long-term care policy premiums?
Part of the premium is deductible, depending on age for AGI on the 1040 and generally not taxable subject to dollar caps
The deduction is subject to dollar amount limitations based on age.
What are the deduction limits for long-term care premiums in 2024 for ages 51-60?
$1,760/year
This limit is part of the self-employed health insurance deduction based on age.
What are the deduction limits for long-term care premiums in 2024 for ages 61-70?
$4,710/year
This limit is part of the self-employed health insurance deduction based on age.
For taxable years beginning after 1996, what expenses related to long-term care are deductible?
Premiums paid and unreimbursed expenses for qualified long-term care services are deductible as itemized medical expenses
Deductions are subject to the 7½%-of-AGI floor.
Does Medicare cover most long-term care needs?
No, Medicare LTC does not cover most LTC needs
Private medical insurance policies generally exclude coverage for long-term care.
Fill in the blank: The benefits received from long-term care insurance are generally _______.
taxable
This follows the general rule for benefits received from insurance.
What are the settlement options available other than cash?
SETTLEMENT OPTIONS MEANS YOURE DEAD.
CPR & P.S. (post script)
* options other than cash are Annuity options
* Pure life / single life
* Refund
* Period certain and life
* Specified period
* Specified income / Interest only option
The interest only option provides flexibility for the beneficiary to decide on the proceeds.
What are the nonforfeiture options?
CEP: Can’t Even Pay.
* Cash
* Paid-up reduced amount
* Extended term
* Paid-up term
Nonforfeiture options are available when a policyholder stops paying premiums.
What are the dividend options?
CRAPO5
* Cash
* Reduce premium
* Pure life / single life
* Accumulate with interest
* Refund
* Paid-up additions
* Period certain and life
* One-year term / 5th dividend
CRAPO5
Dividend options allow policyholders to choose how they want to receive dividends from their insurance policies.
Fill in the blank: The interest only option gives the beneficiary time to _______.
[decide on the proceeds]
True or False: The extended term is one of the nonforfeiture options.
True
What does the acronym CEP stand for? Hint* Nonforfeiture options
Can’t Even Pay:
Cash
Paid-up reduced amount
Extended term/Paid-up term
What does the acronym CRAPO 5 refer to?
HINT* Dividend Options
CRAPO5
Cash
Reduce premium
Accumulate with interest
Paid-up additions
One-year term/5th dividend
What is the purpose of the one-year term / 5th dividend option?
Buys an extra 1 year term policy. Can cover amount equal to a loan from a policy on whole life polices
What is the primary benefit of the ‘interest only’ option?
[Flexibility for the beneficiary to decide what to do with proceeds]
What are life settlements? And what are the tax implications of them?
Life settlements usually describe a transaction involving an insured who is not terminally or chronically ill and is generally over 65. Since the settlement is not made to a terminally, ill person, the participants in a life, settlement, transaction or taxed as part of the settlement and will be treated as a long-term gain. LOOK FOR THE LTGC answer.
What happens when a life insurance policy is surrendered?
The surrender is subject to ordinary income tax and potentially an additional 10% penalty.
Dividends are a refund of unused premium.
The premiums billed minus the dividends equals the basis.
Cash value minus basis is treated as ordinary income.
This is generally applicable unless specific exceptions apply.
Fill in the blank: The dividends received from a life insurance policy are considered a _______.
refund of unused premium
Dividends reduce the taxable amount upon surrender.
True or False: Maury will receive the entire cash value of his policy tax-free upon surrender.
False
Only a portion of the cash value is tax-free; the excess is subject to ordinary income tax.
If a loan is ever taken out on a policy, you should keep it in force. True or false.
True.
How are distributions from a MEC treated?
Distributions from a MEC are treated like an annuity, LIFO. Taxable as ordinary income. If a taxable distribution, which is not part of an annuity distribution, is received under the contract before eight 59 1/2 and the policy owner is not disabled, it is also subject to a 10% penalty tax.
