Part 3 Life Test

What are Multiple Employer Trusts (METs)?

A trust made up of multiple small employers in the same or similar industries that form to provide life insurance or other benefits for their employees while gaining tax benefits

When do dependents lose coverage of a group plan?

- Certificate holder dies - Legally divorced

What are the 4 parties in an annuity contract?

- Contract owner - Annuitant - Beneficiary - Insurer *Contract owner & annuitant are frequently the same person

What are Association Group Plans?

A trade, professional, or other type of association may sponsor a group plan for it's members

According to exclusion ratio, if annuity owner paid in $12,000 and it's now worth $19,200 - Monthly payment is $100 - what portion can be excluded from gross income?

$12,000 / $19,200 = 62.5% $62.50 or 62.5% of $100 monthly payment = $37.50 $37.50 is ordinary income This is applied until investment portion of contract has been paid out, balance is then taxable

How do you determine a MEC? What is it based on? When would it MAKE it a MEC?

- "7-pay" limit - Based on annual premium that would pay up the policy after the payment of seven, level annual premiums. - Limit determined by Internal Revenue Code *Under MEC (7 pay test) - Cumulative amt paid at anytime in the first 7 years, cannot exceed teh cumulative MEC limit applciable in that poilcy year

What are the factors that determine a life annuity payment amt?

- Annuitants age: lower the age, lower the payment - Annuitants gender: women lives longer, have lower payments - Payment guarantee: Refund options have lower payments. W/ period certain options, the longer the period, lower the payment - Assumed interest rate: Lower the assumed rate, lower the payment

What happens when there is a full surrender in a life insurance policy?

- Any gain in cash value is taxable Gain = cash value - premiums paid *Full surrenders - any gain is taxable

Answer these questions about loans: - Policy loans reduce ________ - What part of a loan becomes taxable? - What happens if policy is surrerendered or lapses? - Is interst paid on policy loans tax deductible?

- Cash value (used as collateral for loan) - None, even if loan exceeds policy's cost basis - Any portion of loan that exceeds policies cost basis IS taxable gain - NOT tax deductible

List some of the specifications on if a certificate holder can convert their policy to an individual one of they were to lose coverage.

- Conversion must be done within 31 days - Must be perm insurance - must provide same coverage amt - Premium will be based on insureds age at the time of conversion - No proof if insurability required

What are the interest rate guarantees in a Fixed Annuity?

- During accumulation period, accumulated values earn a current interest rate that is competetive - Current rate is declared at the beginning of year & guaranteed for that year - Current rate may rise or fall from year to year, but will not go below a stated minimum

In a Fixed Annuity, what is the level benefit payment amt?

- During the annuity period, annuties provide a level amt. - Annuitants can count on getting a specified dollar amt of income on a regular basis. - Can lose purchasing power during periods of inflation

Simply put, explain the tax implications of annuity payments after annuitization: - Taxed according to: - ___ / ___ = % of payment not taxed -If annuitant lives beyond life expectancy =

- Exclusion ratio - Premiums paid in / Total of expected payments over annuitants life expectancy = % of payment not taxed - 100% of payment becomes taxable

What life insurance premiums ARE tax deductible to the business as employee compensation?

- Executive Bonus Plans *Also means, premium paid is considered taxable income to employee

What are the 4 basic types of annuities

- Fixed - Variable - Equity-Indexed - Market Value Adjusted

What two types of accts do MECS effect?

- Flexible premium UL - Single premium Whole Life

Simply put - what are group annuities?

- Funded by employer contributions - Distributions made by employer - Employer sponsored retirement plans are funded w/ group annuities

What happens if someone declines to enroll during the enrollment period?

- If they decide later to enroll, insurer can then ask for medical questions or require medical exam - Many plans don't allow late enrolees and they may need to wait the annual open window

With a death benefit, what is the taxability if it is paid in a lump sum? What if it is paid in settlement options?

