Life & Health Ins. Ch. 14

Social Security Provides The Following Categories of Benefits: (5)

1. Monthly retirement benefits for retired workers at least age 62 2. Monthly benefits for spouses of retired workers 3. Monthly survivor benefits for the spouse and certain other survivor of deceased workers 4. Monthly disability benefits for disabled workers and their dependents 5. A modest lump-sum death benefit payable at a worker's death

Survivor Benefits

1. Widow 2. Disabled Widow (early as age 50) 3. Widow at any age if person takes care of deceased's child who is under 16 or disabled and receiving SS Benefit 4. Unmarried children under 18 or up to 19 if attending high school full time 5. Stepchildren, Grandchildren, or adopted children under certain circumstances 6. Children at any age who were disabled before age 22 and renin disabled. 7. Dependent parents age 62+

Retirement Benefits

Based on how much was earned over a full working career. Higher lifetime earnings result in higher benefits

Section 1035 (Policy Exchanges) Taxable? What policies qualify for a 1035 exchange? (3)

Certain ones are nontaxable. Generally, if policyowner exchanges a life insurance policy for another with the same insured and beenficiary and a gain is realized, it will nto be taxed as income under section 1035(a) Qualify: 1. Cash Value Life Insurance policy to another Cash Value Life Ins. Pol. 2. Cash Value Life Ins. Pol. to an Annuity 3. Annuity to another Annuity

Social Security Normal Retirement Age

Currently 65 and will increase to age 67 (born 1960 and after)

Disability Benefits

Disability under SS has a 5-month elimination period and is defined as "the inability to engage in any substantially gainful activity by reason of medically determinable physical or mental impairment that can be expected to result in death or that has continued or can be expected to continue for at least 12 months.

Dividends and Surrender Values Taxation

Dividends paid to participating policy owners are generally not taxable as income because return of premium. Interest earned on dividends is taxable. Proceeds that exceed the cost of the policy is subject to ordinary federal income tax in the year received.

Surviving Spouse's Benefit

Entitled, at the spouse's normal retirement age, to a monthly life income equal to the worker's primary insurance amount at death. If which to receive early, can elect reduced benefits starting as early as age 60. If has a dependent child, additional 75% of PIA, regardless of spouses age, until child reaches 16.

Primary Insurance Amount

Expressed as a percentage of the primary insurance amount. Based on the average level of earnings of that worker and is updated and published annually in tables by the federal government.

Accelerated Benefits Taxation

Fall into same category as death benefits, and are received income tax free as long as qualified. Qualified = insured has been certified by a physician as having an illness or physical condition that can be reasonably expected to result in death 24 months or less.

How is social security determined?

Formula based on earnings. 90% of all employed persons covered by SS and pay SS taxes. Employers pay 50% and employees 50%. Self employed pay 100%.

Insured Status

Fully, Currently, or disability insured status. Depends on how many quarters of coverage a worker has earned.

Lump Sum Death Benefit

Helps deceased survivors to pay funeral costs. May not exceed $255. Payment made to spouse, if no spouse then to an eligible child.

Cash Surrender Value Tax Implications

If a policyowner surrenders a policy for cash value, some may be subject to ordinary income tax if it exceeds the sum of premiums paid for the policy.

Policy Proceeds

May or may not be subject to federal income taxes are estate taxes.

Group Life Insurance Proceeds taxable?

Not federal income taxable when received by the beneficiary as a lump-sum payment. Premiums - not deductable when shared by employee, but are deductable for business (as business expense). Contributions paid by employer not considered income for het first $50,000 of coverage, beyond $50,000 will be taxed.

Lump Sum Settlements Taxable

Not taxable as income

Policy Loan Tax Implications

Not taxable as income because they are treated as a debt against the policy. Under contract terms, policy loans must be paid back with interest in order to maintain policy values. Otherwise it reduces available death benefit.

Social Security is also known as?

OASDI - Old age, survivors, and disability insurance.

