MS Insurance Supplement License Exam Study Guide: Chapter 3 & 4
When the owner of a$250,000 life settlement policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the interest settlement option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on
$11,000
If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?
$3,000
qualified retirement plan
- Approved by the IRS -Have taxed advantages -Contributions currently tax deductible -Cannot discriminate -Earnings grow tax deferred -All withdrawals are taxed
Group Life Insurance
- Is issued to the sponsoring organization and covers the lives of more than 1 individual member of that group -Written for employee-employer groups and is annually renewable term
Group Underwriter characteristics
- Purpose or Nature of the group -Size of the group -Turnover of group -Financial strength of group
Consumer Report
- Reports include written and/or oral information regarding a consumer's credit, character, reputation or habits collected by a reporting agency from employment records, credit reports, and other public sources.
SIMPLE Plans (Savings Incentive Match Plan for Employees)
-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. -To est. a plan, the employer must not have a qualified plan already in place. -Employees who elect to participate may defer up to a specified amount each year, and the employer then makes a matching contribution, dollar for dollar, up to an amount equal to 3% of the employee's annual compensation -Taxation is deferred on both contributions and earnings until funds are withdrawn.
Elements of Insurable Risk
-Due to change -Definite and measurable -Statistically predictable (Law of Large Numbers) -Not Catastrophic (War and Bombs)
Investigative Consumer Report (Inspection)
-General reports of the applicant's finances, character, work, hobbies, and habits that supplement the information of the application. -Insurance applicants must be notified in written if requested
Conversion Privilege
-If a employee terminates membership in the insured group, the employee has 31 days after termination to convert to an individual policy without proving insurability at a standard rate, based on the individual attained age. -Can convert to any policy except TERM -Face amount or death benefit equal to the group term face amount but premium higher
Rollover
-Is a tax free distribution of cash from one retirement plan to another -Must be completed with in 60 days from time the money is taken out of the first plan -If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor. 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
Nonqualified Retirement Plans
-Not tax deductible -Does not need IRS approval -Can discriminate -Earning grow tax deferred -Excess over cost basis is taxed
Simplified Employee Pension (SEP)
-Qualified plan suited for the small employer or for the self-employed. -Employee establishes and maintains an individual retirement account to which the employer contributes and contributions are not included in the employee's gross income.
Third Party Ownership
-The contract may be owned by someone other than the insured. -An individual or Entity that is not an insured under the contract but that has a legally enforceable right under it -Written in business and for minors
Fair Credit Reporting Act (FCRA)
-U.S act that protects privacy of background information and ensures that information supplied is accurate. - Any person who knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses may be fined and/or imprisoned up to 2 years. - Unknowingly violates is reliable in the amount to the loss to the consumer. -willfully violates this act enough to constitute a general pattern or business practice will be subject to be penalty up to $2,500.
OASDI (Old Age, Survivors, and Disability Insurance)
-When you have died and checks go to the children or spouse if not remarried by age 60. - Have to be qualified, fully insured- have 40 credits(Paid taxes for 10 years) -Currently insured- earned 6 credits over the previous 13 quarter period
Individual Retirement Account (IRA)
-allows individuals with earned income to make tax deductible contributions regardless of age. -Plan participants are allowed to contribute up to a specified dollar limit each year, or 100% of their salary if less than the maximum allowable amount. -the owner may withdraw the funds at any time but withdrawals prior to age 59 1/2 are considered early withdrawals and are subject to a 10% additional tax. -Owner must start receiving distributions at the age of 72. Starting at age 72 the owner must receive at least a minimum annual amount know as Required Minimum Distribution -TAX DEDUCTIBLE
Self-employed Plans(HR-10 or Keogh Plans)
-make it possible for self-employed persons to be covered under IRS qualified retirement plan. -allows to fund retirement program with pre-tax dollars as if under a corporate retirement or pension plan -the person must be self-employed or a partner working part time or full time who owns at least 10% of the business
Federal Credit Reporting Act
-procedure that consumer- reporting agencies must follow in order to ensure that records are confidential, accurate, relevant and properly used. ~ Protects consumers against the circulation of inaccurate or obsolete personal or financial information. - Reports include written and/or oral information regarding a consumer's credit, character, reputation or habits collected by a reporting agency from employment records, credit reports, and other public sources.