- In a lump sum, it is NOT taxable income (individual or business) - In a settlement option, original death benefit is not taxable, but interest earned on proceeds is taxable as ordinary income to bene

What is a separate account in a Variable Annuity?

- Investment risk is on annuity owner - Have sub accounts (mutual funds)

Life insurance premiums for the following are NOT tax deductible

- Key person - Buy-Sell agreements - Reimburse the company for benefits paid under deferred comp arrangements (B/c business receives financial benefits from owning them)

What are personal uses of annuities?

- Lifetime Income at Retirement - Accumulating fund prior to retirement - Funding IRA's - Accumulating Education Funds

During the annuitization phase, the accumulated value no longer belongs to the annuity owner. What does this mean?

- No additional premiums can be made - No withdrawals - Can't be surrendered - Can't change contract *Money belongs to insurance company

Describe the beneficiary in an annuity contract. What rights do they have?

- Only receive the benefits upon the death of the contract owner.

Describe a Deferred Annuity

- Payments postponed until retirement age - Purpose is the accumulation of money for future use - Can be purchased with a single premium (SPDA), or ongoing premium payments (PPDA or FPDA)

What happens to death benefit and taxability when accelerated death benefits are used?

- Reduces death benefit the bene will receive - Tax exempt

What are reasons that Accelerated Death Benefits may be used?

- Requires certification from physician for: *Terminal illness (death within 24 MO) *Acute illness *Emergency organ transplant *Permanent confinement to nursing home *Long term care (ADL cannot be performed)

What is a SPIA?

- Single Premium Immediate Annuity Pays a monthly income immediately (within a month, latest is 1 year)

What are some of the underwriting considerations with group underwriting?

- Stability of group (no excessive turnover) - Persistency of group (Does not change insurers) - Existence of group (Insurance is not the only reason for group formation

Are MECs still life insurance? How does it impact the bene? WHEN would it affect the owner?

- Still life insurance, and still tax-free & tax deferred accumulation to bene - If they take a distribution

Describe an Immediate Annuity: - Structured to: - What is subject to taxes? - When do payments begin?

- Structured to provide current income - Made with a lump-sum premium (or SPIA), so they have income that begins as soon as a month after purchase - Can be delayed up to 1 year - When payments start, portion of each payments attributed to interest is subject to taxes (rest is just return of premium, so tax free) - Has no or short accumulation period

What are some of the impacts of doing a withdrawal (partial surrender)?

- Taxable to the extent of any gain - Taxed on a "first-in-first-out (FIFO) basis) -Money withdrawn first is supposed to be coming from premiums paid (cost basis) and EX) Cost basis is $10,000 & withdrawal is $12,000, $2,000 is considered excess & taxable *Any money received from policy other than death benefit, reduces the policy's cost basis

Describe the withdrawal penalties from an annuity (Before annuitization period)

- Taxed differently than annuitized payments - Earnings are taxed as ordinary income - If under 59 1/2, also subject to 10% penalty on taxable earnings

Describe the basics of a Fixed Annuity

- Values are guaranteed against a loss. - General accnt - Long term, low risk investments - If annuitized - fixed income payments - Money guarnateed by company

If something is a MEC, what are the tax implications?

- Withdawals or loans are taxed *Interest out first (LIFO) *10% penalty on interest if withdrawn before 59 1/2

When do certificate holders & their dependents lose group insurance coverage? (3)

1) Certificate holder leaves the employer 2) Employer discontinues plan 3) Insurer does not renew the policy

What two features separate group credit insurance from other plans?

1) Group credit insurance can be made payable to to the sponsoring group 2) The amt of coverage is limited to the amt of each insured's individual debt *Lender is automatically the bene *Insurance cannot exceed the debt

Within annuities, distributions at death: What are the 4 options for bene to receive annuity value if death of owner. What is taxable?

