Life Insurance & Annuities / Retirement

Section 1035 Exchanges

Insurance, Endowment and annuity policies are considered to be property so the gain or loss on each exchange of the policies will be considered for tax purposes by the IRS. *exchanges allow for people to fund annuities and retirement accounts with life insurance or other cash value contracts. Unlimited funds may be exchanged tax-free as long as the person does not take a distribution.

Specialized Policies

Joint Life (First to DIE) Joint life, known as first to die, insurers two people on one policy and pays the death benefit when the first person dies. it is CHEAPER to purchase one life insurance policy as opposed to two, so a married couple or business partners would save money using one joint life policy as opposed to two individual policies. Premiums are based upon the average age and health status of both people and policy will cease to exist after it has paid the death benefit upon the first person's death. Survivorship (Second-to-die) Survivorship Life, known as second-to-die, is the opposite of Joint Life. The policy is used to insure two ore more people on one policy but will only pay its death benefits upon the last person's death. If the first person dies, no benefits will be paid, the death benefit will only pay out when every person insured on the policy has died. SURVIVORSHIP insurance is best used for estate planning, such as estate conversion, and again is lower cost as opposed to buying multiple policies.

Social Security Blackout period

No benefits paid to spouse.

ROTH IRA's

ROTH IRA's are funded with after tax dollars but grow completely tax free; the person funding the roth account will not take a tax deduction on contributions, but upon reaching retirement age, all contributions and the interest (gains) earned will be tax free. ROTH IRA'S are preferable when income tax rates are lower and expected to rise in the future. To prevent abuse of Roth IRA's, the accounts must be open for 5 years to gain access to tax free growth; however, Roth IRA's do NOT need to begin withdrawal at age 70 1/2 like Traditional accounts.

Disability Income Benefit Rider

When selected by the policy owner, the disability income benefit rider (in the event the insured becomes disabled) will also wave the policy premium payments; but the insured will also receive monthly disability income check of say $100-$200. The disability income rider is only to help offset costs, not designed to replace full income.

Individual Retirement Accounts (IRA's)

All american citizens may set up an IRA, especially those who do not qualify for employer sponsored retirement plans.

Settlement Options

Lump Sum: The annuitant receives a one-time check from the insurer for the full amount of the death benefit. Interest Only: A temporary option, which will conserve the face amount until a later date, but pay the annuitant small amounts of interest over time. Fixed amount: The annuitant will receive a fixed amount of money each year until funds are exhausted. During this time, the cash value will grow interest, so the money lasts much longer. Fixed period: The annuitant will receive the funds over a period of time. This is commonly used for lottery payments and court settlements. Life annuity: Pays income for life to the annuitant.

Liquid asset

Meaning the funds are easily accessible without needing to sell stocks or a home for access to the cash value.

Viatical Settlement

Selling an existing policy to a third party upon terminal illness Viator = Insured with terminal illness (Agent represents viator)

EMPLOYER SPONSORED RETIREMENT ACCOUNTS

There are various retirement plans offered by employees for the benefit of employees; the names are typically derived from the IRS code. such as 401K plans are called 401K, because that is the line where it can be found in IRS Rules.

Premiums

determined by an actuary of the insurer, based a set rate of per $1,000 of coverage. Actuary is a mathematician who uses statistics and the law of large numbers to predict losses for the insurer, then utilizes three primary factors to determine premium rates.

Ordinary life insurance and Industrial life insurance

over $1,000 face amount for ORDINARY under $1,000 for industrial life insurance and the primary purpose of industrial was funeral expenses for "blue collar workers" such as railroad employees or mining employees.

Since no premium was accepted at the time of application, the agent must obtain?

statement of good health and premium

401K Retirement Plan - CODA

(Cash or Deferred Arrangement Plan) * a 401k plan is a voluntary employer sponsored retirement plan which is primarily funded by an employee; 401ks allow for 17,500 pre tax contribution in 2014 by an employee, and employers may choose to make extra percentage contributions if they wish. If the employer chooses to match contributions, the contribution will not be included in the employees gross income, but may be taxable upon distribution past age 59 1/2. There are three primary ways a 401K plan may be funded.

What is a policy rider?

A rider is an insurance policy provision that adds benefits to or amends the terms of a basic insurance policy. Riders provide insured parties with options such as additional coverage, or they may even restrict or limit coverage. There is an additional cost if a party decides to purchase a rider.

What is an Annuity?

An Annuity are a cash value account that will be liquidated in a structured way; such as a $1,000,000 death benefit being paid out over 30 years.

Nonforfeiture Options

" "to not give up" nonforfeiture is referring to the cash value in policies such as whole, adjustable and universal life. If the insured cancels (surrenders) the policy early, the insurer cannot keep the cash value; essentially, the insured cannot give up the cash value in a policy, since it is "nonforfeiture". There are three ways to utilize the cash value in a policy upon surrender: Cash Surrender Value: Receive the cash value in a check, minus any surrender penalties. Reduced paid up: Reduces the death benefit of the policy, but uses the cash value to "pay up" or "pay off" the policy. IE: 100K whole life reduced to 60K whole life, but paid off. Extended Term: Cancels the policy, but uses the cash value to pay for a term policy of the same death benefit. IE: 100K whole life exchanged for 100K term, but only for 5 years. These nonforfeiture options allow the insured to keep a policy in force instead of cancelling if they cant afford it. The reduced paid up and extended term options will continue to give the insured coverage without and future premiums payments.

