Life Insurance Flashcards
Life insurance special desires
Adjustment or readjustment fund refers to a cushion to readjust when a loved one dies
Two methods of life insurance need
Need analysis and human life value
Life insurance need analysis
Estimates the need that must be met following an individual’s premature death and compares those needs to the resources available
Life insurance human life value analysis
Based on the insured income-earning ability. Considered the present value with a discount rate of income lost by dependents. Does not consider other resources due to premature death
Recommending term life insurance human
Only need insurance for a certain amount of time
Money is short (it’s better to have life insurance verse cash value)
Paying limited-pay life ie 65 life
Usually used for long-life expectancy insured
The insured will be pay considerably less premiums because premiums are discounted
If the insured dies early then they would have paid excessive premiums for the benefits
When someone has changing case flow and changes coming up what life insurance should they pick
The most flexible ie term
Decreasing term insurance
Premiums stay the same but the bd decreases
Death benefit alternatives A and B
Option A, type 1 or level death benefit is just that, don’t include cash value. When cash value exceeds certain benchmarks db will increase
Option B, type II, increasing db with cash value
Unless test states B it is A (only face value is paid to bene)
Endowments on test
Are wrong answers or not usable answers
Second-to-die/survivorship life
The policy’s main purpose is for liquidity to pay federal estate taxes at the death of a second spouse
Significantly lower than two individual policies
Can be in form of any type of life insurance
Life insurance evaluation if the client wants retirement funds, flexibility
VUL or UL
Whole life is rigid
A person with kids and not a lot of income (46,000)
Needs a lot of insurance and probably can’t afford premiums of a cash value policy
Client set financially, ex is paying alimony, divorce settlement states she can get insurance on his life. enjoys stock market. Should she get insurance?
Yes because alimony payments will end when he dies
A buy sell consideration if buyout is in 15 years
The cash value component along with growth potential of the vul is often the best solution for funding a buy-sell. Buyer could use the cash value to buy the seller in 15 years
Typically a buy-sell becomes a 10 year installment which then makes the 15 years 25 years
UL and VUL disability waivers of mortality and admin expenses and waiver of premium
Waiver of mortality and admin expenses, cash value would just grow by interest credited to the policy
Waiver of premium- premium would be added to the policy, then would be subtracted by mortality and expenses charged
Accidental death/double indemnity
Usually pays double the db if insured dies accidentally
Does not effect needs analysis calculation
One year term insurance dividend option- 5th dividend
All or a portion of dividend is used to buy one year of term insurance equal to the policy’s base cash value (not the cash value of paid up additions)
Non forfeiture options for whole life
Cash option- can be surrendered at any time for cash value minus loan
A 6 month delay clause applies, which is rarely used but is asked on the test
A company that is in financial stress can cash out everyone, it prevents carrier from bankruptcy
Reduced paid up insurance
Take cash value as single premium for paid up and no additional premium is required
Paid up term
Uses cash value to buy term
Once term expires, policy expires
Person has substantial loans. She is concerned about reduced db. What dividend should she elect
5th dividend or 1 year term. That will buy amount equal to outstanding loan
Extended term option
Different mortality tables. Puts company at adverse risk for the extended term
NAIC WATCH list
12 financial ratios that help naic keep tabs on insurance companies
If a company has 4 out of 12 outside naic’s normal range they go on the list
One year term dividend is not term
It’s an additional death benefit equal to the guaranteed cash value. This is true even if borrowed against
Paid up insurance is not a dividend option
It is a non-forfeiture option
Surrender with withdrawals and loans and paid additions, equating to taxes
Cash value - loan=cash to surrender
Cash value-basis=taxable amount at ordinary income
premiums paid-premiums received=basis
Uniform simultaneous death act
Some dies with 120 hours (5 days) it will bypass the estate of each other
A mec is a life insurance policy
After 6-21-1988 and fails the 7 pay test
Single premium policy always considered a MeC
Mec taxation treatment
Loan is treated as a distribution
Lousy lifo, no tax deferral
10% penalty if taken before 59.5 and is not disabled
Dividends are taxable to pay a loan, cash or reduced premium
Transfer for value
Transfers that are not exceptions can lose the federal income tax exemption
Transfer to insured
Transfer to a partner of a partnership
Transfer to a corporation in which the insured is a shareholder
Transfer related to a divorce agreement
Three person business case when one dies
Partner should buy the policy that insures themselves
The difference between gifting and selling a policy to a family member
A gift to a family member would not cause the db to be taxable and sale (outside the insured) could make the db taxable if outside the exclusions
1035 exchange to new product when new basis is lower than old basis
The old basis remains
What type of person would face Group life insurance exclusions?
