Taxes, Retirement, and Other Insurance Concepts

Buy-Sell Funding

A buy-sell agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.

Know this

traditional IRA distributions are taxable; Roth IRA distributions are NOT taxable

Social Security

uses the Quarter of Coverage (QC) system to determine whether or not an individual is qualified for Social Security benefits. The type and amount of benefits are determined by the amount of credits or QC's a worker has earned. Anyone working in jobs covered by Social Security or operating his/her own business may earn up to a maximum of 4 credits for each year of work.

Surrenders

when a policy owner surrenders a policy for cash value, some of the cash value received may be taxable as income if the cash surrender value exceeds the amount of the premiums paid for the policy. When the owner withdraws cash value from a universal life policy (partial surrender), both the cash value and the death benefit are reduced by the surrender.

Accelerated Benefits

when accelerated benefits are paid under a life insurance policy to a terminally ill insured, the benefits are received tax free. When accelerated benefits are paid to a chronically ill insured (for example, someone who has cancer, Alzheimer's disease or other severe illness), these benefits are tax free up to a certain limit. Any amount received in excess of this dollar limit must be included in the insured's gross income.

Know this

when converting from group life to individual life insurance, evidence of insurability is not required

Settlement Options

when the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is taxable as income Ex. 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 and $3,000 per year would be income taxable.

Rollover

withdrawal of the money from one qualified plan and placing it into another plan

There are several types of buy-sell agreements that can be used for partnerships and corporations:

- Cross Purchase - used in partnerships when each partner buys a policy on the other - Entity Purchase - used when the partnership buys the policies on the partners - Stock Purchase - used by privately owned corporations when each stockholder buys a policy on each of the others - Stock Redemption - used when the corporation buys one policy on each shareholder

Taxation rules that apply to Roth IRAs:

- contributions are not tax deductible - excess contributions are subject to a 6% tax penalty

Qualified Retirement Plan characteristics:

- designed for the exclusive benefit of the employees and their beneficiaries - are formally written and communicated to the employees - use a benefit or contribution formula that does not discriminate in favor of the prohibited group - officers, stockholders, or highly paid employees - are not geared exclusively to the prohibited group - are permanent - are approved by the IRS - have a vesting requirement

If the general requirements for qualified plans are met, the following tax advantages apply:

- employer contributions are tax deductible to the employer, and are not taxed as income to the employee - the earnings in the plan accumulate tax deferred - lump-sum distributions to employees are eligible for favorable tax treatment

Generally speaking, the following taxation rules apply to life insurance policies:

- premiums are not tax deductible - death benefit: - tax free if taken as a lump-sum distribution to a named beneficiary - principal is tax free; interest is taxable if paid in installments (other than lump sum).

Taxation rules apply to contributions made to Traditional IRA plans:

- tax-deductible contributions for the year of the contribution (based on the person's income) - contributions must be made in "cash" in order to be tax deductible (the term cash includes any form of money, such as cash, check, or money order - excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA - tax-deferred earnings (the money that accumulates in the account) are not taxed until withdrawn

The following are taxation rules that apply to MEC's cash value:

- tax-deferred accumulations - any distributions are taxable, including withdrawals and policy loans - distributions are taxed on LIFO basis (Last in, first out) - known as "interest first" rule - distributions before age 59 1/2 are subject to a 10% penalty

Several concepts needed to understand about viaticals:

- the insureds are referred to as viators - viatical settlement provider means a person, other than a viator, that enters into a viatical settlement contract - viatical producers represent the providers - viatical brokers represent the insureds Viators usually receive a percentage of the policy's face value from the person who purchases the policy. The new owner continues to maintain premium payments and will eventually collect the entire death benefit.

2 most common qualified individual retirement plans

- traditional IRAs - Roth IRAs. anyone with earned income can contribute to either plan.

Roth IRA

A form of individual retirement account funded with after-tax contributions. An individual can contribute 100% of earned income up to an IRS-specified maximum, as with traditional IRAs (the dollar amounts change every year). Roth IRA contributions can continue regardless of the account owner's age, and in contrast with a traditional IRA, distributions do not have to begin at age 72 (previously 70 1/2). Roth IRAs grow tax free as long as the account is open for at least 5 years.