Policy Riders

Riders can be used to supplement an existing life insurance policy providing increased coverage, or they can be utilized so that coverage decreases. Using riders to decrease coverage will most likely decrease premium payments. On the other hand, using riders to increase coverage will most likely increase premium payments. Eliminating coverage that is not needed is an effective way to reduce cost, "don't pay for what you don't need."

Contestability & Incontestability Clause

The Contestability clause sets a TWO YEAR TIME LIMIT, from the issuance of a policy, that an insurer may deny claims or void a policy due to material misrepresentation on the application. After two years have passed, from the issuance of the policy, the insurer may not deny claims due to material misrepresentation, fraud, or concealment on the application.

How does life insurance work very similar to amortization?

The insurance companies invest premiums and earn interest to make profits; if all of the premiums are paid early, money can be invested right away. The longer the insured takes to pay the policy off, the more expensive the overall premium. 4 Different ways to pay off for whole life policies and they all have different names; these are still all whole life, the only difference is when the policy is paid off: Straight life, Limited pay, Life paid up @ 65 and Single Premium.

OWNERSHIP (Owners rights) Provision

The policyowner is responsible for 1) paying the premiums 2) Naming a beneficiary 3) Choosing the death benefit 4) Cash value loans and withdrawals 5) Canceling the contract if they wish Once a policy has been issued, the only changes that can be made are by the policyowner through riders, endorsements, or amendments that are approved by the insurer. IF the policyowner dies and the policy remains in force, and could be transferred to the policyowners estate, or more commonly ownership is transferred directly to the insured.

Buy-sell funding (Buy-out, Sell-out) (fund the sale of a business)

CROSS PURCHASE PLANS = each partner/owner will purchase a policy on the other owners in the amount of their interest. MOST buy-sell agreements are Cross-purchase plans. ENTITY PURCHASE PLANS = The business itself purchases the polices on the owners; and upon an owner's death, the business will receive the funds to purchase the shares from the family members. BUY-OUT = Works the same way that life insurance would, except instead of death, the policy will pay out when a partner is "economically dead". Disability buy-outs are typically written as entity purchase plans, not cross-purchase.

Cash Value Components in Life Insurance

Death Benefit: Also known as the "face amount", is the amount of money a beneficiary will receive when the insured dies. All life insurance will include a death benefit; HOWEVER annuities will not have a death benefit. Cash Value: A savings account attached only to permanent life insurance and annuities. Essentially a portion of each premium payment goes into an account, and while the insured is alive, the policyowner may withdraw these funds, or even take a loan against it. Cash value consists of two components as well: * Principle: The premiums paid into the policy, just like placing $100 into the bank. The principle is always tax free. * Interest: Any money earned on the principle, through either investments or a set percentage listed on the contract. IF you place $100 into the bank then next year you will have $102, the $2 is earned from interest. Interest is ALWAYS TAXABLE upon withdrawal.

Decreasing Term

Decreasing term policies will see the death benefit decrease over a period of years, but again, the premiums will still remain the same during the policy. *Decreasing Term insurance is mostly used for mortgage protection and to cover credit lines, and to be used as collateral for loans. Since the death benefit will be decreasing as the insured gets older, the risk to the insurer is lowered and which in turn allows for the premiums to be cheaper. NOTE --> Decreasing terms are NOT renewable because at the end of the term, the death benefit is zero.

Grace Period

When the insureds premium due date passes without payment, the policy does not automatically lapse, the insured is still covered during their grace period. The grace period HELPS PREVENT THE UNINTENIONAL LAPSE of a policy by giving an insured extra time to make their premium payment past the due date. The grace period varies by which premium payment mode the insured chooses: Annual & Quarterly Payments: The grace period is 31 days Monthly Payments: The grace period is 10 days Weekly Payments: Not often utilized unless through payroll deduction, the grace period is 7 days Claims during the grace period will be REDUCED BY ANY UNPAID PREMIUM.

Whole Life Insurance

Whole life insurance provides death benefit protection until age 100; should the insured survive to age 100, the policy will "endow/mature" and the face value will be paid directly to the insured without the need of death, thus providing for permanent protection. Whole life insurance also builds cash value (savings account) with each premium payment, providing a living benefit that the insured may tap into at any time while alive. With the combination of permanent life insurance and a cash value account, the premiums of whole life are much higher than the temporary protection term.

Classifications of Risk

After the underwriter has reviewed all pertinent information, they must begin to classify the risk to determine premium prices. 4 main classifications of risk PREFERRED RISK = will receive a discount on their premiums, typically this is a risk that is in the correct height and weight proportions with little to no medical problems and is a non-smoker. STANDARD RISK = Are representative of the average person; the standard risk is the insurer's base rate and is not rated-up or rated down. SUBSTANDARD RISK = Typically have medical issues and receive a rated up premium DECLINED RISK = will not receive an insurance policy; there are many instances of being declined, such as no insurable interest, extremely high medical issues, too old or too young. SPECIALIZED RISK = A specialized risk policy insures extreme or high risk situations or items for people who would normally be excluded. Pilots, Actors, Football & Sports Athletes, Models, Singers etc. may receive a specialized risk policy to provide protection for their field.

Limited Pay (Whole Life)

Any policy that is paid up prior to age 100 will be considered "limited pay", meaning that the premiums have been limited to before the endowment age. A 10-pay whole life policy would be a policy paid off in 10 years, but still provides coverage until age 100. Life paid up @ 65, Single premium, 20-pay and even life paid up @ 99 would still be considered "limited pay". Straight life is NOT limited pay, because the premiums are not limited in any fashion, with a straight life policy, the premiums are paid until age 100.