Retirement Earnings Limit

Once a Social Security retiree reaches normal retirement age, there is no restriction on the amount the retiree may earn from employment without losing social security benefits. Retirees age 64 and under may earn only up to a certain amount without a reduction in benefits.

Cash Value Accumulation

One of the most significant advantages, ability to earc cash on tax-deferred basis.

Annuity Payments Taxable?

Only part. The fixed part os nontaxable. Remaineder of each annuity income payment is income and taxable.

Installment Payments

Partially taxable as income. The principal (the face amount) is returned tax free. The interest portion is taxable as income.

Social Security Tax

Pay-as-you-go program. Flat amount set by ingress and adjusted upward from time to time. Currently set at 6.2% for employers and employees. Self-employement is 12.4% (both employee and employer portion).

Blackout Period

Period of years during which no Social Security benefit is payable to the surviving spouse of a deceased, fully insured worker.

Dual Benefit Liability

Person eligible to receive more than one Social Security Benefit. Souse who has reached age 65 eligible to receive retirement based on own earnings and also based on late husbands earnings. Entitled to receive only the larger of the two benefit amounts instead of both amounts.

Taxation of Social Security Benefits

Portion (up to 85%) of social security retirement income benefit is includable in worker adjusted gross income for tax purposes.

Business Insurance Tasable?

Premiums paid by companies for life insurance policies for business purposes are generally not deductible as a business expense with the exception of group insurance. Proceeds received by company are tax free. Policy Proceeds not includable in esttate of individual isured by business unless individual possessed some incident of ownership in the policy. True even if insured was owner or one of owners of the business.

Premiums Taxable?

Premiums paid for individual life insurance are considered to be a personal expense and are not tax deductible. Business group term lit insurance are considered necessary business expense and are tax deductible.

Who is not eligible for Social Security?

Railroad workers and federal employees hired before 1984. Employees of state and local governments are not covered unless government entity has entered into an agreement with Social Security Administration or does not have a retirement program.

Disability Insured

Requires that the worker be fully insured and have earned at least 20 quarters of coverage in the 40 calendar quarter periods ending with the calendar quarter in which the disability begins. Requirement slightly modified in covered worker is disabled before 31.

Currently Insured?

Status of limited eligibility that proves only death benefits. After acquiring at least 6 quarters of coverage during the full 14 quarter period ending with the calendar quarter in which the person died, became disabled, or became entitled to retirement benefits.

Modified Endowment Contract

To discourage the use of life insurance contracts with high premiums as investments, federal law subjects all permanent policies to a test. If fail it is considered a modified endowment contract (MEC). MEC = Life insurance policy with premiums that exceed what would have been paid to fund a similar type of life insurance with seven annual premiums (7 pay test). If total aggregate premiums paid at any time during the policy's initial seven years exceed the total premium that would have been paid on a seven-year level annual premium basis for the same period, the contract will not meet the required seven-pay test and will be considered a modified endowment contract. Funds withdrawn are subject to LIFO tax treatment, making it less attractive. Also 10% penalty imposed on total withdrawals prior to 59and a half. Once MEC, MEC forever.

Individual Life Insurance Tax Considerations When is Life insurance taxed? (3)

Values included in the insured estate. With respect to federal estate taxes, life insurance proceeds are subject to inclusion the deceased's estate for federal estate if: 1.Estate was named beneficiary 2.Deceased was policyowner 3.Deceased transferred the policy to another person within 3 years of death

Maximum Family Benefit

When several members of a worker's family are entitled to receive benefits, the family may run up agains an overall limitation. Updated Annually.

Fully Insured?

Worker who has worked 40 quarters (10 years of covered employment). Insured for life even if that person spends no further time in covered employment. Aso fully insured if at least 6 quarters of coverage, and has acquired at least as many quarters of coverage as there are years elapsing after 1950 (or later, after the year in which the person reaches age 21) and before the year in which that person dies, becomes disabled, or reaches or will reach age 62, whichever occurs first.