Chapter 6: Markets and Social Security

Key Person (Key Employee)

Life insurance purchased to offset the expense and financial losses due to the death of a valued employee. This policy will provide funds for decreased cash flow, recruiting cost, cost of training and cost of replacing the key employee. The Key Person insurance does not provide an employee retirement, replace group life insurance or affect any present or future group or retirement benefits. The Key Person coverage is written for the benefit of the employer, not the employee's family. The employer is the owner, premium payor and usually the beneficiary. If the owner is not the beneficiary, the premiums may be used as a business expense for IRS purposes. If the owner is the named beneficiary, the premiums are not considered business expense by the IRS.

Primary Insurance Amount (PIA)

Mathematical calculation based on overall FICA contributions used to determine retirement/disability/survivorship benefit.

annual renewable term

Most common form of group insurance

Currently Insured

The minimum requirement for workers under age 24 to obtain a currently insured status for disability benefits is to earn at least 6 quarter credits in the last 3 years (13-quarter period). Beginning at age 24, additional credits are required, based on the worker's age at the time of disability, to obtain currently insured status.

Master Policy

The policy contract issued to the employer under a Group insurance plan. Remember, the employees covered by a group plan are considered to be insureds, but they only receive certificates.

Group Conversion

There is a conversion period of 31 days in which the employee may, upon termination of eligibility and without evidence of insurability, convert his/her group life insurance benefit to an individual permanent policy

Buy-Sell Agreement

This agreement contractually establishes a price with the intent to purchase, at a predetermined value, the assets of a business should one of the contract participants predecease the others. It may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation. Any type of life insurance may be used to provide funds for the Buy-Sell Agreement. Premiums are not deductible, and policy proceeds are received income tax-free.

Surviving Parent

beginning at 62, eligible for monthly survivor benefits if at least one half supported by deceased worker

Social Security Funding Program

provided by both employee and employer through the Federal Insurance Contributions Act (FICA) withholding. The employer withholds the employee's contribution and pays it along with the employer's portion. Self-employed individuals pay an amount equal to the total of an employer and employee payment.

late enrollee

those who enroll after initial period, must provide evidence of insurability

Surviving spouse benefits

with a dependent child under age 16 is entitled to monthly income until the youngest child reaches age 16 (or a disabled child reaches age 22). Once the youngest child reaches age 16, the surviving spouse's benefits stop. Unmarried spouce may recieve retirement benefits at 60, gap between this time is called blackout period

Cross Purchase Plan

- Used when the partners of a business purchase life insurance on each other. At the death of one of the partners, policy proceeds are used to purchase that person's interest in the business from his/her heirs. Each partner owns insurance on each of the other partners.

Grace period

31 day period

Death Benefit

A one-time lump sum payment of $255 in total may be made after the taxpayer's death. This death benefit is only payable to a surviving spouse or minor children.

probationary period

A period of time between when an individual is hired and when they can be eligible to enroll in group insurance

fully insured

A status of complete eligibility for the full range of Social Security benefits: death benefits, retirement benefits, disability benefits, and Medicare benefits. 40 credits

Entity Plan

An agreement in which a business assumes the obligation of purchasing a deceased owner's interest in the business, thereby proportionately increasing the interests of surviving owners.

initial open enrollment

As long as the individual enrolls during this open enrollment, coverage is guaranteed and evidence of insurability is not required.

Surviving children

Eligible for benefits and covered to age 18 or 19 if still enrolled in high school.

Contributory

Employees must contribute to the premium payments and at least 75% of all eligible employees must participate.

noncontributory

Employer pays the entire premium with a mandatory 100% of the eligible employees participating. The percentage participation requirements are used to reduce adverse selection.

Credits

Equivalent to number of quarters of coverage based on years in the workforce and taxable income (4 quarters, 4 credits)

Group Insurance Market

Group life insures a group of people under a single contract.

Natural group

Group was formed for a purpose other than procuring or reducing cost of ensurance