Policies with guaranteed cash value growth? Disadvantage of fixed products is what?

Fixed Universal Life, Fixed Annuity, Traditional Whole Life, Adjustable Life Disadvantage of fixed products is going to be inflation which is the devaluing of money. Say that inflation is 4% and the account is earning 6%, then the policyowner only really earned 2%; the insured cannot change any terms of the contract.

Mortality Cost

In life insurance, a cost determined using the information on a mortality table. To calculate the mortality cost, THE FACE AMOUNT of a policy is multiplied by the chance that the policy will have to be paid out as a claim, specifically, that the insured will die.

Interest Sensitive

Indexed and Variable products may be considered Interest Sensitive because the premiums could possibly be affected by how the interest rates are credited to the account. Whereas traditional fixed products, such as whole life and adjustable are NOT interest sensitive.

Option A Universal Life

Option A is less expensive because the death benefit comprises of insurance and the cash value account. The insured cash value is essentially part of the death benefit. Mortality cost of Annually Renewable Term is much lower; with the lower cost of ART and coupled with variable stock market investments, the policies cash value could grow very quickly IRS has established the IRS corridor that must be maintained should the cash value encroach on the death benefit, maintaining a pure insurance limit. If the insured passes the corridor the policy becomes a Modified Endowment Contract. Corridor = A concept in universal life insurance. The corridor is the amount of pure insurance protection above the accumulation value to qualify as life insurance for tax purposes. Accumulated Value = Is the total amount an investment currently holds, holding the capital invested and the interest (gain) it has earned to date. The Accumulated value is important in the insurance field because it refers to the total acquired VALUE of a whole (or universal) life insurance policy. Modified Endowment Contract (MEC) = is a cash value life insurance contract in the United States where the premiums paid have exceeded the amount allowed to keep the full tax treatment of a cash value life insurance policy.

Use of Annuities

PERSONAL AND NON EMPLOYER ANNUITIES *most personal annuities are utilized for retirement or education planning, but annuities may be used as judicial (court) settlements, or lottery pay-outs, or any time a structured liquidation of funds over time is needed. QUALIFIED ANNUITIES * A qualified annuity has passed the IRS guidelines to be a retirement account. These are typically employer sponsored retirement vehicles where funds are accumulated as pre-tax dollars and when funds are paid out, they will be taxed. In order for an annuity to be considered qualified it must meet a wide range of tests to deter discrimination. NON QUALIFIED ANNUITIES Non-qualified annuities are typically purchased outside of the workplace and are funded with after-tax dollars. There are no specific IRS requirements to follow because the accounts funds have already been taxed. upon withdrawal, only the interest will be taxable in the account.

Who is the applicant for a key person policy? Business overhead expense covers all of the following except?

The business The owners salary

Underwriting

Underwriting is process of checking applications by utilizing classification of risks, and is performed by an employee of the insurer known as an underwriter. (only the underwriter sets premiums and issues policies)

Right to examine (Free look) how many days?

When a policy is delivered to an insured, they will have 10 days after the time of delivery to return the policy to the insurer and receive a full refund for all of their premiums. This allows the insured to look over the policy and determine if it is suitable for them. How long is the free look period for Medicare Supplement and Long Term Care Policies? and the TIME OF DELIVERY begins when the agent hand delivers the policy, or at the time of the postmark when mailed directly to the insured.

Annuities are ..

financial products sold through life insurance companies with the purpose of prolonging funds to create a steady income stream. What are they typically used for? retirement, education savings, lawsuit settlements, lottery jackpots and any other time a person may need a steady income for years or even the rest of their life. Funded over time called what? Deferred Annuity Funded with a single payment is called what? Single Premium Immediate Annuity In short, an annuity is typically used as a retirement savings account that will earn interest, and upon achieving a certain age (usually 59 1/2) the annuity will begin repaying those funds; but instead of receiving the funds all at once, the payments will be made over time in structured installments. Structured Liquidation = An annuity would be considered structured liquidation of funds over time, that typically pays income for life (Life Annuity)

TRADITIONAL IRA's

funded with pre-tax dollars (or tax deductible dollars) and funds grow tax deferred. Since the account was funded with non-tax dollars, the IRA owner will pay ordinary income taxes only when funds are withdrawn from the IRA.

The Underwriter may ALSO

pull the insureds medical records from the MIB (medical information bureau which is a non-profit organization that share application information between insurers. 98% of all health insurers and 80% of all life insurers are members of the MIB; each time an application is taken, the insurer will send the application to the MIB to be stored for later underwriting.

Option B (INCREASING) Universal Life

(INCREASING) universal life has the same pure insurance amount throughout the entire policy. If the cash value grows, the death benefit increases as well to ensure that the policyowner maintains the same pure insurance amount. This option is more costly as the cash value and death benefit are two separate factors, resulting in a higher amount paid at death by the insurer. Universal life insurance is typically written as Variable Universal Life or Indexed Universal Life, where the cash value may be invested in stocks or tied to an index such as the S&P 500. S&P 500 = ( Capitalization-weighted index) * Standard and Poor's index is a market capitalization weighted index of the 500 largest U.S. publicly traded companies. The S&P is a float weighted index, meaning company market capitalizations are adjusted by the number of shares available for public trading.