401(k) Plans

A qualified retirement plan that allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also match the employee's contribution, whether it is dollar for dollar or on a percentage basis. Under a 401(k) plan, participants may choose to either receive taxable cash compensation or have the money contributed into the 401(k), referred to as cash or deferred arrangement plans (CODA). Contributions into the plan are excluded from the individual employee's gross income up to a dollar ceiling amount. The ceiling amount is adjusted annually for inflation. The plan allows participants age 50 or over to make additional catch-up contributions (up to a limit) at the end of the calendar year.

qualified retirement plan

An employer-sponsored plan approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth.

Know this

FIFO applies to life insurance. Annuities follow a LIFO format.

Know this

Group insurance is written as annually renewable term insurance

Eligibility and who contributes

HR-10 (Keogh) - eligibility: self-employed - who contributes: employer matches employee's contributions SEP - eligibility: small employer or self-employed - who contributes: employer only SIMPLE - eligibility: small employers (no more than 100 employees) - who contributes: employer matches employee's contribution 401(k) - eligibility: any employer - who contributes: employer matches employee's contribution 403(b) - TSA - eligibility: nonprofit organizations - who contributes: employer and employee

Self-employed Plans (HR-10 or Keogh)

HR-10 or Keogh plans make it possible for self-employed persons to be covered under an IRS qualified retirement plan. These plans allow the self-employed individuals to fund their retirement programs with pre-tax dollars as if under a corporate retirement or pension plan. To be covered under a Keogh retirement plan, the person must be self-employed or a partner working part time or full time who owns at least 10% of the business. Contribution limits are the lesser of an established dollar limit or 100% of their total earned income. The contribution is tax deductible, and it accumulates tax deferred until withdrawal. Upon a participants death, payouts can be available immediately. If a participant becomes disabled, he or she may collect benefits immediately or the funds can be left to accumulate. When a participant enters retirement, distribution of funds must occur no earlier than age 59 1/2 and no later than age 72. If withdrawn before 59 1/2, there is a 10% penalty. At any time payments may be discontinued with no penalty, and funds can be left to accumulate. Under eligibility requirements, any individual who is at least 21 years of age, has worked for a self-employed person for one year or more, and worked at least 1,000 hours per year (full time) must be included in the Keogh Plan. The employer must contribute the same percentage of funds into the employee's retirement account as he/she contributes into his/her own account.

Vesting

the right of a participant in a retirement plan to retain part or all of the benefits

Estate Conservation

Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets.

Amounts Received by Beneficiary - General Rule and Exceptions

Life insurance proceeds paid to a named beneficiary are generally free of federal income taxation if taken as a lump sum. An exception to this rule would apply if the benefit payment results from a transfer for value, meaning the life insurance policy is sold to another party prior to the insured's death.

Business of Life Settlement

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

Tax considerations for life insurance and annuities

Premiums - not deductible (personal expense) Death Benefit - not income taxable (except for interest) Cash Value Increases - not taxable (as long as policy in force) Cash Value Gains - taxed at surrender Dividends - not taxable (return of unused premium; however, interest is taxable Accumulations - interest taxable Policy Loans - not income taxable Surrenders - surrender value - past premium = amount taxable Partial Surrenders - First in, First out (FIFO)* Settlement Options - death benefit spread evenly over income period (averaged). Interest payments in excess of death benefit portion are taxable Estate Tax - if the insured owns the policy, it will be included for estate tax purposes. If the policy is given away (possibly to a trust) and the insured dies within 3 years of the gift, the death benefit will be included in the estate

Permanent Life Features and their Tax Treatment

Premiums - not tax deductible Cash Value exceeding premiums paid - taxable at surrender Policy Loans - not income taxable Policy Dividends - not taxable Dividend Interest - taxable in the year earned Lump-sum Death Benefit - not income taxable

Profit-Sharing

Profit-sharing plans are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees. If the plan does not provide a definite formula for figuring the profits to be shared, employer contributions must be systematic and substantial.