1) Lump sum: Gain (Total value - cost basis) is taxable 2) 5 year withdrawal period: Gain is taxable, gain is taken out before any non-tax cost basis is withdrawan 3) Annuity payout: They ahve 1 year to select form date of owners death. Part tax gain, part non-tax cost basis 4)Spousal options: Can be transferred w/ no tax consequence

What are the two things that dictate the Income tax treatment on life insurance policies & annuities?

1. Is the premium tax-deductible or not? 2. Are distributions from insurance products taxable or not?

Insurers can refund excess premiums within _____ days to avoid a policy becoming a mec

60

What are Market Value Adjusted Annuities?

A FIXED annuity w/ a market value adjustment feature that offers flexibility of various guarantee terms combined w/ the potential for higher interest rates than traditional fixed investments *Single premium deferred annuities *Interest rate for fixed number of years *Early surrender

What are Employer Group Plans?

A group insurance plan sponsored for employees

What is Group Credit Life Insurance?

A lender, or creditor may sponsor a group life insurance plan for it's group of debtors.

What is the death benefit for an deferred annuity? What is the death benefit greater of?

Accumulated value is paid to the selected bene if the annuity owner dies during the accumulated period Greater of either; - Total accumualted value of annuity - Total premiums paid to that point, minus any withdrawals

What are Accumulation Units in an Variable Annuity?

Accumulated values of variable annuties are expressed by accumulation units. - Similar to shares/purchased in mutual fund - Value of an accumulation unit is found by dividing the total value of the separate acct by the number of the existing accumulation units

What are advantages and disadvantages of a group credit life insurance plan?

Advantages: - Policyowner controls the individual policy, lender controls the group policy - Policy can continue even after the debt/loan has been paid Disadvantages: - Individual policy premiums can be higher than group coverage - Evidence of insurabillity is required for individual coverage

How are the coverage amts determined for group life plans?

Amt doesn't have to be the same, but the formula that applies must be the same: 1) Percent or multiple of earnings 2) Amt of coverage based on years of service 3) Limit different for classes of employees

What are employer-sponsored retirement plans in regards to annuities?

Annuities designed to accept employer contributions made to the retirement plan set up for their employees - Annuity payout options can provide lifetime income for employee & spouses

What are the two common classifications of employees in regards to group benefits? How does this determine coverage?

Full time vs part time Years of service Employers don't have to include everyone, but they cannot choose which individuals get coverage or not. They CAN determine which classes are covered though

What are dividends considered? Are they taxable?

Considered to be return of a portion of the premium, so NOT TAXABLE - Return of premium reduces policy's cost basis - Dividends are not taxable but the interest they accrue IS taxable

What is group credit insurance plans?

Creditors sponsor these plans for their borrowers as part of the loan transaction. The amt of insurance = debt They are the bene, so if insured dies they death claim is paid to them.

In Life Annuities, describe the Life with Refund payment option?

If the annuitant dies & total payments received are less than the amt paid for the annuitiy, remainder is paid to bene.

What happens if you die within the 31 day conversion period?

Death benefit is paid as if the insured had decided to convert the group coverage to an individual policy

What is an Enrollment period?

Eligible employees must sign up within 31 days after probationary period ends. (To avoid adverse selection)

Simply put, what are the taxabilities of the following premiums paid: Employer paid = Employee paid = Death benefit to named bene =

Employer paid = tax deductible to employer Employee paid = not tax deductible to anyone Death benefit to named bene = not taxable

What is a Noncontributory Employer Plan?

Employer pays the entire premium on behalf of the employees. 100% of eligible employees must participate in a noncontributory plan.

What is a Certificate of Insurance?

Evidence of an employee's coverage under the master policy. *It is a summary of insured's benefits under the plan, certificate number & bene name *An employee (certificate holder), has the right to name the bene Certificate of Insurance = Evidence of coverage

In a Fixed Annuity, what is the general acct?

Fixed annuities are supported by these. - The investment risk on the INSURER - The assets are conservatively invested typically in debt securities and other fixed-rate investments that provide a steady return for many years

What happens if annuitant dies during the Life with Period Certain payout? What if they live through the period certain?