What is the elimination period for Social Security disability benefit?
5 Months
Misrepresentation
A false statement or lie that can render the contract void.
Gramm-Leach-Bliley Act (GLBA)
A law that requires banks and financial institutions to alert customers of their policies and practices in disclosing customer information.
Buy-Sell Funding(Business Continuation Agreement)
A legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.
Material Misrepresentation
A statement that, if discovered, would alter the underwriting decision of the insurance company.
Medical Information Bureau (MIB)
An information database that stores the health histories of individuals who have applied for insurance in the past. Most insurance companies subscribe to this database for underwriting purposes. ~Insurers cannot refuse coverage solely on the basis of adverse information on an MIB report
All of the following are examples of third-party ownership of a life insurance policy except
An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan
Modified Endowment Contract (MEC)
Any cash value policy that builds cash value faster than a Seven-Pay Whole Life Contract and therefore loses the tax advantages of life insurance.
Contract of Adhesion
Any contract in which one party must either accept the agreement as written by the other party or reject it. Take it or Leave it!!
Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement?
Any form of life insurance
In classifying a risk, the Home Office underwriting department will look at all of the following except
Applicant's past income
All of the following statements are true regarding tax-qualified annuities except
Employer contributions are not tax deductible
All of the following are business uses of life insurance EXCEPT
Funding against company's general financial loss
All of the following are business uses of life insurance Except
Funding against company's general financial loss
Cross Purchase
In a partnership each partner buys a policy on the other
Referred Risk
Individuals who meet certain requirements and qualify for lower premiums than the standard risk. Applicant have a superior physical condition, lifestyle and habits.
Speculative Risk
Involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?
It is only taxable if the cash value exceeds the amount paid for premiums
Which of the following is NOT true regarding policy loans?
Money borrowed from the cash value is taxable
Substandard Risk
Not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. Referred as Rated because premiums rated up (High exposure).
Unilateral Contract
Only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. Insurer is.
Traditional IRA contributions are tax deductible based on which of the following?
Owner's income
Which of the following refers to the amount of retirement benefits a worker receives under Social Security based on the worker's earnings and retirement age?
PIA
Entity Purchase
Partnership buy the policies on the partner
Policy Summary
Provides specific information on the policy being issued
401(K) Plans
Qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. -company can match the employee's contribution, whether it is dollar for dollar or on a percentage basis. -Participants may choose to either receive taxable cash compensation or have the money contributed into the 401(K), referred to as cash or deferred arrangement plans(CODA). -Allows participants age 50 or over to make additional catch up contributions(Up to a limit) at the end of the calendar year.
Which of the following would be considered a nonqualified retirement plan?
Split-dollar plan
Presentations
Statements on a application and is believed to be true
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as
Survivor Protection
All of the following would be different between qualified and nonqualified retirement plans except
Taxation on Accumulation
Moral Hazard
Tendencies towards increased risk. Involve evaluating the character and reputation of the proposed insured. Refers to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.
Social Security Income is also called
The Blackout Period
Which of the following is an example of liquidity in a life insurance contract?
The cash value available to the policyowner
All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT
The policy is owned by the company
USA Patriot Act
The uniting and strengthening American by providing appropriate tools required to intercept and obstruct terrorism act -purpose is to address social, economic, and global initiative to fight and prevent terrorist activities
Which of the following is true regarding METs?
They allow several small employers purchase less expensive insurance together.
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
They are tax free to terminally ill insured
Which of the following insurance arrangements will be appropriate for a parent buying a life insurance policy on a child where the parent is the policyowner?
Third-party ownership
When is the earliest a policy may go into effect?
