Life Insuance & Annuities Flashcards
Lump sum life insurance death benets received are excluded from gross income generally.
When considering to keep or replace an insurance policy
Consider the financial strength of the insurers. We DO NOT care about the length of time the insurers has been in business.
Lifetime insurance dividends taxation
Not taxable, generally considered a return of premium.
Annually renewable term
Has lowest initial premium.
Level term
Initial premium guaranteed for 5 to 30 years ( a timeperiod). The longer the guarantee the higher the cost.
Decreasing term
Premium stays level, but death benefit goes down. ( was used for 15 or 30 years mortgages)
Whole life
Most common type of permanent insurance. Premiums, death benefit, and cash value are all guaranteed.. cash is invested in general account. Conservative in nature.
Variable life (VL)
Policies cash value NOT guaranteed, vary and invested in a seperate account ( invested in subaccounts) Premiums are fixed. Guarantee that the death benefit will never be less than face value.
Graded premium life
Premium low in first year then increase yearly for 5 to 7 years then stays level.
Universal life
Flexible death benefit, premium, cash value. No ability to directly invest cash value.
Universal life cash value
Premium paid
Minus mortality charges
Minus admin. Expenses
Plus interest
Equals cash value
Option A
Level death benefit
N.A.R.,Net amount at risk -decrases
Option B
Increasing death benefit
NAR stays level
NAR, net amount at risk
Difference BTW cash value and death benefit
Universal life
Flexible premiums and death benefit. Cash value is NOT guaranteed For flexibility ul is best.
VUL, variable universal life
Only mortality rate is guaranteed, all risk of investment assumed by insured, complex and can be expensive.
Difference between VL and VUL
VL: $400 k death benefit & $600k sub-accounts
VUL: $1000000 to sub-accounts, monthly mortality & expense charges deducted.
Equity indexed UL
Minimum fixed interest rate
Also index option
Has participation rates and interest rate caps and downside protection
First to die
Buy sell agreements
Mortgage or education fund
Secondary to die
Also called last do die or survivors
Useful in estate planning ( unlimited marital deduction)
Accredited investor
$200K individual income or $300k joint
NW $1M without house, or a trust w/ 5M
Taxation on insurance
Death benefits are income tax free
Earnings are tax deferred
Withdrawals are tax free up to the basis ( basis equals premium paid minusdividends minus any withdrawals made)
MEC modified endowment contracts
A policy becomes a MEC when it fails the 7 pay test ( deposits of equivalent of total net annual premium payments during the first 7 years)
Once a MEC, always a MEC
Single premiums are MECs
Taxable as ordinary income LIFO
10% on early withdrawals prior to 59.5
5th dividends option
One year term
Calculating insurance needs
- Multiple of salary
- Human life value
- % of income method
- Personalized need
(Capital utilization or capital retention)
Superannuation
Risk of outlining ones money
Taxation of annuities
- Tax deferred, contributions w/ after- tax $ ( which equals the basis), withdrawals are taxed as ordinary income LIFO original investment is a return of principal and is not taxed.
- Annuitization - each payment is a slice of the pie. Made up by a part of a principle and a part interest.
EXCLUSION RATIO-portion that is not taxable
Formula is payment times (total annuity over payment × 12 months x # of years)
A taxable event occurs if an annuity is exchanged for a life insurance policy or endowment contract
Indexed Universal life policies do not contain investment options
Rather, they track an external index and receive a credited rate to the cash value account.
Regarding insurance policy loans when is interest charged?
Similar to most consumer loans, insurers generally charge interest in arrears.
Regarding policy loans:
- With variable products, cash values equal to borrowed amount are moved to a guaranteed interest rate account.
- A variable interest rate is used w/ participating policies.
- Most insurers charge interest in arrears
- A policyholder generally may borrow close to the entire cash value of the policy ( less some interest)
Three nonfofeiturw options available when surrendering or discontinuingpremium payments on whole life insurance
- Surrender policy in return for receiving the cash surrender value of the policy,
- Leave cash value w/ co. & receive a smaller amount of fully paid - up insurance,
- Leave cash value w/ ins co and keep full death benefit amount, but as term insurance policy for a guaranteed period.
Life insurance contracts favorable taxation elements…
- Death benefits paid to a bene not usually taxable as income
- Earning on cash value are not taxed during accumulation period
- Income taxes on investment gains are tax deferred
Automatic premium loan provision
Provides that premiums will automatically be charged against the policy cash value if not paid by the due date.
Advantages of SPIA, single premium immediate annuity
- Investment risk transfered to the insurers
- Principal protected from creditors
- Ensure a lifetime of income
* most benefits are fixed and will not increase with inflation unless COLA rider ( not a benefit but just fyi)