Life Annuity Option

(Life Settlement option) Life Annuity provides monthly income to the annuitant for life, even if funds are exhausted early. This option is known as the life income selttlement option and pays income for life; but once the annuitant dies, payments cease. Pure life: Payments are made only to one person for their entire life Joint life: Income will be split amongst two annuitants for life; when one annuitant dies, the payments will cease to all annuitants Joint & Survivorship: Income provided to two or more annuitants, when one annuitant dies, payments continue on to the survivor either with full benefits or reduced to 66 and 2/3 of the total payment Period Certain Option = The period certain option may be attached to any life annuity and would guarantee income for a certain period of time even if death arrived. * Once a person chooses to retire, they do not want to outlive their savings; a life annuity is typically used for retirement purposes. Since the payments end upon death, the insured typically adds a 5-10 year period certain option to protect if the event they die earlier than expected.

403b - Tax Sheltered Annuity Plan (TSA, TSP)

403B plans are very similar to 401K plans, except 403B plans are specifically for public school employees and nonprofits such as religious organizations or charities; which are defined by IRS code 501 as tax exempt employers. The employers

SEP IRA (Simplified Employee Pension)

A SEP IRA, is a Traditional IRA established by an employer for an employee, where the employer makes all contributions into the account and must contribute the same amount to all employees retirement accounts. SEP's have a much higher contribution limit than regular Traditional IRA's because the business is making the contributions; in 2014, contributions may be up 25% of an employees' salary to a maximum $52,000. SEP's are ideal for high income earning small business for either the self-employed or family owned businesses.

Waiver of cost rider

A waiver of cost rider provides that in the event of the disability of the insured the cost of the insurance is waived. The cost of the premium amount necessary to accumulate cash value is not waived; so cash value growth will stop unless extra premium payments are made.

Waiver of Premium Rider

A waiver of premium rider allows for the insured to waive premium payments during a period of disability. Most often, insurers impose a 6 month waiting period from the start of the disability until the first premium is waved. IF the insured is still disabled after the waiting period, the insurer generally will refund the premiums from the onset of the disability.

Flexible premium policies

Adjustable life: A combination of term and whole life; the insured may convert between the two without proving insurability (medical underwriting). The policy is considered CONVERTIBLE INSURANCE and also builds cash value due to the whole life aspect. Universal Life: The most flexible policy, where the insured has a target premium, but is not required to pay that exact amount. The policy is a combination of Annually Renewable term and a cash value account; the insured must be careful of the corridor with variable universal life.

Dividend Options

CASH IN HAND --> Dividends can be distributed through a tax free company check REDUCTION OF PREMIUM --> Dividends can be used to pay policy premiums and lessen the policy owners out of pocket expense. ALLOW DIVIDENDS TO ACCUMULATE AT INTEREST --> Dividends do not necessarily have to be disbursed; the funds can be left in the account to accumulate with interest and be withdrawn later. Dividends are considered a nontaxable return of premium; however, any interest that has accumulated must be declared as taxable income whether or not the funds have been withdrawn. USE DIVIDENDS TO BUY PAID UP ADDITIONS --> Additional life insurance can be purchased as long as it is of the same kind as the original policy. Premium rates will probably be higher since the insured will be older. USE DIVIDENDS TO PURCHASE ONE YEAR TERM INSURANCE --> This is so called "fifth dividend option" allows the policyowner to use the dividends to purchase one year term insurance at net rates, usually limited to no more than the current cash value of the contract.

(Equity) Indexed Interest Rates

Cash Value is tied to a stock index such as the S&P 500; but not actually invested in the index. MINIMUM GURANTEED FLOOR: Indexed products cannot lose money because the insurer sets a minimum guaranteed interest rate. If the S&P 500 goes down 10%, the account will not go down because its not invested into the S&P 500, just tied to it. The insurer sets a minimum guaranteed earnings percentage usually 0-3%. FIXED PRODUCT: Since indexed products are not invested in the markets, they are considered fixed products, with no need for a securities license. CHANGING INDEXES: The policyowner may change indexes at the end of the index term, which is usually 1,3,5, or 7 years.

Specialized policies

Credit Life Credit insurance is a decreasing term life policy used to cover the balance of current debts, such as credit cards, mortgages and auto loans; usually limited to a 15 year or smaller loans. Creditor: The bank or lending institution who required the loan. The creditor is the beneficiary of the policy and will receive the benefits to pay off the loan. Debtor: The policyowner & Insured; the debtor must pay the premiums of the policy.

Variable Annuity

During the pay-in-phase, annuity funds may be invested within the stock market and other investment vehicles. Variable annuities provide the policyowner with more control over the interest rates because the funds may be invested in different stocks or mutual funds and may provide added protection against inflation due to this control. Variable annuities earnings are called annuity units, instead of interest, when the policy begins paying out.

Specialized policies

FAMILY POLICIES An entire family may be covered under one policy; but the one policy would consist of multiple different insurances. Head of household or both parents would receive traditional whole life policies and the children would receive convertible terms. Essentially 4 different policies but 1 premium is going to be paid. IF the parents have another child, it would be considered covered automatically for 14 days (Life insurance, health is 31 days); the parents may add the newborn onto the policy within that timeframe.

Now what if we withdraw out of the cash value? Will there be any taxed involved? Well the accounting method will depend on which type of policy it is:

First In First Out (FIFO): Whole life and Universal life insurance utilize FIFO, where you will withdraw principle first, then withdraw interest second, Principle was First In, therfor, Principle is First Out: meaning you could withdraw $8,000 tax free because you would withdraw all principle. Last In First Out (LIFO): Annuities (Accumulation Phase) and Modified Endowment Contracts (MECs) utilize LIFO. Interest will be withdrawn first and taxes will be paid on it; after all of the interest is withdrawn, then principle comes next. If you withdrew $8,000, you would pay taxes on $2,000 (interest) and then $6,000 would come out tax free. Policy Loans: Policy loans are taken without paying taxes; but you may have to pay the loan back with interest. Even though the money is the policyowners, they may have to pay the insurer interest because the insurer cannot invest the money loaned to the owner. Typically the insurers may NOT charge more than 6%-8% interest. However, if a policy becomes a MEC loans are taxed.

