Exam fx 4-5

Group Life and Employer-sponsored Plans

-The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are tax deductible to the employer as a business expense. -If the group life policy coverage is $50,000 or less, the employee does not have to report the premium paid by the employer as income (not taxable to the employee).

There are several types of buy-sell agreements that can be used for partnerships and corporations:

Cross Purchase - used in partnerships when each partner buys a policy on the other; Entity Purchase - used when the partnership buys the policies on the partners; Stock Purchase - used by privately owned corporations when each stockholder buys a policy on each of the others; and Stock Redemption - used when the corporation buys one policy on each shareholder.

Qualified plans have the following characteristics:

Designed for the exclusive benefit of the employees and their beneficiaries; Are formally written and communicated to the employees; Use a benefit or contribution formula that does not discriminate in favor of the prohibited group — officers, stockholders, or highly paid employees; Are not geared exclusively to the prohibited group; Are permanent; Are approved by the IRS; and Have a vesting requirement.

The Commissioner has the following broad powers and duties:

Grant or deny applications for Certificates of Authority; Examine each insurer, rating organization, or any other organization or association authorized to transact insurance in this state; Enforce and execute the duties imposed by the Insurance Code; Adopt and promulgate rules and regulations; Have the powers and expressed authority to carry out all duties; Enforce payment of fee, charges and taxes; Have additional rights, powers and duties provided by other laws of Delaware. The Commissioner or examiners may conduct an examination of any insurer in Delaware, as often as deemed appropriate, but at least once every 5 years

Life Settlement Broker

is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners, and have a fiduciary duty to the owners to act according to their instructions and in their best interest.

rollover

is a tax-free distribution of cash from one retirement plan to another. completed within 60 days from the time the money is taken out of the first plan.

Settlement Options

used to pay the death benefits to a beneficiary upon the insured's death, or to pay the endowment benefit if the insured lives to the endowment date.

2 most common qualified individual retirement plans

are Traditional IRAs and Roth IRAs. Anybody with earned income can contribute to either plan.

One-year Term Option

Dividend option in which the policyowner uses the dividend as a single premium to purchase one-year term protection.

Keogh Plans (HR-10)

- Allows unincorporated business owners to participate in the retirement plan - as an employee - Can be either defined contribution or defined benefit plans

Estate Tax

- If the insured owns the policy, it will be included for estate tax purposes. If the policy is given away (possibly to a trust) and the insured dies within 3 years of the gift, the death benefit will be included in the estate.

Direct Rollover

-The 20% withholding of funds can be avoided if the distribution is made directly from the first plan to the trustee or administrator/custodian of the new IRA plan. -The plan administrator can transferring a distribution directly to another retirement plan or IRA. Sometimes a check will be issued made payable to your new account. No taxes will be withheld from your transfer amount.

Insurance producer

-means a person required to be licensed under the laws of his or her state to sell, solicit or negotiate insurance. -applies to insurance agents, insurance brokers, and insurance consultants.

settlement options

-the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is taxable as income.

Modified Endowment Contracts (MECs)

A life insurance policy that has too much money (premiums) paid into it in the first seven years (the 7 pay test) fails to meet the standard established -Tax-deferred accumulations; Any distributions are taxable, including withdrawals and policy loans; Distributions are taxed on LIFO basis (Last In, First Out) — known as "interest-first" rule; and Distributions before age 59 ½ are subject to a 10% penalty.

If a licensee violates the cease and desist order, he or she will be subject to any of the following:

A maximum monetary penalty of $11,500 for each violation; License suspension or revocation; Other relief the Commissioner deems reasonable and appropriate.

Old Age Survivors Disability Insurance

An insurance that pays benefits to retired workers that help them meet their financial obligations and provides benefits to families of retired workers and disabled workers under certain conditions

The following taxation rules apply to Roth IRAs:

Contributions are not tax deductible; and Excess contributions are subject to a 6% tax penalty.

