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Risk Management > Virtual Assistant Library > Flashcards

Virtual Assistant Library Flashcards

1
Q

What four aspects make up earning power?

A

Your Income
Spouse’s Income
Investment Income
Other Income

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2
Q

What is the SS survivor benefit that your family receives based upon?

A

You earnings history at the time of your death and is limited to a maximum family benefit.

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3
Q

When can your surviving spouse receive benefits at any age?

A

If they take care of your child who is receiving SS benefits and is younger than age 16 or disabled.

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4
Q

Besides a spouse, who else can receive your SS survivor benefits? When can they get benefits at any age?

A
  • Your unmarried children who are younger than age 18 (or up to age 19 if they are attending elementary or secondary school full time) also can receive benefits.
  • Your children can get benefits at any age if they were disabled before age 22 and remain disabled.
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5
Q

When would a surviving spouse be able to received full benefits?

A

At full retirement age.

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6
Q

What is the full retirement age?

A

For people born in 1945-1956 - 66

For people born in 1962 or later it will gradually increase to age 67.

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7
Q

When can reduced widow or widower benefits be received? What if the surviving spouse is disabled?

A
  • As early as age 60.

- Disabled survivors can claim benefits as early as age 50.

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8
Q

What is the blackout period?

A

The period from which the surviving spouse stops receiving children’s survivor benefits (child(ren)’s age 18) and the time the surviving spouse starts receiving Social Security benefits (age 67).

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9
Q

What is FREEDS?

A

The cash needs that must be considered when doing life insurance capital needs analysis.

  • Final Expenses
  • Readjustment Fund - a month or more of survivors income
  • Emergency Fund - 6 to 12 months of household operating costs
  • Education Fund
  • Debt - All loans, mortgage, credit cards, etc.
  • Special Needs or Bequest.
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10
Q

At your death, what can life insurance proceeds be used to do? 4

A
  • Pay the cash needs that arise at death
  • Maintain your family’s income and standard of living
  • Help finance a child’s education
  • Make your financial goals for your family a reality.
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11
Q

What benefits can your life insurance cash values provide during your life? 4

A
  • A source of funds for emergencies or financial opportunities.
  • Assistance in financing a child’s education
  • A supplement to other sources of retirement income
  • Tax-deferred asset growth.
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12
Q

What will withdrawals and loans of a life insurance policy’s cash value do?

A

Reduce the policy’s death benefit and cash value available for use.

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13
Q

What are the three things that need to be analyzed to determine what a survivor will need?

A
  • Identify cash needs that will arise at death
  • Analyze income needs and sources at death
  • Determine additional capital required to provide for cash and unmet income needs at death.
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14
Q

What are the three steps to implement a life insurance plan?

A
  • Select type and amount of life insurance coverage
  • Establish insurability
  • Arrange for payment of premiums.
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15
Q

What are the three categories of differences found in cash value life insurance?

A
  • Fixed or Flexible Premiums
  • Responsibility for investment decisions
  • Benefit guarantees or benefits based on actual investment
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16
Q

Generally, what is the tax consequences of premiums paid on life insurance?

A

They are not tax deductible (and therefore, if returned in a return of premium term insurance, come back tax free because you were already taxed on that amount)

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17
Q

When does the cash value in life insurance become taxable?

A

When surrendered. The taxable portion is the difference of the amount surrendered and the the total amount of premiums paid.

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18
Q

When surrendering a life insurance policy and taking a lump sum, what is generally included in the lump sum?

A
  • Cash Value
  • Any dividend accumulations
  • The cash value of any paid-up additions
  • Termination dividend
  • Any unrepaid policy loans
  • Any tax free withdrawals previously received.
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19
Q

In order to qualify for tax-favored status as life insurance contract, the product must meet 2 tests:

A
  • Cash Value Accumulation Test

- Guideline Premium Test (Cash-value corridor)

20
Q

What happens if a life insurance product fails to meet either the CVAT or GPT?

A

It is no longer tax-favored and is taxed as an investment.

21
Q

What is the CVAT?

A
  • Cash Value Accumulation Test

- Maintains a net single premium relationship between the cash value and death benefit.

22
Q

What is GPT?

A
  • Guideline Premium Test (cash value corridor)
  • Defines limits (Single or Level Premium) on premiums paid based on the death benefit. Payments in excess of these limits are prohibited.-
23
Q

When do you want to use CVAT?

A

-When your client doesn’t want any limitations on the amount of premium that can be paid into the policy.
(There are still limits to avoid becoming MEC.)
-Client prefers to maximize policy distributions (death benefits).

24
Q

When do you want to use GPT?

A
  • When your client is more interested in lifetime cash accumulation.
  • Client wants to pay maximum annual premiums for 10 years or longer.
25
Q

What is a MEC?

A
  • Modified Endowment Contract
  • Any contract issued on or after June 21, 1988 that meets the cash value accumulation test or guideline premium-cash value corridor test, but fails the seven-pay test, or is any policy received in exchange for a MEC.
26
Q

What is major difference between MEC and Traditional cash-value policy?