Determining the amount of personal life insurance

HUMAN LIFE VALUE APPROACH = developed in 1924 by Dr. Solomon Heubner, this approach takes into account ONLY the applicants networth. The HLV method includes the age, occupation, applicants investments, applicants age to retirement and future earnings potential when placing a value on their life; WHILE completely disregarding the applicants family's needs, inflation, and increase in standard of living. NEEDS BENEFIT ANALYSIS (Needs Approach): The needs approach was designed to replace the HLV method, as the approach takes into account the surviving family members when determining the amount of insurance needed. THe spouses income, child's education funds, social security, pension plans, and all other forms of income are now included in the method. MUCH MORE THOROUGH

Increasing Term

Increasing term policies are also purchased for a specific amount of years, and the premiums are still locked in for that factor but the unique factor about increasing term is that the death benefit will increase over time, NOT the premiums. Increasing term policies are commonly sold to protect against inflation and cost of living increases, or sometimes utilized by new business, or younger people who are expecting to accumulate more wealth later on in life. The amount the death benefit increases is not random; the policyowner may choose a specific amount of increase every year or tie the death benefit to the Consumer Price Index (CPI) ensuring the death benefit keeps pace with inflation and protects against the devaluing of the dollar. (*understand and do some research to really be able to explain this thoroughly)

3 Primary term policies

Increasing term: The death benefit increases, but premiums remain the same Level: The death benefit and premiums both remain level. (each has a different price point but level is the most expensive, increasing a little cheaper and decreasing being the least expensive) Decreasing: The death benefit decreases, but premiums remain the same

LESS commonly sold Whole Life

Indeterminate Premium: Premiums will change up/down each year based off the insurer's investments and profitability. The insured will not know what the premiums will be until the next year when the insurers accounting is finished. Modified Whole Life: Lower premiums for the first 3-5 Years, then increased; good for insureds with low income in financial needs. Graded Whole Life: Lower premiums for 3-10 years, then increased; used commonly with older insurers. Enhanced "ECONOMATIC" Whole Life: Participating (Mutual) Insurers use dividends to control the premiums of the policy. Variable life: A FIXED premium policy but the cash value is invested in stocks. Even if the stocks lose value, the death benefit stays the same.

PROS and CONS of Indexed Universal Life Insurance

Indexed Universal Life Insurance is getting a lot of interest amount those looking for little investment action with their life insurance protection these days. IUL also known as Equity-Indexed Universal Life Insurance is something of a hybrid vehicle Like any whole life insurance product, it gurantees a payout upon death. AND like other types of universal life insurance, IUL holds cash value that goes up over time, as premiums are paid. Where is the difference? The difference with IUL is that the policyholder can tie up to 100% of the policy's cash value to a stock market index. The remaining portion if any, goes to a fixed account. IF the indexed account shows gains a percentage of income called the "participation rate" is added to the cash value of the policy. IF the index falls in value or remains steady, the insured's account nets little or nothing. ALTHOUGH it reflects the performance of securities, IUL is not an investment security itself. The cash value is not actually invested in the market of the index. The index is just a measuring device to determine the interest crediting rate on the cash value account.

Interest

Just like a bank, the majority of an insurer's revenue is derived from interest earned on investments. When a customer pays their premium, the insurer invests the premium, typically in real estate or bonds, and generates income from those gains. The insurers invest premiums so that they can keep premiums low (do more research on this). Actuaries assume that all policies are paid in advance to predict an assumed interest rate for the year to create the Net Single Premium to pay off the policy well in advance. Meaning that the customer could pay only the mortality costs up front and receive a huge discount for paying off the policy in one lump sum this would allow the insurer to invest the premiums and earn their own interest.

Annual Renewable Term (ART)

LEAST expensive term form of all life insurance due to the fact it is only a one year term policy which will renew each year. *Since the policy is technically good for only one year and the premiums are locked in for that one year, the premiums will have to increase each time the policy renews (known as a step-rate method) (Policy only good for one year and premiums are LOCKED in for that one year) * each time the policy renews, the insured will NOT need to prove insurability (medical underwriting) every year, but mortality (understand) costs will only factored in for the current year of the policy.

Most commonly purchased life policy, and the most expensive term are what?

Level Term = death benefit and premiums remain the same throughout the life of the policy. Nothing will change, until the term either expires or the policy is cancelled. The insurance is easy to understand for the policyowner because the beneficiary will always receive the same death benefit no matter when the insured dies. When is level term sold you might be wondering? Level term is going to be sold when a person requests a specific amount, such as $200,000. - The person would likely add up all of their needs and cover it under just one policy. - Any extra insurance would be justified as being left to a spouse or child.

What annuity would not have a refund option?

Life annuities do not have a refund option Life annuities, when the annuitant dies, the payments cease completely unless they added the period certain optoin

How do annuities differ from Life Insurance?

Life insurance is based around death and creation of an estate, with a settlement that will be paid to a beneficiary only upon death; whereas, annuities are based upon life and the liquidation of an estate. Annuities provide for the living and life insurance protects survivors in the event of death. The two may act the same in many regards, but only life insurance has a death benefit, annuities do not include a death benefit, which allows the annuity to have pure cash growth at a much higher rate than life insurance. Annuities provide for a stable way of paying funds over time and are defined as Structured Liquidation of funds over time.