When the application is signed and a check is given to the agent
Which of the following is NOT an example of a business use of life insurance
Workers Compensation
profit-sharing plan
a benefit whereby employees may share in the profits of the business. If the plan does not provide a definite formula for figuring the profits to be shared, employer contributions must be systematic and substantial.
Roth IRA
a form of an individual retirement account funded with after-tax contributions. -An individual can contribute 100% of earned income up to an IRS-specified maximum, as with traditional IRAs. -Roth IRA contributions can continue regardless of the account owner's age and in contrast with traditional IRA, distributions do not have to begin at age 72. -Grows tax free as long as the account is open for at least 5 years -NOT tax deductible
Solvency
ability to meet financial obligations
Aleotory contract
an exchange of unequal amounts or value. The premium is small in relations to the amount that will be paid by the insurer in the event of loss.
nonprofit organization
an organization that uses its surplus to fulfill its purpose instead of distributing the surplus to its owners or members
Investor-owned life insurance (IOLI)
another name for a STOLI, where a third-party investor who has no insurable interest in the insured initiates a transaction designed to transfer the policy ownership rights to someone with no insurable interest in the insured and who hopes to make a profit upon the death of the insured or annuitant
Hazards
are conditions or situations that increase the probability of an insured loss occurring.
Stranger-Originated Life Insurance (STOLI)
arrangement in which a person with no relationship to the insured (a stranger) purchase a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies.
Morale Hazard
carelessness or indifference to a loss because of the existence of insurance. Actions taken without forethought may cause physical injuries.
Peril
cause of loss
If taken as a lump sum, life insurance proceeds to beneficiaries are passed free of
federal income taxation
Human Life Value Approach
gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured
Physical Hazard
individual characteristics that increase the chances of the cause of loss
HIPPA (Health Insurance Portability and Accountability Act)
is a federal law that protects health information. Regulations provide protection for the privacy of certain individually identifiable health information.
403(b) plan
is 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
Retention
is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self insurance. Purpose is to reduce expenses and improve cash flow, increase control of claim reserving and claims settlements, and fund loss than cannot be insured.
Underwriting/Underwriter
is the risk selection and classification process. Responsibilities are to helps prevent Adverse selection, the proper solicitation of a application, completing application, obtaining required signatures, delivering the policy, and collecting premiums and issuing the receipt. Are Field Agents
Policy Endowment
maturity date
Insurable Interest
must exist at the time of the application between the policyowner and insurer.
Standard Risk Classification
persons who are entitled to insurance protection without extra rating or special restrictions (Average Risk).
Key Person Insurance
protects against the loss of a key employee or key executive by making the business the beneficiary if a key person dies. The business is the owner, premium payor, and beneficiary.
Buyer's Guide
provides generic information on various types of policies
Transfer
refers 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.
Life Settlements
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. Has to have a Absolute Assignment
Pure Risk
refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Risk is the only type of risk that insurance companies are willing to accept.
liquidation
selling assets in order to raise capital
large of large numbers
states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.
A 60-year-old participant in a 401(k) plan takes a distribution and roll it over to an IRA within 60 days. Which of the following is true?
the amount of the distribution is reduced by the amount of a 20% withholding tax.
A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then
the benefit is received tax free
Risk Classifications (underwriting process)
the higher the risk, the higher the premium
Consequences of Incomplete Application
the insurer must return it to the applicant for completion. ~ If policy is issued with unanswered questions, the contract will be interpreted as if the insurer waived its right to have an answer to the question~
Stock Purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
Stock Redemption
used when the corporation buys one policy on each shareholder
Noncontributory
when an employer pays all of the premiums and requires 100% of the eligible employees to be included in the plan
Contributory
when the premiums are shared between employer and employee; requires 75% of employees required
Conditional Receipt (Collecting the premium)
whenever the agent collects the premiums, the agent must issue a premium receipt. Most common type of receipt and is only used when the applicant submits a prepaid application. Receipt says coverage will be effective on either on the date of the application or the date of Medical exam, whichever occurs last.