Know this

Qualified plans have tax advantages

Qualified vs Non-Qualified

Qualified: - contributions currently TAX DEDUCTIBLE - plan APPROVED by the IRS - plans CANNOT DISCRIMINATE - earnings grow TAX DEFERRED - ALL WITHDRAWALS are TAXED Nonqualified: - contributions NOT currently TAX DEDUCTIBLE - plan DOES NOT NEED IRS APPROVAL - plan CAN DISCRIMINATE - earnings grow TAX DEFERRED - EXCESS over cost basis is TAXED

Policy Loans

The policyowner may borrow against the policy's cash value. Money borrowed against the cash value is not income taxable; however, the insurance company charges interest on outstanding policy loans. Policy loans, with interest, can be repaid in any of the following ways: - by the owner while the policy is in force - at policy surrender or maturity, subtracted from the cash value - at the insured's death, subtracted from the death benefit

Group Life and Employer-Sponsored Plans

The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are tax deductible to the employer as a business expense. If the group life policy coverage is $50,000 or less, the employee does not have to report the premium paid by the employer as income (not taxable to the employee Any time a business is the named beneficiary of a life insurance policy, or has a beneficial interest in the policy, any premiums that the business pays for such insurance are not tax deductible. Therefore, when a business pays the premiums for any of the following arrangements, the premiums are not deductible: -key-employee (key-person) insurance -stock redemption or entity purchase agreement -split-dollar insurance

Contributory Plan

When the premiums for group insurance are shared between the employer and employees, the plan is referred to as a contributory plan. An insurer will require that 75% of eligible employees be included in the plan.

Cash Accumulation (personal insurance needs)

life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed. For example, some life policies (those that provide permanent protection, such as whole life) accumulate cash value that is available to the policyowner during the policy term.

403(b) Tax-sheltered Annuities (TSAs)

a 403(b) plan or a tax-sheltered annuity (TSA) is a qualified plan available to employees of certain nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems. Contributions can be made by the employer or by the employee through salary reduction and are excluded from the employee's current income. As with any other qualified plan, 403(b) limits employee contributions to a maximum amount that changes annually, adjusted for inflation. The same catch-up provisions also apply.

Key Person

a business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contacts. A business can lessen the risk of loss by the use of key person insurance. Key person insurance may be issued as term or permanent life, with whole life and universal life policies being used most often. with this coverage, the key employee is the insured, and the business is all of the following: - applicant - policyowner - premium payer - beneficiary

Life Settlement Provider

a person (other than the owner) who enters into a life settlement contract with the owner.

Life Settlement Broker

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

Gross Income

a person's income before taxes or other deductions

Life Settlement Example

a person, age 70, owns a $1,000,000 life insurance policy. He recently sold his business for $5,000,000 and decided he no longer needed the insurance coverage. The cash value is $390,000, which the insurance company would give the policyowner if he cashed in the policy. A life settlement provider may offer him, after reviewing his medical records, $575,000 for the policy. One ownership is transferred and the policyowner has received the funds, the life settlement company will assume premium payments until the insured dies, at which time the life settlement company will receive the proceeds of the policy - $1,000,000.

tax deductible

a reduction of taxable income, resulting in lower tax liability

Simplified Employee Pension Plan (SEP)

a type of qualified plan suited for the small employer or for the self-employed. In a SEP, an employee establishes and maintains an individual retirement account to which the employer contributes. Employer contributions are not included in the employee's gross income. The primary difference between a SEP and an IRA is the much larger amount that can be contributed each year to a SEP (an IRS established annual dollar limit or 25% of the employee's compensation, whichever is less).

7-pay test

all life insurance policies are subject to the 7-pay test, and any time there is a material change to a policy (such as an increase in the death benefit), a new 7-pay test is required. Whether from a life insurance policy or a MEC, the death benefit received by the beneficiary is tax free.

