Standards and Insurance Flashcards
For trouble areas in my weekly review
What is a PER
Professional Eligible for Reinstatement
Elements of Section 1 of Rules of Conduct
“Defining the Relationship”
- 1 - Mutual agree upon the services
- 2 - Discuss obligations (goals, needs and objectives), Compensation, Proprietary products, other entities to meet product needs.
- 3 Written agreement (Parties, date, terminates, services to be provided)
- 4 FIDUCIARY!
Elements of Section 2
“Information Disclosed to P. Clients or Clients”
- 1 - Certificant shall not lie and stuff, leave things out, etc.
- 2 - Client shall disclose… Comp, conflicts, areas of expertise, must put services in writing (if planning). . . ADV works here.
2 Factors for Buying vs. Renting
FHA maximum mortgage limits
Time and Taxes.
Higher the tax bracket, more advantageous for buying.
Shorter time frames good for renting
FHA Loan max mortgages between 270 and 730K
Mortgage Interest Deduction Rules
750 JNT, 375 Single interest deductible.
Old mortgages are grandfathered UNLESS you refinance. (so if you have a jumbo, don’t refinance)
Old mortgage loans 1MM limit still deductible
Shortcut for Mortgage Interest / After Tax Problems
Calculate interest as if it were 100% mortgage interest in the first year and do the calculation (no principle, e.g. interest rate X mortgage balance).
Then pick the next highest number!
EE Education Bonds
Parents own them
Phaseouts on tax sheet
Can’t be in a UTMA or UGMA for tax free interest.
Kiddie tax goes how long?
Until 24, if a full-time student etc.
Until 19 if not
The Fed sets which interest rate?
DISCOUNT rate (not fed funds… that’s bank to bank overnight)
Types of Bankruptcy
Chapter 11: Those who don’t qualify for 13, reorg, because too much debt, or not enough income… ugly
Chapter 13: Reorganization. Creditors can’t harass. Debtor can keep assets
Chapter 7 (HIGHLY TESTED) - Permits debtor to claim either Federal or State exemptions (33 states have opted out)
Chapter 7 and Education Savings Accounts
Must have been in accounts for 2 years to be protected for Chapter 7. Basically a 2 year look back.
Bankruptcy and Fitness Standards
One bankruptcy generally doesn’t deem an individual to fail to satisfy board requirements.
Suspension Rules
- Time not to exceed 5 years
- Must publish and identify in press release
- Certificant may qualify for reinstatement
- The suspended person must notify clients and their employer of the board suspension
Appeal Window for Suspension
You have to file an appeal within 30 days, or the ruling is permanent
When NPV is 0, what is IRR?
SAME AS REQUIRED RATE
Parts of the Insurance Contract
DDICE
Declarations Definitions Insuring Agreements Conditions (duties and rights of both parties) Exclusions
Homeowners Shortcut
A (Abode)
B (Buildings)
C (Contents)
D (Demnity, aDditional) “Loss of use”
E (Enemies)
F (First Aid) - for others
Replacement Cost vs. ACV
ACV is Replacement - Depreciation
Replacement cost is preferred, only for buildings though.
Personal property is covered under ACV
Scheduled personal property is on an “Appraised” value basis (jewlers, etc.)
HO 3 Percentages
A Open
B Open 10% of A
C Broad 50% A
D Open 30% of A
Amount of Coverage for Partial Property Loss
Greater! of ACV ( or Replacement Cost Formula (Insurance Carried / Insurance Required (using RC) * loss, less deductible
PAP Which parts for who?
A - Liability (others)
B - Medical (ME)
C - Uninsured (others)
D - Damage to auto (ME)
B and D are for MEEEEEEE
COBRA, which companies pay, and who gets benefits?
Companies: If total employees (NOT covered) including PT exceeds 20
Who gets?: You have to be covered by health insurance to get them
Disability Benefits Taxation - S Corp
2% owners, tax free benefits. Same as a 162 bonus plan basically.
(even though they deduct it, but then have to pay it later)
What’s it mean to be “Qualified” LTC
Premiums Deductible:
- after 1996, premiums deductible as itemized medical (subject to 7.5% floor). 51-60, 1560/year, 61-70 $4,160/year (older you get, more you can deduct
- Self employed health insurance/LTC, same “Portion” deductible on front of 1040 (no floor)
OLDER YOU GET, MORE YOU CAN WRITE OFF)
PQs and NTQ
NTQ LTC policies have a “Medical Necessity” trigger. Not deductible premiums.