A commission only salesperson, may not be classified as an employee. A life insurance salesperson who is classified for social security purposes will be considered an employee for group term coverage
Group life must meet four conditions
It must provide db that is excludible from gross income
It must provide to a group of employees as comp for services performed
The insurance must be provided under a policy carried directly or indirectly by the employer
The amount provided must be computed under a formula that precludes individual selection of db
A group permanent policy does not meet the requirements to be treated as group life
Employee will be taxed w2. Employer can deduct premiums
A Dependent group coverage is?
Not included in the $50k exemption
$2000 will be income tax free
Income tax implications on group life
Monthly cost .43200=86
Contribution cost .20250=50
36*12=432
Subject to fica tax
$50k excluded unless discriminatory
Group insurance if forfeitable
Then premiums are not deductible for employer
If nonforfeitsble
Group life insurance db and estate
Is included in the employee’s estate
Converting group life
Must be permanent
Can be converted
Does not require proof of insurability
The premium will reflect the insured’s age
Strategy to maximized disability
Buy an individual plan prior to enrolling in group plan, you can start approaching 100% of income with this strategy
Social security disability coverage
100% disability that lasts or is expected to last more than 12 months
There is a 5 month waiting period, benefits start at the beginning of the 6th month
Group disability will often coordinate benefits with social secuit
The split dollar endoRsement method
The employeR is the owner and can’t deduct the premiums
The employer’s share of benefit is secured through ownership of the policy
A bene is named to get the share of the employee’s death proceeds
On a discriminatory plan a non-key employee will receive $50k of life insurance
Tax free
But not a key-person
A key person getting a discriminatory life insurance plan
Will pay the economic benefit for taxes ie the table rate not the actual premium
Discriminatory premiums to the employer
Are tax deductible
Buy sell agreement rights of creditors
Entity/stock purchase-life insurance can be attached
Cross-purchase cannot be attached
Entity purchase/stock redemption on buy/sell
-Corp agrees to buy stockholders interest using life insurance
-The corp is the owner and beneficiary on the lives of each shareholder
-db is income tax free
-basis remains the same
-remainder own the remaining shares
Cross-purchase/stockholder purchase
-Cumbersome with multiple owner
-db is tax free
-step up in basis for buying the portion from the other partner or partners
Benefits of a buy/sell
-Guarantees a market
-Provides liquidity for taxes and estate settlement costs
-Helps establish the estate tax of the decedents business interest
-Enables the business to continue in the hands of the remaining owners
-makes a business a better credit risk
The split dollar collateral assignment method
The insured employee is the policy owner
The corp lends the employee money for the premiums-secured by the assignment of the policy to the corporation
The corp receives it’s benefit at the employees death or termination of the split dollar plan
Absolute assignment means
The insured gives up the right to change ownership or beneficiaries. There is no incidence of ownership
Benefits are removed from the estate
The three year rule is still applicable from the absolute assignment date
Collateral assignment is a disadvantage to a corporation
Because it does not get the cash value, just gets paid back premiums.