Viatical Settlements

allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed, before their death. They are not policy options. They are separate contracts in which the insured sells the death benefit to a third party at a discounted rate.

Life insurance definitions

because Life Settlements are not involved in the establishment of new life insurance coverage, the Life Settlement Act defines terms that are not in conflict with the sale of the original life insurance coverage, but which accurately identify the distinctions in the Life Settlement business. Some of the more important definitions are as follows: - business of life settlement - owner - insured - life expectancy - life settlement contract - life settlement broker - life settlement provider

Know this

lump-sum cash payment of life policy proceeds are tax free for the beneficiary

Traditional Retirement Account (IRA)

allows individuals with earned income to make tax deductible contributions regardless of age. Previously, individuals were allowed to contribute to the account until the age of 70 1/2; however, the SECURE Act of 2019 removed the prior age limit for all contributions starting in tax year 2020. Plan participants are allowed to contribute up to a specified dollar limit each year, or 100% of their salary if less than the maximum allowable amount. Individuals who are age 50 or older are entitled to make additional catch-up contributions. A married couple could contribute a specified amount that is double the individual amount, even if only one person had earned income. Each spouse is required to maintain a separate account not exceeding the individual limit. The owner may withdraw the funds at any time. However, withdrawals prior to age 59 1/2 are considered early withdrawals and are subject to a 10% additional tax. Starting at age 59 1/2, the owner may withdraw assets without having to pay the 10% additional tax. However, the owner must start receiving distributions from the IRA at the age of 72 (raised from 70 1/2 to 72). Starting at age 72, the owner must receive at least a minimum annual amount, known as the required minimum distribution (RMD).

Social Securities Benefit

also referred to as Old Age Survivors Disability Insurance (OASDI). It is a Federal program enacted in 1935, which is designed to provide protection for eligible workers and their dependents against financial loss due to old age, disability, or death. With a few exceptions, almost all individuals are covered by Social Security. In some aspects, Social Security plays a role of federal life and health insurance, which is important to consider when determining an individual's needs for life insurance.

Executive Bonus

an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The employee owns the policy and, therefore, has has full rights to the policy. Since the employer treated the premium payment as a bonus, that amount is tax deductible to the employer and income taxable to the employee. It is assumed that if the employee were not willing to accept these conditions, the employer would not provide the benefit. Executive bonus plans are not subject to plan limits established by the IRS for qualified plans, so it is considered a nonqualified benefit plan.

Nonprofit organization

an organization that uses its surplus to fulfill its purpose instead of distributing the surplus to its owners or members

Conversion Privilege

another characteristic of group insurance. If an employee terminates membership in the insured group, the employee has the right to convert to an individual policy without proving insurability at a standard rate, based on the individual's attained age. The group life policy can convert to any form of insurance issued by the insurer (usually whole life), except for term insurance. The face amount or death benefit will be equal to the group term face amount, but the premium will be higher. 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. Other rules that apply to conversion involve the death or disability of the insured, and termination of the master policy. If the insured dies during the conversion period, a death benefit equal to the maximum amount of individual insurance which would have been issued must be paid by the group policy, whether or not the application for an individual policy was completed. If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to covert to individual permanent insurance of the same coverage.

Cash Value Accumulations

any cash value accumulations in the policy can be borrowed against by the policyowner. or may be paid to the policyowner upon surrender of the policy. Cash values grow tax deferred. Upon surrender or endowment, any cash value in excess of cost basis (premium payments) is taxable as ordinary income. Upon death, the face amount is paid, and there is no more cash value. Death benefits generally are paid to the beneficiary income tax free.

Policy Loans

are not taxable to a business. Unlike an individual taxpayer, a corporation may deduct interest on a life insurance policy loan for loans up to $50,000.

Liquidity

as a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner. That means the policy's cash values can be borrowed against at any time and used for immediate needs.