PQs are partnership policies with the state. Mass Lien law basically.
When is 1035 Exchange Not ALlowed?
Annuity to Life Insurance NO
If Insured changes NO
Insurance Cash Value Restrictions
If “General Account” policy, this can happen.
If Variable or “Separate Account” policy, you’re safe.
Incontestible Period and Suicide Clause Period
2 Years
Reinstatement of Policy Requirements
Must be within stated time period
PROOF OF INSURABILITY
2 Waiver of premium Options
With UL / VUL policies specifically. Disability benefit can pay either
(1) Mortality & Administrative only (Cash Value stagnates)
(2) Full premium!
Whole life pays whole premium.
Dividend Options
CRAPO
Cash Reduced Premium Accumulate w/ Interest Paid-up Additions One year term (5th Dividend)
NAIC Model Regulation Highlights
Non-variable policies only
- Copies of illustration must be signed by applicant ang agent, and sent with policy application.
- Can’t be represented as anything but Life Insurance
- “Vanish” is prohibited as a word in the policies
Illustrations:
- Must be labeled “Life Insurance Illustration”
NAIC does not do what?
No legal power over insurance regs. Makes recommendations, or suggestions (to state comissioners)
Accelerated Benefits vs. Viatical
Both tax free benefits to ill insured.
Accelerated Benefits better, because unused face goes to beneficiaries tax free. (you still get full face ultimately)
Viatical basis
Viatical sales price + Add’l premiums paid is tax free.
Everything else is ordinary income to Viatical company. (logical)
Life Settlement (Not Terminally Ill, Over 65 usually)
LTCG is the right answer. (generally)
Between Prem paid and CV = OI, CV to settlement is Cap Gains
Policy Lapse Taxation
Basis = Premiums Billed - Dividend prem reductions
Amount over basis (CV) is taxable as Ordinary Income.
Death Benefits Taxation
Tax Free EXCEPT for Transfer for Value rules.
MEC Taxation
- LIFO for Distributions (like Annuity) - then tax free return of premium
- 10% penalty for earnings taken < 59.5
- Dividends taxable as income if received in cash, used to reduce premiume, or retained to pay policy loan.
(only post-1988)
Once, always a MEC
For grandfathered, if you increase face >150K, or need to prove insurability, you lose grandfathered status.
Non-Funded Buy/Sell Options
Could be:
- Naked promise to pay (stroke a check)
- Installment Sale
Formula for Cross-Purchase number of policies
N * (N-1)
Disability Buy/Sell Differences
Entity Purchase: For Life, his family gets 500K income tax free (because of step-up in business basis). For disability, he has to pay capital gains tax (no step-up in business interest)
Cross-purchase: Both disability and Life get basis step-up for the surviving / non-disabled person.
Key Employee life insurance. Estate consequences?
Employee has no incidents of ownership. Not included in Estate
Transfer for Value Consequences
Policy is taxed like a Viatical for someone non-terminal (proceeds in excess of consideration paid, and premiums paid, are Ordinary Income)
Exceptions are transfers to the insured, partner / partnership, Corporation with insured as officer, divorce.
Insured should buy the policy, then gift to kids (gifts don’t trigger it)
Spendthrift Annuity Payout Options
Specified Period (term certain)
Specified Income (dollar certain)
How are Annuities Taxed?
- Withdrawals are taxed at LIFO, with any earnings B4 59.5 10% penalty
- Basis comes out tax and penalty free (after all earnings)
- Exceptions:
(1) Distribution over the life of the annuitant
(2) Contributions before 1982 are still FIFO
Annuity Taxation for Non-Natural Citizens
Non-natural persons (trusts, corporations, etc.) do NOT get tax deferral. Accumulation is treated as earned in that year (ordinary income)
As such losses are ORDINARY
When do companies lose the 50K life insurance exemption?
When plans are discriminatory or “Carve Outs”.
Taxed per “Table 1” rate, as COMPENSATION (FICA / FUTA on top)
How is “Table 1 Rate” given for above 50K taxation?
.29 cents / 1000 of face coverage over 50K PER MONTH
Anything above is W2 income (FICA / FUTA included)
Do FSAs pay taxes?