Dividends paid by mutual life, insurance companies under modified endowment contracts or taxable income if they are used as follows:
A) if they are received in cash or to reduce premiums due
B) if they are retained by the insurer as a repayment of a policy loan
Once a MEC always a MEC
All single premium policies are MECs for exam
MECs aren’t always necessarily bad unless you take distributions i.e. useful in an irrevocable life insurance trust for wealthy families.
A contract is a MEC if it meets the requirements for classification as a life insurance contract (the 1984 act) was entered into on or after June 21, 1988 and fails to meet the seven pay test.
Can a non MEC life insurance policy become a MEC?
Yes. If someone increases the death benefit my MORE THAN $150,000 it MAY become a MEC, if no proof of insurability is required.
- If you have to prove in your ability, get a new policy to not MEC it up.
Under the uniform simultaneous death act (USDA) how many hours can persons die with each other to lawfully “proceed” each other?
120 hours. This rule keeps the property of one deceased person from passing through the estate of another deceased person before passing to those who survived both.
What are the exceptions to transfer for value of a life insurance policy?
If there is transfer for value (not a gift), the proceeds in excess of the consideration, paid for the policy, combined with any premiums paid by the owner, or taxable ordinary income (like a viatical)
The main exceptions to the rule are
A sale or transferred to the insured
A sale or transfer to a partner or a partnership with which the insured is a partner
A sale or transferred to a corporation in which the insured is a shareholder or officer
A transfer of property incident to a divorce
Is an FSA a cafeteria plan?
Yes, an FSA is a cafeteria plan. It must meet complex rules, prohibiting discrimination of highly compensated employees. A cafeteria plan is Section 125, they are funded solely by the employee. Meaning it is not group coverage and cannot be deductible by the employer.
There are two types of FSA’s, medical and dependent care.
*No income tax, FICA or FUTA taxes
* cannot be used for long-term care cost
* it is use it or lose it by 12/31 for dependent care FSA
A grace period ruling allows workers an extra 2 1/2 months (until March 15) to spend money in medical FSA’s only. Not for dependent care. Employers can offer the grace period ruling OR a Carryover Ruling.
A carryover rolling allows participants in medical FSA‘s to roll over up to $640 of unused funds at the end of the year
Employers cannot offer both a grace period and carryover in medical FSA. Either one or neither.
What are the caps for FSA’s? Medical expense and dependent care FSAs
For medical expenses, there is a $3200 cap. There is a 2 1/2 month grace period or $640 rollover option.
For dependent care the maximum is $5000. No grace period or roll allowed.
The maximum tax free reimbursement under an FSA is $5000 per year. Any tax-free reimbursement from the account reduces the expenses eligible for the dependent care credit.
If married, both spouses must earn income in order for the dependent care FSA to work. The only exception is if the non-earning spouse is disabled or student. If one spouse earns less than $5000 in the benefit is limited to whatever the spouse earned.
What type of liability is workers comp compensation?
Workers comp compensation is absolute liability.
What do participating insurance policies do with their premiums?
Participating policies, overcharge premiums
What is the formula method for property loss calculations?
Insurance Carrie divided by insurance required times loss minus deductible equals amount paid by insurance
Insurance will pay the greater of the actual cash value or the amount determined by using the formula.
For Holmes, 80% insurance of replacement cost is required, for business use properties. It’s 90%.
What are the BASIC form of perils covered under an HO2 policy?
What is the acronym?
WARVES/FLT
Wind, storm, hail, aircraft, riot, vandalism, vehicles, explosion, smoke, fire, lightning, and theft
What BROAD form of perils are covered under homeowner policies
Everything from basic perils WARVES/FLT
Plus RAF
RUPTURE OF A SYSTEM, ARTIFICIALLY, GENERATED, ELECTRICITY, FALLING OBJECTS, FREEZING OF PLUMBING
REMEMBER ROYAL AIR FORCE OR FAR
Open perils coverage is generally appropriate choice for CFP exam because it covers unusual risks that are not named under basic and broad forms
What is covered under section 1 in section 2 of homeowner insurance policies
Section one covers A, B, C & D.