Amounts Available to Policyowners

as you have learned, permanent life insurance provides living benefits. There are several ways in which policyowners may receive those living benefits from the policy. - dividends - cash value accumulations -policy loans - surrenders - accelerated benefits

Policy endowment

maturity date

Business Insurance Needs

businesses use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured. The most common use of life insurance by businesses is as an employee benefit, which serves as a protection for employees and their beneficiaries. There are also other forms of life insurance that can serve business owners and their survivors, and even protect the business itself. These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees.

Example of Surrenders

consider following scenario: Face amount: $300,000 Premiums Paid: $70,000 Total Cash Value: $100,000 If the insured surrendered $30,000 of cash value, the full $30,000 would be income tax free. If the insured took out $100,000, the last $30,000 would be taxable because the $100,000 exceeds the premiums that were paid in by $30,000.

Pretax contribution

contribution made before federal and/or state taxes are deducted from earnings

Know this

contributions to a traditional IRA are with pre-tax dollars (tax deductible); contributions to a Roth IRA are with after-tax dollars (NOT tax deductible)

Know this

contributions to qualified plans are limited to a maximum amount (established by the IRS)

Surrender

early termination of a policy by the 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: - the death benefit - policy ownership - any beneficial interest - interest in a trust or any other entity that owns the policy

Modified Endowment Contract (MEC)

following the elimination of many traditional tax shelters by the Tax Reform Act of 1984, single premium life insurance remained as one of the few financial products offering significant tax advantages. Consequently, many of these types of policies were purchased solely for purposes of setting aside large sums of money for the tax-deferred growth as well as tax-free cash flow available via policy loans and partial surrenders. To curtail this activity, and to determine if an insurance policy is overfunded, the Internal Revenue Service (IRS) established what is known as the 7-pay Test. Any life insurance policy that fails a 7-pay test is classified as a Modified Endowment Contract (MEC), and loses the standard tax benefits of a life insurance contract. In a MEC, the cumulative premiums paid during the first 7 years of the policy exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest. Once a policy fails the 7-pay test and becomes a MEC, it remains a MEC.

Group Insurance Underwriting

group underwriting differs from that of individual insurance, and is based on the group characteristics and makeup. Some of the characteristics of concern to a group underwriter include the following: - Purpose or nature of the group - the group must be created for a purpose other than to obtain group insurance - Size of the group - the larger the number of people in the group, the more accurate the projections of future loss experience will be. This is based on the Law of Large Numbers of similar risks - Turnover of the group - from the underwriting perspective, a group should have a steady turnover: younger, lower-risk employees enter the group, and older, higher-risk employees leave - Financial strength of the group - because group insurance is costly to administer, the underwriter should consider whether or not the group has the financial resources to pay the policy premiums, and whether or not it will be able to renew the coverage

Plans for Employers

in addition to individual plans, different types of qualified plans are available and have been designed for use by small and large employers

Group Life Insurance

in contrast to individual life insurance, which is written on a single life, and in which the rate and coverage is based upon the underwriting of that individual, group life insurance is issued to the sponsoring organization, and covers the lives of more than one individual member of that group. Group insurance is usually written for employee-employer groups, but other types of groups are also eligible for coverage. It is usually written as annually renewable term insurance. Two features that distinguish group insurance from individual insurance are: - evidence of insurability is usually not required (unless an applicant is enrolling for coverage outside the normal enrollment period - participants (insureds) under the plan do not receive a policy because they do not own or control the policy Instead, each insured participant under the group plan is issued a certificate of insurance evidencing that they have coverage. The actual policy, or master policy/contract, is issued to the sponsor of the group, which is often an employer. The group sponsor is the policyholder and is the one that exercises control over the policy.

Nonqualified Retirement Plan

in contrast, nonqualified plans are not subject to the requirements regarding participation, discrimination, and vesting found in qualified plans. Nonqualified plans require no government approval and are used as a means for an employer to discriminate in favor of a valuable employee with regard to employee benefits. Nonqualified plans accept after-tax contributions. Ex. of Nonqualified plans are individual annuities and deferred compensation plans for highly paid executives, split-dollar insurance arrangements, and Section 162 executive bonus plans.

Know this

in group insurance, the master contract is for the employer, and certificates of insurance are for individual insureds.