If they die before end of selected period, payments continue to bene for the rest of the period certain. - No payments are made to bene if annuitant lives past that period

What is dual regulation?

In regards to variable annuities - variable annuities being regulated as insurance products & also regulated as securities

What happens after the probationary period in regards to contributory / noncontributory plans?

Individuals become covered in the plan automatically after fulfilling that period - In contributory plan, employees decide if they want to participate - In noncontributory plan, all eligible employees are included

Accumulations on interest to annuities, when are they taxable to individuals vs corporations?

Individuals: When paid out Corporations: When credited

What is group underwriting? What is different than Individual underwriting?

Insurance underwriter focuses on the group as a whole, not singular members. - No medical information, no medical underwriting. - Individuals w/ poor health still get benefits - Premiums are based on experience of the group - Renews annually, premiums can fluctuate year to year

In Life Annuities, describe the Joint-Life-And-Survivor payout option.

Insurer promises to make payments until the last survivor of the two annuitants dies. Owner can choose for continued payments in the same amt for survivor or in a lesser amt.

What is a Mastery Policy?

Issued to the sponsoring group, and the applicant is the policyowner or policyholder. This could be an employer or a labor union Master Policy = Policyholder or applicant

What part of cash value accumulation or interest earned is taxable, if any?

It grows tax deferred, policy owner is taxed if gain with withdrawn

What are the two annuitization payout options?

Life Annuities: Have a payment that is guaranteed to last for at least as long as the annuitant lives Temporary Annuties: Do not have that guarantee

While both life insurance & annuities have tax benefits, what's a difference in tax benefits?

Life Insurance: Bene receives tax free when insured dies VS Annuities: A bene will have to pay taxes on growth (interest) on the money that was put into the contract

Difference between life insurance & annuities in regards to what they protect?

Life Insurance: Protects from dying too soon VS Annuities: Protects against living too long

Difference between life insurance & annuities in regards to an ESTATE.

Life Insurance: Used to create an estate VS Annuities: Used to liquidate an estate

Difference between life insurance and Annuities in regards to payments?

Life Insurance: Uses a series of payments to guarantee a lump sum of money upon death VS Annuities: Uses a lump sum of accumulated money to guarantee a series of income payments while living

In the Life with Refund annuity payment options, what are the cash refund and installment refund payment options referring to? What is this also known as?

Lump sum = cash refund Continuation of payments in same amt as what was being paid to annuitant = Installment refund AKA: Life - Refund Certain

What are modified endowment contracts? (MECS) What does the federal income tax law perscribe a test to differentiate between?

MECS are when too much premium is paid in the first 7 years of the policy - Policies that are purchased primarily for certain tax advantages VS - Policies purchased primarily for death protection

With contributory plans (group life insurance), is the emplyee portion of the group life insurance premium tax deductible?

NO

Within Annuities, are premiums taxable? Any outliers to the rule?

NOT tax deductible, unless held in an qualified retirement plan

Are premiums for individual life insurance tax deductible?

No

Can an annuity be in both the accumulation & annuitization phase? Why or why not

No. Once contract is annuitized, no contributions can be made

Describe the Accumulation Period

PAY IN - when the annuity is being funded, before a payout begins. Money paid in is called PREMIUM. - Money grows tax deferred

Describe the Annuitization period

PAY OUT - Money is converted into a series of regular income payments for either a set time or lifetime.

What are the two phases of an Annuity?

Pay in: Accumulation period - principal & periodic deposits grow w/ credited interest Pay out: Annuitization period - generates income stream from it's accumulated value

In regards to Life Annuities, what is the Life Only (Pure Life) option in regards to death payments?

Payments stop when the annuitant dies, regardless of when that occurs. One month or 20 years. Death stops ALL payments.

In Life Annuities, Describe the Life with Period Certain payment option.