Life paid up at 65 (whole life): $$

Life paid up @ 65 allows for the premiums to be paid off at 65, but coverage lasts until age 100; this is perfect for retirement. The policy be cheaper than straight life and build faster cash value growth, but the monthly bill will be a little bit higher. *Great for retirement, lower overall cost, better cash growth

Convertible Term

Many people purchase term for the benefits of having a lower premium, with the expectations to purchase permanent life insurance later on in life. * Todays' term policies may add the option to be convertible, allowing the insured to exchange the term policy for a whole life policy at any time regardless medical history. *All whole life polices may be switched to term with no medical underwriting, but Term polices must be convertible in order to switch WHOLE. * Think of it like a credit card; if you are approved for $50,000, you can use any limit under that. But once you try to spend more than $50,000, you can use any limit under that. But once you try to spend more than your limit the credit card company wants you to prove your income, because that would be a higher risk to them; insurers work the same way.

Expenses

ONE of the insurer's largest expenses comprises in the function of policy reserves. A set amount the insurer must keep on hand to saving for future claims. The gross premium is what the insured typically has to pay because most policies are not purchases with one lump sum payment. Any time a customer chooses to pay over time, they have to help pay some of the expenses not earned by the insurance company through interest.

Pure Salary Reduction Bonus/Profit Sharing Thrift Plan

PSR = Funded by an employee on a pre-tax basis from each paycheck; where the employer matches a set percentage or amount each year. BPS = The employer offers an employee a bonus each year, that the employee may elect to be applied to the 401K plan. profit sharing plans typically include vesting limits of 2, 5, or 7 years until the employee gain access to the funds. Thrift plan = Specifically designed for employees of the federal government, working very similar to a pure salary reduction plan.

Adjustable Life Insurance

Prior to 1971, Insureds only had the choice between Term Life and Whole Life, which were very limiting in nature and were not convertible, thus if a person's medical status changed for the worse, they may be unable to qualify for a new life policy. To fix this problem and fill a need, an insurer developed ADJUSTABLE LIFE INSURANCE to provide clients with more flexibility. Adjustable life insurance is convertible between Term and Whole life, meaning that the customer may swithc between the two at anytime without proving insurability. Does adjustable life insurance build cash value? YES adjustable life insurance does build cash value because it may be switched to whole life at any point and begin building cash value. Should the insured decide to swtich back to the term, the policy will no longer build cash value, and any previous cash value is typically used to pay for the term premiums. *Control premium payments by switching, Control length of coverage by switching, Decrease death benefit without proving insurability, Increasing of death benefit (will likely need to take a medical exam)

Term Life Insurance Policies: Term, the lowest cost of all life insurance policies and is considered temporary life insurance.

Purchased for a specific amount of years such as 1,5,10,20 and 30 year terms or sometimes to a specific age such as 75. Premiums remain fixed during the term and will not change unless the policy is renewed, upon which the premium will increase due to the insureds higher age. Since term only provides for a death benefit and has no other frills, it may be considered pure death protection and will not build cash value; which results in its low price. When reading the names of term policies, remember that the premiums remain the same during the term but the death benefits are what will be changing. Term policy names refer to the death benefit.

3 Primary types of Whole Life

STRAIGHT LIFE: Must pay premiums each year until age 100 when the policy endows. The policy is not paid off early and has the highest overall premium cost. LIFE PAID UP AT 65: Coverage until age 100, but the policy is paid off at 65. SINGLE PREMIUM: Also covered until age 100, but the policy is paid off in 1 payment. NAMES: refer to the name the way the policy can be paid off. Single premium is the least expensive overall, and the most of the premium goes into the cash value. This is very similar to paying for a house in cash.

Settlement, Nonforfeiture, and Dividend Options

Settlement Options: This is how the beneficiary will receive the proceeds of a life insurance or annuity contract *LIFFL Lump Sum, Interest Only, Fixed Amount, Fixed Period, Life Annuity Nonforfeiture: These are the options the policy owner may utilize with the cash value in a Whole life or Universal life contract. Nonforfeiture means the policyowner cannot give up the cash value in the contract, the insurer must return it back to them in some fashion. *CRE Cash Surrender Value, Reduced Paid Up, Extended Term Dividend Options: Only paid up by (Mutual) insurers to their policyowners; if the insurer pays a dividend, the customer may either receive it in cash, pay off their policy or add additional insurance. Dividends are not guaranteed. *CEPPO Cash payment, Earn interest, Paid up insurance, Paid up additions, One year term

Single premium (WHOLE LIFE): $

Single premium whole life is paid off in one lump sum, meaning there are no additional premiums required; the policy is paid up FULLY. May be relatively high, into tens and thousands of dollars; but, single premium whole life is the least expensive overall because the insurer will have the longest amount of time to invest the premiums, which provides a large discount for the customer. When does this policy generate cash value? Immediately but may have a surrender charge (penalty) if the cash value is withdrawn early; the penalty usually begins at 10% and decreases each year as long as the funds have not been withdrawn. Perks? ----> Lowest overall cost and highest cash value growth.