Continuing education (CE)

Education beyond the basic technical education, usually required for license or certification renewal n Delaware, licensees must fulfill specific requirements every 2 years, as follows: All resident licensees must complete 24 credit hours, 3 of which must be in ethics. If a producer holds a health license and solicits long-term care policies, the producer must also complete 3 hours in courses on long-term care insurance. Resident Adjusters must complete 12 credit hours, 3 of which must be in ethics. individual insurance producer who allows his or her license to lapse may, within 12 months from the due date of the renewal fee, reinstate the same license without the necessity of passing a written examination.

Two features that distinguish group insurance from individual insurance are

Evidence of insurability is usually not required (unless an applicant is enrolling for coverage outside the normal enrollment period); and Participants (insureds) under the plan do not receive a policy because they do not own or control the policy.

Insurer's Appointment

If an insurance producer is acting as an agent of an insurer, the producer must become appointed by that insurer. A producer who is not acting as an agent of an insurer is not required to become appointed. In order to appoint a producer, the appointing insurer must file a notice of appointment with the Commissioner within 15 days from the date the agency contract is executed or the first insurance application is submitted.

survivor protection.

Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death.

There are certain conditions, under which the 10% penalty for early withdrawals would not apply (penalty tax exceptions):

Participant is age 59½; Participant is totally disabled; The money is used to make the down payment on a home (not to exceed $10,000, and usually for first-time homebuyers); Withdrawals are for post-secondary education expenses; and Withdrawals are for catastrophic medical expenses, or upon death.

401(k) Plans

Plans that allow employees to make tax-favored pay deferrals toward retirement savings through a payroll deduction plan.

following taxation rules apply to life insurance policies:

Premiums are not tax deductible; and Death benefit:Tax free if taken as a lump-sum distribution to a named beneficiary; andPrincipal is tax free; interest is taxable if paid in installments (other than lump sum).

The following taxation rules apply to contributions made to traditional IRA plans:

Tax-deductible contributions for the year of the contribution (based on the person's income); Contributions must be made in "cash" in order to be tax deductible (the term cash includes any form of money, such as cash, check, or money order); Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA; and Tax-deferred earnings (the money that accumulates in the account) are not taxed until withdrawn.

There are several important concepts you need to understand about viaticals:

The insureds are referred to as viators; Viatical settlement provider means a person, other than a viator, that enters into a viatical settlement contract; Viatical producers represent the providers; and Viatical brokers represent the insureds.

conversion privilege

The provision in a convertible issue that stipulates the conditions of the conversion feature, such as the conversion period and conversion ratio. -right to convert to an individual policy without proving insurability at a standard rate, based on the individual's attained age. -convert to any form of insurance issued by the insurer (usually whole life), except for term insurance -employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy.

403(b) Tax-Sheltered Annuities (TSAs)

a qualified plan available to employees of certain nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems

Group Underwriting

Underwriting in which the premium is based on the risk of the group as a whole rather than on characteristics of individual group members.

Cash (Lump-Sum) Payment

Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash

General Penalties

Violations of the general provisions of the Insurance Code for which a greater penalty is not provided are subject to fine of up to $2,300 per violation, imprisonment for up to 1 year, or both. The maximum fine for corporations is $6,900 per violation.

Key Person

With this coverage, the key employee is the insured, and the business is all of the following: Applicant; Policyowner; Premium payer; and Beneficiary.

Viatical settlements

allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed, before their death. they are separate contracts in which the insured sells the death benefit to a third party at a discounted rate. receive a percentage of the policy's face value from the person who purchases the policy.

Simplified Employee Pension (SEP)

is a type of qualified plan suited for the small employer or for the self-employed.

Life Expectancy

is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean).

Profit Sharing

incentive pay in which payments are a percentage of the organization's profits and do not become part of the employees' base salary

Insured

is the person covered under the policy that is considered for sale in a life settlement contract.

business of life settlement

refers to any activity relating to the solicitation and sale of a life settlement contract to a third party who has no insurable interest in the insured.

life settlement

refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash. -would require an absolute assignment of all rights to the policy from the original policyowner to the new policyowner.

