Unit 4 - Life Ins. Selection Process Flashcards
Surrender of the Policy
Lump sum payment in excess of owners basis is taxable to owner as ordinary income.
Owners cost basis is equal to aggregate premiums paid less any dividends paid
Sales of the Policy
Transfer for value rule may apply.
Insurance proceeds are includable in gross income of transferee to extent proceeds received exceed the purchasers basis.
*Exceptions: insured, partner, partnership, and corporation
Gifts of the Policy
Not the same as a lifetime sale because no consideration passes between donor and donee
*Transfer for value rule does not apply, but gift tax may be assessed on transfer.
Modified Endowment Contracts (MECs)
Subject to LIFO tax treatment and may incur a 10% tax penalty for withdrawals or loans up to the basis in the policy made before owner’s age of 59 1/2
Lump Sum Payment
Generally excluded from the recipient’s income.
*Exception: Transfer for Value rule
Interest Only Payment
- Beneficiary leaves death proceeds with insurance company and receives only interest payments
- Interest is fully taxable as ordinary income
Viatical Settlement
The sale of a life insurance policy by a terminally ill person to an investor or investment group.
*upon death of insured all of gain is taxable as ordinary income.
Installment or Annuity Payment
- Each payment partially non taxable return of basis and partially taxable interest
- Non taxable return of basis equals ratio of policy face value to total amount of expected payments to be received
Adjustable Life Insurance
- Death benefit a pond premium amount chosen at time of application
- Nonforfeiture values then calculated
- Policy owner may elect to increase (adjust) death benefit and/or change the premium
- Typically has a cost of living rider
Endowment Life Insurance
- Whole life policy endows at age 100
- Traditional endowment age was much earlier (65)
- After 1984 Tax Act, endowments no longer classified as life insurance contracts and rarely used today bc of resulting loss of income tax benefits
First to Die Life Insurance
- Pays out at death of first spouse or individual to die
- Commonly used in buy-sell or business continuation agreements to provide liquidity for one business owner to buy out family of second owner
Guaranteed Values
Those for which the insurer bears the risk, such as the interest rate on permanent life insurance policies with guaranteed cash value
Non-guaranteed Values
Those for which the risk is borne by the insured, such as investment returns under a variable life insurance policy.
Interest Adjusted Methods
Two interest adjusted methods may be used for comparing the cost of life insurance policies: the surrender cost method and the net payment method. They are more useful than the traditional net cost method because they take into account the time value of money.
IRR on yield method
This method is used to determine the internal rate of return (IRR) on the cash value of a permanent policy that is held for a particular term.