Straight (WHOLE) Life

Straight life insurance is whole life, but the premiums will be paid every year until age 100, meaning the policy is NOT paid off early. Straight life is the most expensive overall type of whole life because the payments are stretched for the longest period of time (age: 100). The insurer can only invest those small premiums at a time, so the insured will have to make up the profits that the insurance company is not earning; it will take 3 years to build cash value just to cover the insurers expense of the policy. * The vast majority of whole life policies are straight life just like the most common mortgage is the 30 year mortgage, because both have the lowest monthly premiums. However, in both scenarios these are the most costly choices for customers because they have to pay the interest costs for the financial institution. *highest overall cost/ slowest cash growth / Most commonly purchased

Reasons to purchase LIFE INSURANCE

Survivor protection = The MOST IMPORTANT reason for life insurance is utilized to maintain the lifestyle for the family, such as replacement of income in the event of the wage-earning spouses death. Final expense (funeral) funds, education funds, emergency funds, monthly income etc. ESTATE CREATION = An estate consists of a persons Assets, Liabilities and Taxes (Probate, Estate, Death taxes). If a person has a negative net worth upon death, if any assets are left to the family/heirs, the creditors may sue the heirs for the amount willed to them. Estate creation will create an estate and allow cash to be left to the heir. ESTATE CONVERSION = There are federal and state estate taxes ("death tax") on any amount left to an heir other than a spouse. Life insurance can be used to pay off those taxes, so the assets do not need to be sold. Assets left to a spouse are not taxed, but assets left to children are. LIQUID CASH ACCUMULATION = Life insurance is the only form of insurance to accumulate cash (permanent policy with a cash value account) and that cash value is a liquid asset, meaning the funds are easily accessible without needing to sell stocks or a home for access to the cash value.

Life Insurance Policies

TERM = Temporary, less expensive life insurance with no savings account. WHOLE = Permanent to age 100, has a savings account attached to it. The savings account is called "cash value" Adjustable = Convertible between Term and Whole without medical underwriting. Universal = Flexible policy comprising of annual renewable term and cash value. Premiums and death benefits are tied to the savings account.

ASSIGNMENT

The assignment provision allows for the policyowner to transfer the rights of the policy; essentially moving rights from the current policyowner and transferring those rights to a new policyowner (called the assignee). 2 DIFFERENT TYPES OF ASSIGNMENTS ABSOLUTE ASSIGNMENT = allows for an irrevocable, one-way, permanent full transfer of all rights to the policy. The current policyowner will be fully removed and a new assignee policyowner will fully take over the contract. COLLATERAL ASSIGNMENT = Allows for a revocable, two-way, temporary partial transfer of rights to the policy; this is most often used when securing a debt, such as a bank loan; the creditor will obtain certain rights, such as being named as a beneficiary for the amount of the loan. *After the loan is paid off the policy is transferred back to the original policyowner; if the policyowner dies before paying off the loan, the bank will receive the death benefit covering the loan and any excess will be given to the remaining beneficiaries (usually family members)

Variable Interest Rates

The cash value is invested in stocks and investments, which pay the policyowner the current rate of the investment. Variable products see higher gains, but are riskier investments; most retirement accounts such as 401ks are variable products. SEPARATE ACCOUNT: Since the product is invested in the stock market, each policyowner will have their funds held in separate escrow accounts ( is an account where funds are held in trust while two or more parties complete a transaction) INFLATION: Since variable products may earn higher interest rates in the stock market, they provide some protection against inflation. PRODUCT REGULATION: Variable products are regulated by the Securities and Exchange Commission (SEC) and the state Department of Insurance. Producer Regulation: Producers must obtain a life insurance license AND a securities license through either National Association of Securities Dealers (NASD) or Financial Industry Regulatory Authority (FINRA)

ENTIRE CONTRACT

The entire contract comprises of the policy and a copy of the application; these two items encompass all conditions, benefits, exclusions and consideration on both parties' behalf. Only an EXECUTIVE OFFICER of the insurer may make modifications to the contract, but any changes must be in the benefit of the insured and also have the insureds written consent. all provisions of contract are included in the entire contract which includes the consideration clause, modifications clause, incontestability clause, free look period, coverage amounts and anything else in the policy are all part of the entire contract. What is not a part of the entire contract? policy illustration, producers report and buyers guide. The entire contract is the POLICY so this is what the insured receives at the time of delivery.

Medical Underwriting

The first step in the underwriting process is to ensure the application is completed fully and to ensure the applicant and insured have an insurable interest in each other. Upon reviewing the medical history on the application the underwriter may request to obtain an Attending Physicians statement which will have the applicants physician or nurse provide a detailed report on any current medical conditions.

Free look period (remorse clause)

The free look provision allows a policyowner to determine if a polcy is suitable for them and when a policy is delivered to the policyowner, they will have 10 DAYS to return the policy to the insurer and receive a full refund for all of their premiums; this allows the policyowner to look over the policy and determine if it is suitable for them.

Upside of IUL (Indexed Universal Life)

The most significant advantage of IUL insurance is the potential for healthy gains in the cash value - gains that can be significantly higher than those possible on many other types of financial products, including traditional universal life or whole life insurance policies. Policyholders also get the benefit of a crediting floor, typically 0% or 1%, so the existing cash value is protected from losses in a poorly performing market. Crediting floor = An interest rate floor is set by the issuer of a variable rate credit card as the minimum annual percentage rate it will charge.

Effective Coverage Date

The policy becomes effective when the underwriter issues the policy and the premiums are paid.