Pays an income for as long as the annuitant is alive. Annuitant selects a payment period (5, 10, 20 years), paymetns are guaranteed to be made for at least that number of years

In Life Annuities, what is the Joint Life option? What does this do to monthly payments?

Pays income until the death of the first of two or more annuitants. Monthly payments are higher. No considered sutiable as a joint annuitiy b/c survivor is left without income

In group life insurance, are premiums tax deductible? When?

Premium paid by employer are tax-deductible as a business expense. - Premium for the first $50,000 is not taxable to employee - Premium for additional coverage over $50,000 is taxable to employee

What are advantages/disadvantages of Life Only death payout option? What is this death payout also known as?

Pros: Pays highest monthly income b/c only the annuitants life expectancy is considered Cons: If they die before life expectancy, amt they received is lower than total amt paid into contract AKA: Straight life, Pure Lief, Life - no refund

Describe an Annuity. What is it used for?

Protects people from living too long. Used for: -Accumulate funds over time -Distribute over a period of time - Both accumulate & fund and then evenly distribute over a period of time.

Describe Group Life Insurance. Who is the policy owner? How does this affect the employee?

Provides coverage for many lives, using one contract. Employer is the policyowner Employee receives certificate of insurance & also names bene

What are Probationary Periods?

Requires new employees to wait for a certain period of time before they can enroll in the plan. - During this time they are NOT covered - Typically 1 - 12 months - 1 - 6 is most common

What are the typical eligible dependents of group life?

Spouse Children Dependent parents Other individuals that have financial dependency on insured

What must variable products be licensed with?

State & security regulators (SEC & FINRA)

What is a Variable Annuity?

Supported by investments (stocks & bonds) & have investment risk b/c values are not guarnateed against loss *Separate acct *No guarantees by company * Owner assumes risk *Premium buys accmulation units * If annuitized, accumulated money buys annuity units

What is a contributory Employer Plan?

The employee pays part of the premium. At least 75% of eligible employees must participate in a contributory plan

Describe the Annuitant. What rights do these people have?

The insured - they are chosen by the contract owner to receive the income payments during the annuitzation period. - It's their life expectancy used to determine payments - Must be an individual (not trust) - Do not have power to make changes - CAN be more than 1 person

Describe the rights of the contract owner in an annuity policy

The person or couple who buy the annuity. They can: - Name/change annuitant - Name/change bene - Choose payout option - Add money/withdrawals - Surrender

What is the tax treatment of withdrawal from an annuity during the accumualtion period

Treated the same as a MEC - ***Last-in-first-out (LIFO) taxation: entire taxable gain is received before any non-taxable cost basis *10% penalty for under 59 1/2 in addition to regular tax treatment on taxable amt received *interst out first *Income tax on interest *10% penalty if under 59 1/2

What are Labor Unions?

Two or more labor unions may join together to provide group insurance for their collective members. Labor union plans are sponsored under a Taft-Hartley Trust

What are Equity-Indexed Annuities (EIAs)

Type of tax-deferred annuity whose credited interest is linked to an equity index (S&P 500) *Guarantees a minimum interest rate (1 - 3%) *May be higher than fixed annuities, but cost of insurance means it won't be as high as variable *Form of fixed annuity, so guarantee is backed by insurers GENERAL ACCT (Not separate account) *Type of fixed annuity

What is the exclusion ratio?

Used to determine the non-taxable portion of each monthly payment. Formula is applied to each annuity payment to find the portion of that is excludable from gross income - remainder is taxable at ordinary rates

What are surrender charges on Annuity withdrawals/surrenders?

Waiting period for early withdrawals called surrender periods - Short as 2, up to 12 or more - If funds are withdrawn during that time, surrender charges may apply - Decline each year - 10% of contract value can be withdrawn each year free of surrender charges

What are Annuity Units?

When the annuity period begins, the accumulation units are converted to annuity units. - # of annuity units stays teh same throughout the annuity period, but the valute of an annuity unit varies with the value of the investments