Life Insuance & Annuities

Question 1

Lump sum life insurance death benets received are excluded from gross income generally.

Question 2

When considering to keep or replace an insurance policy

Answer 2

Consider the financial strength of the insurers. We DO NOT care about the length of time the insurers has been in business.

Question 3

Lifetime insurance dividends taxation

Answer 3

Not taxable, generally considered a return of premium.

Question 4

Annually renewable term

Answer 4

Has lowest initial premium.

Question 5

Level term

Answer 5

Initial premium guaranteed for 5 to 30 years ( a timeperiod). The longer the guarantee the higher the cost.

Question 6

Decreasing term

Answer 6

Premium stays level, but death benefit goes down. ( was used for 15 or 30 years mortgages)

Question 7

Whole life

Answer 7

Most common type of permanent insurance. Premiums, death benefit, and cash value are all guaranteed.. cash is invested in general account. Conservative in nature.

Question 8

Variable life (VL)

Answer 8

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.

Question 9

Graded premium life

Answer 9

Premium low in first year then increase yearly for 5 to 7 years then stays level.

Question 10

Universal life

Answer 10

Flexible death benefit, premium, cash value. No ability to directly invest cash value.

Question 11

Universal life cash value

Answer 11

Premium paid
Minus mortality charges
Minus admin. Expenses
Plus interest
Equals cash value

Question 12

Option A

Answer 12

Level death benefit
N.A.R.,Net amount at risk -decrases

Question 13

Option B

Answer 13

Increasing death benefit
NAR stays level

Question 14

NAR, net amount at risk

Answer 14

Difference BTW cash value and death benefit

Question 15

Universal life

Answer 15

Flexible premiums and death benefit. Cash value is NOT guaranteed For flexibility ul is best.

Question 16

VUL, variable universal life

Answer 16

Only mortality rate is guaranteed, all risk of investment assumed by insured, complex and can be expensive.

Question 17

Difference between VL and VUL

Answer 17

VL: $400 k death benefit & $600k sub-accounts
VUL: $1000000 to sub-accounts, monthly mortality & expense charges deducted.

Question 18

Equity indexed UL

Answer 18

Minimum fixed interest rate
Also index option
Has participation rates and interest rate caps and downside protection

Question 19

First to die

Answer 19

Buy sell agreements
Mortgage or education fund

Question 20

Secondary to die

Answer 20

Also called last do die or survivors
Useful in estate planning ( unlimited marital deduction)

Question 21

Accredited investor

Answer 21

$200K individual income or $300k joint
NW $1M without house, or a trust w/ 5M

Question 22

Taxation on insurance

Answer 22

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)

Question 23

MEC modified endowment contracts

Answer 23

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

Question 24

5th dividends option

Answer 24

One year term

Question 25

Calculating insurance needs

Answer 25

1. Multiple of salary
2. Human life value
3. % of income method
4. Personalized need
   (Capital utilization or capital retention)

Question 26

Superannuation

Answer 26

Risk of outlining ones money

Question 27

Taxation of annuities

Answer 27

1. 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.
2. 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)

Question 28

A taxable event occurs if an annuity is exchanged for a life insurance policy or endowment contract

Question 29

Indexed Universal life policies do not contain investment options

Answer 29

Rather, they track an external index and receive a credited rate to the cash value account.

Question 30

Regarding insurance policy loans when is interest charged?

Answer 30

Similar to most consumer loans, insurers generally charge interest in arrears.

Question 31

Regarding policy loans:

Answer 31

1. With variable products, cash values equal to borrowed amount are moved to a guaranteed interest rate account.
2. A variable interest rate is used w/ participating policies.
3. Most insurers charge interest in arrears
4. A policyholder generally may borrow close to the entire cash value of the policy ( less some interest)

Question 32

Three nonfofeiturw options available when surrendering or discontinuingpremium payments on whole life insurance

Answer 32

1. Surrender policy in return for receiving the cash surrender value of the policy,
2. Leave cash value w/ co. & receive a smaller amount of fully paid - up insurance,
3. Leave cash value w/ ins co and keep full death benefit amount, but as term insurance policy for a guaranteed period.

Question 33

Life insurance contracts favorable taxation elements…

Answer 33

1. Death benefits paid to a bene not usually taxable as income
2. Earning on cash value are not taxed during accumulation period
3. Income taxes on investment gains are tax deferred

Question 34

Automatic premium loan provision

Answer 34

Provides that premiums will automatically be charged against the policy cash value if not paid by the due date.

Question 35

Advantages of SPIA, single premium immediate annuity

Answer 35

1. Investment risk transfered to the insurers
2. Principal protected from creditors
3. Ensure a lifetime of income
   * most benefits are fixed and will not increase with inflation unless COLA rider ( not a benefit but just fyi)