Individual Retirement Account (IRA)

-allows individuals to make tax deductible contributions. -Individuals who are age 50 or older are entitled to make additional catch-up contributions. A married couple could contribute a specified amount that is double the individual amount, even if only one person had earned income. -the owner may withdraw the funds at any time. However, withdrawals prior to age 59 ½ are considered early withdrawals and are subject to a 10% additional tax. -Starting at age 59 ½, the owner may withdraw assets without having to pay the 10% additional tax. -However, the owner must start receiving distributions from the IRA at the age of 72 (the SECURE Act of 2019 raised the required minimum distribution age from 70 ½ to 72). Starting at age 72, the owner must receive at least a minimum annual amount, known as the required minimum distribution (RMD).

Cash Accumulation

Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed.

Estate Conservation

Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets.

Estate Creation

Life insurance proceeds paid in a lump sum provide financial assets to create an immediate estate the insured can pass on to survivors.

election & term

The Insurance Commissioner is chosen by qualified electors of the state at general elections, and commissioned by the Governor for a term of 4 years.

penalities

The applicant or licensee may make written demand for a hearing from the Commissioner within 10 days. The hearing must be held within 20 days. The license of a business entity may be suspended, revoked or refused if the Commissioner finds an individual licensee's violation was known or should have been known by any of the partners, officers or managers acting on behalf of the partnership or corporation and the violation was neither reported nor corrective action taken.

life-income option,

also known as straight life provides the recipient with an income that he or she cannot outlive. Installment payments are guaranteed for as long as the recipient lives, irrespective of the date of death. The amount of each installment paid is based on the recipient's life expectancy and the amount of principal. I

distribution

from an IRA is subject to income taxation in the year the withdrawal is made. In case of an early distribution (prior to age 59 ½), a 10% penalty will also apply.

insurance consultant

is a licensee of the Department who offers advice, counsel, opinion or service regarding benefits, advantages or disadvantages to be obtained under any contract of insurance issued in this state.

agent/producer

is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal (insurer). The law of agency defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer.

SIMPLE (Savings Incentive Match Plan for Employees) plan

is available to small businesses that employ no more than 100 employees who receive at least $5,000 in compensation from the employer during the previous year.

group life insurance

is issued to the sponsoring organization, and covers the lives of more than one individual member of that group. - usually written for employee-employer groups, but other types of groups are also eligible for coverage. - It is usually written as annually renewable term insurance. each insured participant under the group plan is issued a certificate of insurance evidencing that they have coverage. The actual policy, or master policy/contract, is issued to the sponsor of the group, which is often an employer.

Cease and Desist Orders and Penalties

issue a cease and desist order. This means that the person must stop the unfair, deceptive act, or practice he or she is suspected of doing. Penalties for violating the laws of unfair practices and methods of competition are any one or more of the following: If the act was unintentional, penalty of not more than $1,000 for each violation, not to exceed an aggregate of $100,000; If the act was intentional, penalty of not more than $10,000 for each violation, not to exceed an aggregate penalty of $150,000 in any 6-month period; Suspension or revocation of the person's license for intentional violations; Any other relief deemed reasonable by the Commissioner.

Liquidity

means the policy's cash values can be borrowed against at any time and used for immediate needs.

agent

of the insurer is a licensed producer appointed by the insurer to sell, solicit, or negotiate applications for insurance policies on its behalf.

life income joint and survivor

option guarantees an income for two or more recipients for as long as they live. Most contracts provide that the surviving recipient will receive a reduced payment after the first recipient dies.

Policy death benefits

paid under a business owned or an employer provided life insurance policy are received income tax free by the beneficiary (in the same manner as in individually owned policies).

fixed-amount installments option

pays a fixed, specified amount in installments until the proceeds (principal and interest) are exhausted.

accidental death and dismemberment rider (AD&D)

pays the principal (face amount) for accidental death, and pays a percentage of that amount, or a capital sum, for accidental dismemberment. - is the same as that already discussed with the accidental death rider. The dismemberment portion of the rider will usually determine the amount of the benefit according to the severity of the injury.

owner

refers to the owner of the life insurance policy who seeks to enter into a life settlement contract.