- No FICA / FUTA
General Rules for FSA
- Use it or Lose It (usually 12/31, but could have 2.5 month extension, or $500 rollover provision. NOT BOTH)
- No LTC, No Concurrent HSA
Dependent Care FSA Differences
5K max, for kids under 13
- Both spouses must work to qualify (unless spouse is disabled or a student) (if one spouse earns less than 5K, then benefit is limited to earnings)
- 12/31 you lose unspent portion. No extension or rollover
- Education, overnight camps, field trips, clothing etc. not included / allowed payments
Who pay to maintain a FSA
- Employer mostly
- Experienced gains also help pay (forfeitures from unused)
Dependent Care credit
- 20% of the first 10K of expenses
- Kids under age 13
- Portion paid with FSA ineligible
Calculator Mode for Retirement problems
Use beginning mode / think beginning of the year for retirement income (so it can be spent throughout the year)
What’s a VEBA
Voluntary employees’ beneficiary asociations (501c9)
- Employers can deduct benefits (except for deferred compensation) (employees can contribute too)
- Death benefits, medical expense benefits, child care, severance, education, disability, legal expenses, unemployment)
Unclear whether or not these amount are included in employee income. I don’t think so…
Prepaid Legal Services taxation?
Benefits are generally taxed as Comp tot he employees.
Dental and Vision Taxation
LTC Taxation
Dental is deductible by employer and tax free to employee.
Vision is deductible, but taxable to employees per a schedule.
LTC premiums paid by employers are includible in employee income
For a couple with no money, not married, and a baby, what is top priority between Life Insurance, Medical Insurance, Emergency Fund, Guardianship, or College Funding
Definitely Medical insurance, but guardianship is a close 2nd.
What is rule 2.1 in the Code of Conduct?
Look it up!
What are the basics of a HRA
- Employer-funded, solely
- Reimburses employees for substantiated medical expenses up to a maximum dollar amount per coverage period
(Look up more, maybe?)
If a question asks for a recommendation, what answers should you eliminate
Answers which aren’t actionable recommendations!
Key Employee life insurance, Company borrowing rules?
Companies can borrow and deduct loan interest on cash values of key employees up to $50,000 per policy.
In a transfer for value, is the policy included in the owner’s estate even if it was a temporary ownership.
Even if it’s an exception to “Transfer for Value”, and the policy is then transferred to a corporation or to kids, the 3 year rule is triggered (beyond the 3 year, they’re out of the woods)
Most important advantage of group life insurance for an employer, over individual policies?
Employer is most concerned with Cost (which is less on group, generally, than individual policies)
Tax Free Fringe Benefits
- Qualifying day care services (limited)
- Health Plan premiums for you, spouse, and dependents
- Up to 50K Life Insurance
- Company car for working conditions
- 260/month cap for parking and transit passes
- Occasional overtime meals, tickets, cab fare, etc.
- Value of discounts on company products (if they don’t exceed gross profit percentage)
- Services discounts, limited to 20% of price charged to normal customers.
Are Section 125 plans deductible by employer?
NO, they’re funded by employee deferrals.
Are Legal Reimbursement plans deductible by employer?
YES. They’re comp to the employee.
Shelly, age 60, bought a 100K limited pay whole life with yearly Premium of 5K. She surrenders the policy after 10 years. Policy values:
Net cash value: 15K
Outstanding Loan: 30K
Dividends Reducing Prems: 10K
What is the tax consequence?
Net CV (is net of Loan), so you add NCV + Loan to get Cash Value of 45K
Basis is 50K - 10K for dividend reductions.
45K CV - 40K Basis = 5K of ORDINARY INCOME
PAP 100/300/50 Meaning
This refers to the Liability (A) coverage
Per Person / Per Incident / Property
All for OTHER people (not your collision / other than collision).
Taxation of Viatical Settlements
If Terminally Ill:
- Death Benefit, less price paid, is Ordinary Income (for company)
- For Terminal Person: Tax Free (<2 years to live)
If a Life Settlement (not terminal):
- For insured, Premiums Paid - Cost of INsurance = Tax free basis
- For insured, Basis - Cash Value = Ordinary Income
- Anything above Cash Value to price paid is Capital Gain.
Homeowners Policy Exclusions (pneumonic)
OPENN WIF
Ordinance of Law Power Failure Earthquake Neglect Nuclear hazard
War
Intentional loss
Flood
