Module 4 Flashcards
Allowable IRA Deduction Limit Calculation
IRA Contribution Limit x [(Upper Limit - AGI) / Phaseout Range]
Roth Conversion Pro Rata Rule
Non-Taxable Percentage of Conversion = Cost Basis / Total IRA Value
Parties to an Annuity
1.) The Insurance Company
2.) The Contract Owner
3.) The Annuitant
4.) The Beneficiary
Guaranteed Minimum Income Benefit (GMIB)
Guarantees a minimum income to the annuitant, regardless of adverse investment performance.
Guaranteed Minimum Accumulation Benefit (GMAB)
Guarantees that there will be a minimum account value at the end of a specified guaranteed date.
Guaranteed Minimum Withdrawal Benefit (GMWB)
Guarantees that either a return of principal or payout of a protected amount through systematic withdrawals over a specified time period in years (not covering a life expectancy).
Guaranteed Lifetime Withdrawal Benefit (GLWB)
Guarantees the right to withdraw up to the specified percentage each year for life.
Exception for Surrender of a Cash Value Policy
If a cash value policy is surrendered, the amount of the cash surrender value that exceeds the total net premiums paid is subject to taxation as ordinary income.
*Rider premiums are not part of the cost basis.
Modified Endowment Contract (MEC)
A life insurance contract that meets both the state law definition and the Internal Revenue Code definition of a life insurance contract but fails the so-called seven-pay test.
Seven-Pay Test
If the cumulative amount paid under the contract at any time in the first seven years is greater than the seven net level annual premiums that would have been paid under a seven-pay, paid-up contract, then the contract is considered a modified endowment contract.
Consequences of a MEC Policy
A life insurance policy that becomes a MEC is no longer considered pure life insurance by the IRS, and if a policyholder wishes to make a withdrawal (or loan) from that modified endowment contract before age 59½, that withdrawal (or loan) will be treated just like a withdrawal from an annuity contract.
Taxation of a MEC Policy
Last-In, First-Out (LIFO) – Cost basis is withdrawn last
Taxation of an Annuity
Lump sum distributions from an annuity are fully taxable until all earnings have been distributed; this is referred to as last-in, first-out.
Taxation of Life Insurance
First-In, First-Out (FIFO)
*Death benefits and cost basis are tax free
Permanent Life Insurance Settlement (Payment) Options
1.) Payments of a fixed amount
2.) Payments over a fixed period
3.) Income for life
4.) Interest-only
Payments of a Fixed Amount
An owner or beneficiary of a life insurance policy receives a specific fixed payment each month until the insurance proceeds (and the interest paid by the insurance company on the remaining proceeds) are exhausted.
Payments over a Fixed Period
This option pays out everything, including all credited interest, over a fixed period of time.
Pension Maximization Strategy
Elect the single life payout and invest the difference between the single life payout and the joint life payout in life insurance.
Viatical Settlement
A third-party company buys the death benefit of an insurance policy on the life of an insured.
Reverse Mortgage
A reverse mortgage converts home equity into a loan that doesn’t have to be repaid until you die or move. The amount available to borrow is based on the value of the home, market interest rates, and the homeowner’s age—the older they are, the more they can borrow. The amount paid from a reverse mortgage can come in the form of a lump sum, monthly payments for as long as the individual resides in the home (tenure payments), a term payment (a certain amount paid out over a specified period of time), or even a line of credit.
Working Beyond Full Retirement Age Benefits
1.) Fewer retirement years need to be financed
2.) Additional time to save for retirement
3.) Social Security benefits increase
4.) Employer-paid health care
Exclusion Ratio (Annuity Taxation)
Determines the tax-free portion of each distribution and it is based on a fraction where the numerator is the total premium paid and the denominator is the total expected payout from the annuity.
IRA Deductibility Phase Out Range (2023)
Single Filers: $73,000 - $83,000
Joint Filers: $116,000 - $136,000
Whole Life Policies
Designed to provide for level premiums, a guaranteed death benefit no matter when the insured dies, and guaranteed cash value.