Contributory Plan

retirement plan funded by contributions from the employer and employee

noncontributory plan

retirement plan funded entirely by contributions from the employer

qualified retirement plan

s approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth. have tax advantages.

Life Settlement Contract

stablishes the terms under which the life settlement provider will pay compensation to the policyowner, in return for the assignment, transfer, sale, or release of any portion of any of the following: The death benefit; Policy ownership; Any beneficial interest; or Interest in a trust or any other entity that owns the policy.

revocation or refusal to renew,

the Commissioner may levy a fine to the licensee between $200 and $20,000 for each violation. The date payment is due should be at least 30 days following the date of the Commissioner's order.

interest-only option

the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals (monthly, quarterly, semiannually, or annually).

Business Insurance Needs

the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured.

uniform application

the uniform application of the National Association of Insurance Commissioners for nonresident agent licensing, effective Jan 15, 2001, or susequent versions adopted by rule by the department

transfer

to a tax-free transfer of funds from one retirement program to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another.

Quarter of Coverage (QC) system

to determine whether or not an individual is qualified for Social Security benefits. The type and amount of benefits are determined by the amount of credits or QCs a worker has earned. -erm fully insured refers to someone who has earned 40 quarters of coverage (the equivalent of 10 years of work), and is therefore entitled to receive Social Security retirement, premium-free Medicare Part A, and survivor benefits. -An individual can attain a currently insured status (or partially insured), and by that qualify for certain benefits if he or she has earned 6 credits (or quarters of coverage) during the 13-quarter period ending with the quarter in which the insured: Dies; Becomes entitled to disability insurance benefits; or Becomes entitled to old-age insurance benefits.

general rule

-proceeds paid to a named beneficiary are generally free of federal income taxation if taken as a lump sum. -An exception to this rule would apply if the benefit payment results from a transfer for value, meaning the life insurance policy is sold to another party prior to the insured's death.

hearings

-statement of charges and hold a hearing for any purpose deemed necessary (within the scope of the Insurance Code). -The notice of hearing must be delivered at least 20 days prior to the date of the hearing. -The application must be filed in the Department within 90 days after act was violated. - If the Commissioner determines that the application was made in good faith, the hearing must be held within 30 days after filing of the application.

Termination of Appointment

An insurer or producer may terminate an agency appointment at any time. The insurer must promptly give written notice of termination and the effective date to the Commissioner and to the producer. The Commissioner must be notified within 30 days following the effective date of termination. Within 15 days of notifying the Commissioner, the insurer must mail a copy of the notification to the producer.

Group underwriting differs from that of individual insurance, and is based on the group characteristics and makeup. Some of the characteristics of concern to a group underwriter include the following:

Purpose of the group — The group must be created for a purpose other than to obtain group insurance. Size of the group — The larger the number of people in the group, the more accurate the projections of future loss experience will be. This is based on the Law of Large Numbers of similar risks. Turnover of the group — From the underwriting perspective, a group should have a steady turnover: younger, lower-risk employees enter the group, and older, higher-risk employees leave. Financial strength of the group — Because group insurance is costly to administer, the underwriter should consider whether or not the group has the financial resources to pay the policy premiums, and whether or not it will be able to renew the coverage.

fixed-period installments option (also called period certain)

a specified period of years is selected, and equal installments are paid to the recipient.

Policy loans

are not taxable to a business. Unlike an individual taxpayer, a corporation may deduct interest on a life insurance policy loan for loans up to $50,000.

Life Settlement Act

efines terms that are not in conflict with the sale of the original life insurance coverage, but which accurately identify the distinctions in the Life Settlement business.

buy-sell agreement

is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.

Third-party owner

is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it.

broker

is a licensed producer who represents his/her clients (policyholders), and is not a direct representative of any insurance company.

Life Settlement Provider

is a person (other than the owner) who enters into a life settlement contract with the owner.

Executive bonus

is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. -tax deductible to the employer and income taxable to the employee.