Endorsements method is typical for the employee who is not a shareholder
Business overhead expense insurance
Covers ongoing expenses for the business sans owners salary
Benefits 1 to 2 years
Sole proprietorship boe is deductible premiums but taxable benefits
Corporations can receive benefits tax free but can’t deduct premiums
Under a split dollar endorsement type life insurance, how would the client get to own the policy
Paying the cash value or premiums paid, whichever is more
On a entity buy/sell-mainly the basis of the deceased stock
The premiums are not deductible
The db is tax free
The deceased shareholders stock will not get a step up in basis
Taxation on annuity gains
Always ordinary income/never capital gains
A disadvantage of an annuitant receives fixed life long income is
It is fixed- with inflation their buying power will go down. 30-40 years their buying power evaporates
Annuity contracts paid by bonus are
Tax deductible for the company
Dependent FSA services not available
Tuition and fees
Expenses for children 13 and older
Late payments
Overnight camps
Advanced payments (services need to be provided)
Field trips, clothing and food
Transportation to and from care facilities
FSA complicated details
FSA contributions can be made to HSA and the partnership can save on fica and futa taxes on the contributions to the FSA and HSA
Medical expense FSA benefits, not HSA, can continue under cobra if a triggering event occurs and can allow the participant to avoid the 7.5 agi floor that limits deductions
Voluntarily employee beneficiary association (veba) to fund certain members benefits, what are the benefits?
Death benefits(also fund retirement)
Medical expense benefits (may be used to pre-fund health coverage under FSA)
Disability benefits
Legal expenses
Unemployment
Child care
Severance
Education
Prepaid legal services taxes
Deductible for employer
Taxable to employee
Individually purchased plans would be after tax but benefits would be tax free
Group long-term care insurance benefit
Not a qualified benefit under a cafeteria plan
Ltc premiums can be paid by HSA which are included in a cafeteria plan
Employer paid long-term benefits (code section 106)
Gross income of employee will include employer-provided coverage for qualified long-term care provided that those services are provided through a flexible spending or similar arrangement
In that light it is unlikely that FSA will support ltc benefits
Medical questionnaire is needed for individual and group plans
Employer Vision plans
Paid by employer which are deductible
Benefits such as eye exam are generally taxable
What are the differences in Compensation income and ordinary income
Ordinary income like interest,dividends and capital gains are not subject to fica or self employment taxes
Compensation is subject to fica or self employment taxes
FSA an employer pays ltc premiums
Included in gross income
Policy reinstatement process
Submit the policy reinstatement form and pay premiums in arrears and maintain the premiums of her policy
If a client has insurance and wants to expand their retirement and reduce their insurance
Then they may want to consider a 1035 exchange into an annuity
If there is a limited need for insurance then one should not get rid of their insurance
They can convert their group coverage to a permanent policy
Cobra family plan when someone losses their job
Is 18 months of benefits
Cobra plan must be identical to prior coverage
Employer can charge 102% for the cobra coverage
I just did the Guaranteed insurability disability option
Is only for earning more money and needs to show proof of the increase
Residual disability and partial disability rider
Partial disability benefits are often a set percentage of the total disability benefits, but residual benefits might relate to how much income you’re losing.
Someone one financial edge
Most likely can’t afford whole life. Need to really read case and see what else is a need before recommending whole life
a car accident involving minor injuries and an emergency visit would be covered under
For auto B/medical
Relatively small costs
Read the
Freaking question
After daughter is finished school and moved to another city in another state. Is her car still covered under her parent’s plan?
She will need to register the car in the new state and insure the car in the new state
Land does not count toward the value of the replacement value
You would subtract a new house purchase by land.
Replacement amount is always the divisor or bottom number
Workers comp payments to an incapacitated person
Total permanent disability benefits
Occupational disease benefits
Running into a bull with a car and being sued by the owner-what is covered
Running into the animal is covered under other than collision
Being sued is covered under BI/PI
Bob a 23 yo is a paraplegic. His dad has a business with 10 people, what health insurance is available
Not cobra-under 10 people
He could convert the group plan (no evidence of insurability)
Health insurance exchange is an option
As long as he is a dependent he can continue under his dad’s plan until 26
If he starts his own business he can apply for group insurance (aca can’t be denied coverage)
Case studies
Must read
Split dollar and non-qualified compensation reflect personal planning
Not business planning
If issues exist with who should get the funds when someone passes in a buy/sell agreement
An entity purchase should not be purchased, a cross-purchase buy-sell should be purchased
If he (corporation) buys a boe (business overhead expense) policy
The corporation cannot deduct the premiums but benefits are excluded from income ie tax free