Section 2 covers E & F
If a spouse elects to drop his employers group health plan due to eligibility for Medicare, how long can the other spouse claim COBRA
36 months.
For how many days does the COBRA election period last?
60 days after the actual notice of the event to the qualified beneficiary by the plan administrator
Medicare – skilled nursing home care:
* Medicare pays all of the first ___ days of skilled care and everything OVER a specified amount per day (I.e. $200) for the next ___ days of skilled care. (Maximum of ___ days)
Medicare pays all of the first 20 days of skilled care and everything OVER a specified amount per day (I.e. $200) for the next 80 days of skilled care. (Maximum of 100 days)
After 100 days, patient pays all expenses
IMPORTANT medicare will only cover skilled nursing home care if it is required after a hospital stay in the condition is expected to get better. ***
Compare how proceeds are taxed when someone sells a policy to a viatical company compared to a life settlement
Gains from a life settlement are always completely tax-free. If the person is terminally ill regardless of cash value or premiums paid. A life settlement is tax-free up to the premium‘s build. Above that is taxed as ordinary income.
If a person flat out surrenders a life insurance policy, it is subject to ordinary income, and in some cases, an additional 10% penalty. Dividends are a refund of unused premium. In a surrender case, cash value minus premium’s build minus dividends reduced premium equals taxes, ordinary income.
Describe extended term non-forfeiture option
Extended term insurance is a non-forfeiture option that maintains the original death benefit for a limited number of years
Which non-forfeiture option could impose a delay clause?
The cash surrender option may apply a six month delay clause. This is to prevent a run on the bank. This is a standard provision in life insurance policies. In insurance industry practice, there would be no delay.
For whole life, policies, what is an APL provision?
An APL provision is an 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.
When are dividends from a participating policy MEC subject to current year income tax?
Participating policy dividends from MECs become subject to current your income tax when they received in cash or used like cash to reduce upcoming premiums or to pay back policy loans.
The policy dividends aren’t taxable when they accumulate with interest. However, the interest paid on the dividends is taxable.
When selling a life insurance policy, what are the best ways to avoid the transfer for value rule?
The best way to avoid the transfer for value rule is to have the insured purchased a policy. They can then make a gift of the policy to their spouse, another family member or trust. They must survive the three-year contemplation of death rule to keep the life insurance face value out of their estate, but it is still income tax free.
The exceptions to the transfer for value, Ruel include a sale or transfer to the insured, or a sale to a corporation in which the insured is a shareholder or officer
If a non-natural person owns an annuity i.e. a corporation owns an annuity to fund a non-qualified deferred compensation plan for an employee, in the separate account has a game for the year, how is it taxed?
The income is taxable as ordinary income in the current tax year when the annuity is owned by an entity who is a non-natural person. Annuities do not declare capital gains.
What type of group insurance policies offer a conversion feature?
Life and health group insurance coverage provides conversion features
Can him employer deduct premiums it pays into a group life insurance program, even if the plan discriminate in favor key employees?
Yes. The employer made deduct premiums. It pays into a group life insurance program, even if it discriminate in favor of key employees.
However, the key employees will be taxed on the first $50,000 of benefits
What is the AGI phase out for active participation losses?
$150,000
What is the low-income housing program deduction-equivalent tax credit?
Up to $25,000. No income phaseout.
How does the deduction equivalent tax credit Work?
Calculate your tax to determine the maximum margin tax bracket. If it’s 37%, for example, multiply $25,000 by 37% to get a credit of $9,250.
If there is no alimony paid in the third year, what amount do you subtract from the alimony paid in the first two years for recapture purposes?
$37,500
Our long-term care PREMIUMS able to be paid from an HSA? What about from an FSA?
Long-term care premiums can be paid from an HSA. Not from an FSA.
If you surrender a life insurance policy, what are the tax implications?
If you surrender a life insurance policy, anything above basis is taxed as ordinary income