Cash Surrender Value

The policyowner may want to relinquish or give up the value of the policy in exchange for cash. For the first two to three years there will not be cash value because the insurer uses all of the premiums to cover their expenses of the policy. After the 3rd year, there will be cash surrender value; which is cash value minus any surrender charges. As time passes, premiums are continually paid and interest is earned, the cash surrender value increases. * Any outstanding loans would be deducted from the surrender value and the cash is usually paid in one lump sum directly to the policyowner. Surrender Charges *The surrender charge is a penalty charge on cash value policies for early cancellation or early withdrawal from cash value. The penalty is typically 10% in the first year and will decrease over time, to 0%, usually after 5-7 years. A policy that is paid for in full upfront almost always has a surrender charge.

Why do premiums increase as age increases?

The premiums are determined by the insurance carrier each year based on actuarial tables. And they increase at each successive age because each year there is a bigger drain on the cash value due to the rising mortality charges.

Modified Endowment Contract (MEC)

The primary purpose of life insurance is to provide a death benefit for your survivors. In the 1980s, some crafty financial people began using whole life insurance to hide their money from the IRS and avoid taxes. They would take large sums of money and overfund their policies, creating millions in cash value; then delay paying taxes on the gains by taking loans instead of withdrawals. Essentially ignoring the death benefit portion of the policy and using the policy solely for cash value growth. IRS did not like this so they stated that if you put too much money into a cash value policy within the first 7 years, the policy becomes a MEC, this is known as the 7-Pay Test. If your policy becomes a MEC, it has tax consequences. Any withdrawal under 59 1/2 hits a 10% tax penalty Any withdraw made is now LIFO instead of FIFO Taxes must be paid if any money is withdrawn Death benefits are still tax free, because that is paid to a beneficiary.

Guaranteed Insurability Rider

The rider promotes younger people to purchase insurance by giving them the option to increase the death/disability benefit at a later date, WITHOUT having to prove insurability again. *Policyowner has the right to exercise this rider every 3 years (usually up to age 40) and upon certain life events, such as: marriage, purchasing a home, children.

Collecting Premiums at Application

There are two main receipts, the conditional receipt being the most common. Conditional Receipts = Coverage would begin immediately since premium has been paid, but it is based on the condition of passing medical underwriting. If the insured dies before the policy is approved, medical underwriting is still completed as if the person is still alive. Should the person fail medical underwriting, all premiums will be refunded and death benefits will NOT be paid. Binding (unconditional) Receipt: Coverage begins at the time premiums are paid, regardless if the insured would fail medical underwriting; exclusions still apply though, such as skydiving. Binding receipts are usually required for nonmedical policies which means that there is little to no medical underwriting requirements.

Mortality

There is an industry standard Commissioners Standard Ordinary (CSO) Mortality Table, which predicts the expectation of life (average number of years left to live) and the probability of death (Average number of deaths per year) for a group of same aged individuals. This table created by the commissioners uses a large number of statistics over a long period of time and is distributed to insurers. Net Single Premium = Mortality cost - interest Gross premium = Net single premium + expenses

Return Of Premium (ROP) Rider

This is actually one of the most common riders added to onto policies. When this rider is included f the insured dies, the policyowner will receive a full refund of all premiums paid into the policy; if the policy is surrendered, canceled, or the insured outlives the term, the policyowner will also receive a premium refund (usually a percentage of premium, depending on how long the policy was in force) The ROP rider does not actually return the premiums though; the added cost of the rider is used to purchase an INCREASNG TERM POLICY, which in effect adds another life policy to the original policy; thus the ROP rider is used to increase the death benefit, rather than refunding premiums. This is called a ROP term life policy in most states.

Variable Life and Adjustable Life

This policy is NOT interest sensitive, because it is a WHOLE LIFE PRODUCT. Whole life insurance are fixed premium policies, meaning that even if the cash value goes up or down, the premiums remain the same Adjustable Life: This policy is NOT interest sensitive because it is considered traditional whole life when building cash value and traditional whole life has a fixed interest rate.

KEOGH (UNINCORPORATED) PLAN - HR - 10 SOLE PROPRIETORSHIPS

This retirement plan may be established by any self-employed sole proprietorship, partnership or LLC business who remains not incorporated as an S corp or C corp. The Keogh plan is very similar to a SP IRA in which it allows a high amount of$52,000 to be contributed to the account; however, the HR-10 plan requires much more paperwork each year.

Simple Plans (simple 401K, Simple 403b etc.)

Under 100 employees *A savings incentive match plan for employees (SIMPLE) is available to small business employers with less THAN 100 EMPLOYEES. As the plan is for small employers, the IRS has incentivized the employer to establish the plan through specific tax credits; but in order to establish the SIMPLE plan, the employer must contribute 3% of an employees annual compensation and also offer the plan to full-time employees earning over $5,000 in compensation. SIMPLE plans become vested immediately for an employee with the regular 59 1/2 10% penalty, but if the employee chooses to withdraw within the first two years then there may be an additional 25% penalty.

Universal Life

Universal life Insurance was invented around 1990 and was designed to offer the most flexible life insurance policy to date; basically allowing the insured to control almost all aspects of the policy and even invest the cash value in the stock market, should the insured earn enough interest, they may not have to pay future premiums. How do you create this flexible of a product is the question? --> In order to create this flexible of a product, the insurers combine Annually Renewable Term and a Cash Account * Cash value grows quickly while they are young but begins to decrease in older years. The insured is not required to pay the target premium since it is based on a lifetime protection; the insured only needs enough cash value to cover each months Annually Renewable Term coverage. As long as the cash value account has cash, the policy remains in force, but if the cash value account REACHES ZERO = COVERAGE ENDS. *Universal Life Insurance can continue coverage forever as long as there is cash value.