IV- THIRD PARTY OWNERSHIP: Taxes, retirement, and other insurance concepts

Taxation of Business Life Policies

-premiums are not tax deductible except for executive bonus -death benefits not taxable -premiums for executive bonus policies are taxable income to the employee

Taxation of Group Life insurance

-premiums paid by employer are tax deductible -premiums paid by employee are NOT tax deductible -death benefits are not taxable - premiums paid by employer for insurance above $50,000 is taxable income to the employee

Third-party ownership

-refers to a situation where the owner of a life insurance policy is SOMEONE OTHER THAN THE INSURED 1. insurer 2. the insured 3. the owner/applicant

MEC

-too much premium paid in first 7 years of the policy= -flexible premium universal life -single premium whole life interest on cash values not taxed while in the policy -withdrawls or loans are taxed

Conversion period in group life insurance

31 day conversion period after termination of group coverage -(if insured dies during that period the death benefit is paid as if the insured had decided to convert the group coverage to an individual policy)

Key Employee

Business Life Insurance- Purchased on a ................. to indemnify business in event of.............death Can be written on either permanent o term basis. It is life insurance purchased on the life of a ................the business is both the policyowner and the beneficiary

Buy-sell funding

Business uses of life insurance: -agreements provide for the sale of a business interest at the death or disability of an owner. Often referred to as business continuation plans

Human life value

DETERMINING AMOUNT OF PERSONAL LIFE INSURANCE: is to replace an individuals economic value and this begins with a straightforward calculation the amount of individual's annual income X the # of years until retirement

blackout period

DETERMINING AMOUNT OF PERSONAL LIFE INSURANCE: Income needs- the ongoing living expenses, social security pays survivor benefits during the family dependency and retirement periods, however during the preretirement period often called..........., PAYMENTS ARE SUSPENDED fully insured=40 quarters of coverage permanently coverage survivor benefits= fully insured died widow can get 75% children/ children can get up to 15%s

Needs approach

DETERMINING THE AMOUNT OF PERSONAL LIFE INSURANCE: similar to the human life value and is used to find the amount of insurance coverage an individual should buy. Detailed/results in more accurate number/ more commonly used than the human life value Survivor's financial needs fall into 2 categories: -cash needs -income needs

Gross premium

DEVELOPMENT OF LIFE POLICY PREMIUMS: is the net premium plus the expense element, referred to as the loaded premium. The ........annual premium is the amount a policyowner pays for a policy Mortality - Interest + Expenses

Premium payment mode

DEVELOPMENT OF LIFE POLICY PREMIUMS: reflects how frequently premiums come due, -more you give up front in premium= bigger discount they funnel down to you -annual is the lowest -premiums will be higher if not paid annually

Net premium

DEVELOPMENT OF LIFE POLICY PREMIUMS: is the premium (BEFORE loading) or the morality element - interest =...........

Premiums

INCOME TAX TREATMENT- INDIVIDUAL LIFE INSURANCE: -___________ paid for individual life insurance ARE NOT TAX DEDUCTIBLE

section 1035 exchange

INCOME TAX TREATMENT: gain in annuity or kife insurance contract is taxable when the policy is surrendered. _____ tax cde allows individuals to move cash values from one contract to another without having any gain taxed at that time. To qualify, the old and the new policies must both have same insured and beneficiary. life to life= not taxable annuity to annuity=not taxable Life to annuity= not taxable annuity to life does not qualify= annuity gains are taxable

Cash value accumulations

INCOME TAX TREATMENT: -interest earnings credited to life insurance ________ are TAX-DEFERRED-NOT TAXABLE as long as they remain inside the policy

death benefits

INDIVIDUAL LIFE INSURANCE: -not taxed if paid in a lump sum -interest is taxable -if paid over time, part of the payment is not taxed and part is taxed

accelerated death benefits

INDIVIDUAL LIFE INSURANCE: are an advance of death benefits-written certification from a phyician is required, diagnosing a qualifying event thtat will substantially decrease the insured's life span. Qualified events include terminal ilnesses expecting to end in death within 24 months -NOT TAXED CERTIFIED TERMINALL ILL OR PERMANENTLY CONFINED TO A NURSING HOME

Dividends

INDIVIDUAL LIFE INSURANCE: -considered to be a return of premium -NOT TAXED -interest earned is taxed

withdrawls

INDIVIDUAL LIFE: -taxed only if withdrawal exeeds premiums paid -only the gain (if any) is taxed only universal life & variable universal life tax-free partial

-emotional, based on love and affection or -economic, based on financial dependency such as the insured's income

INSURABLE INTEREST: means that the person applying for the policy must be at risk of suffering a significant loss if the insured dies: the loss may be.................

If a cash value life insurance policy does not have a valid life insurance purpose, the IRS classifies it as a

Modified endowment contract

Premium elements

Mortality- the relative frequesncy of deaths in a specific population; death rate Interest-earning on premium dollars between the time they are collected and the time they are paid out as claims Expenses-insurer operating costs, referred to as the expense load. Adding the expense element to insurance .... is called loading

-survivor protection -mortage payoff -estate creation -estate conservation -liquidity -cash accumulaiton

PERSONAL USES OF LIFE INSURANCE:

Insurable Interest

REQUIRED FOR THIRD PARTY OWNERSHIP: a legitimate reason to own life insurance. can't just gamble an hope for death. It must exist at the "inception'' of the policy but thereafter is not required. -(To have a policy issued on someone else's life the applicant MUST HAVE _____) -ONLY REQUIRED AT TIME OF APPLICATION

Entity plan

TYPE OF BUY-SELL AGREEMENT: purchaser of a deceased owner's business interest is the business entity itself. If business is a corporation, referred to as stock redemption plans-b/c the corporation is actually redeeming the deceased owner's stock/ Plan usually used with non-incorporated businesses such as partnerships

cross purchase plan

TYPE OF BUY-SELL AGREEMENT: the surviving owners purchase the deceased owner's interest in the business. When funded by life insurance, each partner (or shareholder if the business is a corporation) owns a policy on the lives of each of the other partners. If there are more than two partners or sharholders, many more policies are needed for _____ than an ________

Noncontributory plan

TYPE OF GROUP LIFE INSURANCE: -premium paid by employer -100% if eligible employees must enroll

Contributory Plan

TYPE OF GROUP LIFE INSURANCE: Employee pays part or all of the premium -75% of all eligible employees must enroll

Modified Endowment Contract (MEC)

The IRS has written rules that define when a life insurance policy does not have a real, valid life insurance purpose and is in substance an investment or savings plan

Life settlements

Viatical arrangement is also known as

A Viatical Arrangement

individual or org buys a life insurance policy from a terminally ill insured person for a sum of money less than face amount

MEC

is a special type of life insurance under federal income tax law. Specifically, the law prescribles a test that is intended to differentiate between policies that are purchased for certain tax advantages, vs. policies that are purchased primarily for death benefit

viator

is the insured who is transferring the life policy to the viatical settlement provider

policy loans

reduce the cash value of the policy and can be used as collateral for the loan. They redyce the death benefit;however, loans can be repaid at any time, which retores the cash value and death benefit -interest paid on ______-- is NOT TAX-DEDUCTIBLE

Key employee purpose is

to keep the business going at the death of the key employee -PREMIUMS CANNOT BE TAX DEDUCTED (TAX FREE)