IL Life Insurance - Taxes, Retirement, and Other Insurance Concepts

life insurance as an Executive Bonus

-Any type of insurance policy may be used. -The employer pays a bonus to a selected employee to fund the policy. -It is considered a nonqualified employee benefit. -The policy is owned by the employee.

Federal tax advantages of a qualified plan

-Employee and employer contributions are not counted as income to the employee for income tax purposes. -Employer contributions are tax deductible as ordinary business expense. -Funds in a qualified plan accumulate on a tax-deferred basis -At distribution any amount received by the employee will be treated as ordinary income for tax purposes.

What is different between qualified and nonqualified retirement plans?

-Taxation of withdrawals -Taxation of contributions -IRS approval requirements (Taxation on accumulation is deferred in both types of plans.)

What retirement plans are qualified?

-Traditional IRA -Roth IRA -SIMPLE -SEP -401(k)

The president of a manufacturing company has offered one of the company's officers a special individual annuity plan that is unavailable to lower-echelon employees. This plan would be funded with before-tax corporate dollars, and it does not meet government approval standards. This annuity plan is

A nonqualified annuity plan. Nonqualified plans are a perfectly legal way for selected employees to receive certain types of benefits. Before-tax corporate dollars can be used for these plans, and they are not subject to government standards. Because of this, however, nonqualified plans contributions are not tax-deductible, unlike with qualified plans.

An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses. What option could the insured utilize?

A viatical statement allows an insured with a life-threatening condition to sell the existing policy in order to receive benefits when they are most needed. Viators typically receive a percentage of the policy's face value from the person who purchases the policy.

An employee quits his job and converts his group policy to an individual policy; the premium for the individual policy will be based on his

Attained age. If an employee terminates membership in the insured group, the employee has the right to convert to an individual whole life policy without proving insurability. The insurer will determine what type(s) of policy an employee may convert to, but it must be issued at a standard rate, based on the individual's attained age.

If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is

Fully insured. A worker is fully insured under Social Security if the worker has accumulated the required number of credits based on his/her age.

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, how much of the $13,000 would be taxable annually?

If $100,000 of life insurance proceeds were used in a settlement option paying $13,000 per year for 10 years, $10,000 per year would be income tax free (as principal) and $3,000 per year would be income taxable (as interest).

An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy?

If a person has life insurance under a group plan and then leaves the group, he/she may convert group coverage to individual coverage within 31 days of leaving the plan without proof of insurability.

In order to qualify for conversion from a group life policy that has been terminated to an individual policy of the same coverage, a person must have been insured under the group plan for how many years?

If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.

What is true about policy loans?

Money borrowed from the cash value is not taxable. Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy loans.

Death benefits payable to a beneficiary under a life insurance policy are generally

Not subject to income taxation by the Federal Government. When premiums are paid with after tax dollars, the death benefit is generally not subject to federal income taxation.

What is the official name for the Social Security program?

Social Security is formally called Old Age Survivors Disability Insurance - OASDI.

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as

Survivor protection. Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.

Tax qualified annuities

Tax-qualified annuities must be approved by the IRS and allow for tax deductible employer contributions. All withdrawals are taxed and earnings grow tax deferred.

An employee quits his job on May 15 and doesn't convert his Group Life policy to an individual policy for 2 weeks. He dies in a freak accident on June 1. Which of the following statements best describes what will happen?

The insurer will pay the full death benefit from the group policy to the beneficiary. The employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy.

What is the best reason to purchase life insurance rather than annuities?

To create an estate. With insurance, the death benefit creates an immediate estate should the insured die.

Who is the owner and who is the beneficiary on a Key Person Life Insurance policy?

With the key-person coverage, the business (the employer) is the applicant, owner, premium payer, and beneficiary.

viatical settlement provider

a person other than a viator that enters into a viatical settlement contract

life settlement broker

a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract.. Represents only the policyowners. Has a fiduciary duty to the owners to act according to their instructions and in their best interest.

business of life settlement

any activity relating to the solicitation and sale of a life settlement contract to a 3rd party who has no insurable interest in the insured

life settlement

any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash. Life settlements require an absolute assignment of all rights to the policy from the original policyowner to the new policyowner

life settlement contract

establishes the terms under which the life settlement provider will pay compensation to the policyowner, in return for the assignment, transfer, sale, or release of any portion of the following: -death benefit -policy ownership -beneficial interest -interest in a trust or any other entity that owns the policy

When would life insurance death benefits be tax free

if paid as a lump sum to the beneficiary

Third Party Owner

individual or entity that is not the insured under the contract, but has a legally enforceable right under it

In group life insurance, who receives the master contract?

the employer

viators

the insured in a viatical settlement

What are some characteristics of group life insurance plans?

-Participants receive a certificate of insurance, but the sponsor, not the participants, is in control of the policy. -A minimum number of participants is required in order to underwrite the plan. -The cost of the plan is determined by the average age, sex, and occupation of the entire group. -The amount of coverage is determined according to nondiscriminatory rules. -There is no individual underwriting for group life insurance. -100% participation of members is required in noncontributory plans -Small groups such as labor unions are eligible for group insurance.

What are personal uses of life insurance?

Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement option. A settlement option is exercised when an immediate annuity is purchased with the face amount at death or with the cash value at surrender.

What is an example of liquidity in a life insurance contract?

The cash value available to the policyowner. Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

The cash value of a surrendered policy is only considered to be taxable as income if the cash value exceeds the amount of premiums paid for the policy.

life settlement producer

person who enters into a life settlement contract with the owner of the policy

viatical brokers

represent the insureds in a viatical settlement contract

viatical producers

represent viatical settlement providers

Who can own a Keogh retirement plan?

self-employed individuals and their employees.

Viatical Settlements

separate contracts in which the insured sells the death benefit to a third party at a discounted rate, to allow them to use the proceeds when they are most needed, before their death