A

-MEC’s are stripped of tax-free access to cash-values.

27
Q

How are distributions (of any kind) treated and taxed in a MEC?

A
  • LIFO or Income first.

- Ordinary Income

28
Q

Can you change a policy that has become a MEC?

A

-NO. Once a MEC, always a MEC.

29
Q

Can you exchange a MEC policy?

A

-YES. Under the 1035 exchange rule a MEC can be exchanged for another MEC or an annuity.

30
Q

What is the 7-Pay Test?

A

-It is a limitation on the total amount you can pay into your policy in the first seven years. It discourages premium schedules that would result in a paid-up policy before then of the seven year period.

31
Q

How is the 7-Pay Test calculated?

A

7-pay test examines cumulative amount paid under a contract during the first 7 years. This amount is compared to the sum of the net level premiums that would have been paid on a guaranteed 7-year pay whole life policy providing the same benefit.
Cannot pay more than the cumulative net level premiums.

32
Q

When does the 7-pay test apply?3

A
  • To initially test all policies (after 1988)
  • To re-test policies after 1988 or if the death benefit is reduced within the first 7 contract years
  • To test or re-test any policy that undergoes a material change in future benefits
33
Q

How long does the insurance company have to return an excess premium (plus any interest accrued)?

A

60 days

34
Q

What penalty is imposed on a MEC and how much is it?

A
  • Imposed penalty on transactions before age 59 1/2

- 10% penalty tax

35
Q

What are the benefits of a MEC? or Why have a MEC?

5 possible

A
  • Avoids generation skipping tax
  • Want a tax-deferred savings vehicle that has some insurance.
  • Death benefit is generally income and estate tax free
  • If no access to cash value, no penalty and tax are triggered
  • Allow transfer of wealth that may be taxable under other methods
36
Q

Term Insurance Advantages

A
  • Low initial premium.
  • Well suited to shorter-term, temporary needs.
  • Most plans can be renewed, if you are medically qualified.
37
Q

Term Insurance Disadvantages

A
  • Premiums in future years may become prohibitively expensive.
  • Insurance protection may cease before death.
  • Does not build any cash values.
38
Q

Whole Life Insurance Advantages

A
  • Guaranteed* lifetime insurance protection, so long as the policy is kept in force.
  • Fixed premiums can help create the “savingshabit.”
  • Cash values are guaranteed*, so long as the policy is kept in force.
  • May have policy dividends that can be used to reduce premiums or increase cash values and death benefits.
39
Q

Whole Life Insurance Disadvantages

A

-No premium flexibility.
-Guaranteed* cash value growth may be less than could be achieved through one of the other types of cash value life insurance.
-Death benefit may not keep pace with
inflation.

40
Q

Universal Life Insurance Advantages

A
  • Lifetime insurance protection.
  • Premium and death benefit flexibility.
  • Cash value growth reflects current interest rates, with a minimum guarantee*.
41
Q

Universal Life Insurance Disadvantages

A
  • Required premiums may increase as the insured gets older in order to maintain needed insurance protection.
  • If current interest rates are low, cash value growth may be disappointing.
42
Q

Indexed Universal Life Insurance Advantages

A

-Lifetime insurance protection.
-Premium and death benefit flexibility.
-Cash value growth has the potential to earn higher interest rates when the equity markets are strong, while still earning a guaranteed* minimum interest rate
during downturns in the equity markets.

43
Q

Indexed Universal Life Insurance Disadvantages

A
  • Required premiums may increase as the insured gets older in order to maintain needed insurance protection.
  • Cash value growth may be disappointing during a downturn in the equity markets.
44
Q

Variable Life Insurance Advantages

A
  • Guaranteed* lifetime insurance protection.
  • Fixed premiums can help createthe“savings habit.”
  • Policyowner can select from a variety of investment options.
  • Investment flexibility may result in higher cash value accumulations and increasing death benefits, depending on actual investment performance.
  • Positive investment performance may result in the death benefit keeping pace with inflation.
45
Q

Variable Life Insurance Disadvantages

A

-No premium flexibility.
-Cash values can decrease during times of poor market performance, possibly resulting in a loss of principal.
-Policyowner assumes the investment
risk

46
Q

Variable Universal Life Insurance Advantages

A

 Premium flexibility.
 Policyowner can select from a variety of investment options.
 Investment flexibility may result in higher cash value accumulations and increasing death benefits, depending on actual investment performance.
 Positive investment performance may result in the death benefit keeping pace with inflation.

47
Q

Variable Universal Life Insurance Disadvantages

A

 Required premiums may increase significantly as the insured gets older in order to maintain needed insurance protection.
 Cash values can decrease during times of poor market performance, possibly resulting in a loss of principal.
 Policyowner assumes the investment risk.

Risk Management (8 decks)

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