Know this

in settlement options, the principal is tax free, but the interest is taxable

life expectancy

is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean).

SIMPLE Plans (Savings Incentive Match Plan for Employees)

is available to small businesses that employ no more than 100 employees who receive at least $5,000 in compensation from the employer during the previous year. To establish a SIMPLE plan, the employer must not have a qualified plan already in place. Employees who elect to participate may defer up to a specified amount each year, and the employer then makes a matching contribution, dollar for dollar, up to an amount equal to 3% of the employee's annual compensation. Taxation is deferred on both contributions and earnings until funds are withdrawn.

Distributions from an IRA

is subject to income taxation in the year the withdrawal is made. In case of an early distribution (prior to age 59 1/2), a 10% penalty will also apply. There are certain conditions, under which the 10% penalty for early withdrawals would not apply (penalty tax exceptions): - participant is age 59 1/2 - participant is totally disabled - the moeny used to make the down payment on a home (not to exceed $10,000, and usually for first-time homebuyers) - withdrawals are for post secondary education expenses - withdrawals are for catastrophic medical expenses, or upon death

A unique aspect of group underwriting

is that the cost of the coverage is based on the average age of the group and the ratio of men to women. In addition, in order to reduce adverse selection, the insurer will require a minimum number of participants in the group, depending on whether the employer or employees pay the premium.

Insured

is the person covered under the policy that is considered for sale in a life settlement contract.

Third Party Ownership

most insurance policies are written where the insured and owner of the policy is the same person. However, there are situations in which the contract may be owned by someone other than the insured. These types of contracts are third-party ownership. It is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it. Most policies involving third-party ownership are written in business situations or for minors in which the parent owns the policy.

Policy death benefits

paid under a business owned or an employer provided life insurance policy are received income tax free by the beneficiary (in the same manner as individually owned policies).

Example of Cross-Purchase buy-sell agreement

partnership AB has two partners, A and B. The value of the business is $1,000,000. The partners each have an equal interest ($500,000 each). A buys a life policy on B for $500,000, and B buys a life policy on A for $500,000. If A dies, B gets 100% ownership of the business and A's heirs receive $500,000.

Estate Creation

person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time. The purchase of life insurance creates an immediate estate. Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, he/she will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost.

Profit Sharing and 401(k) Plans

plans permit early withdrawal for specified hardship reasons such as death or disability. Loans are also permitted in certain instances up to 50% of the participant's vested accrued benefit or a specified dollar limit (set by the IRS annually).

Know this

policy loans from the cash value are NOT income taxable

LIFO (last in, first out)

principle applied to asset management in life insurance products, under which it is assumed that the funds paid into the policy last will be paid out first

FIFO (first in, first out)

principle under which it is assumed that the funds paid into the policy first will be paid out first

Transfer (Direct Transfer)

refers to a tax-free transfer of funds from one retirement program to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another.

Life Settlement

refers to 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. A life settlement would require an absolute assignment of all rights to the policy from the original policyowner to the new policyowner. Policyowners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have grown too high to justify continuation of the policy. In many cases, however, life settlement transactions are offered to senior citizens who may have a life-threatening illness and a short life expectancy. In these situation, the owner may elect to sell the policy to a life settlement provider for an amount greater than what they would receive if they surrendered the policy for cash value.

Owner

refers to the owner of the life insurance policy who seeks to enter into a life settlement contract. The term does not include an insurance provider, a qualified institutional buyer, a financing entity, a special purpose entity, or a related provider trust.

Earned Income

salary, wages, or commissions; but not income from investments, unemployment benefits, and similar sources of income

Dividends

since dividends are a return of unused premiums, they are not considered income for tax purposes. When dividends are left with the insurer to accumulate interest, the interest earned on the dividend account is subject to taxation as ordinary income each year interest is earned, whether or not the interest is paid out to the policyowner.

Rollovers and Transfers

situations exist in which a person may choose to move the monies from one qualified retirement plan to another qualified retirement plan. However, benefits that are withdrawn from any qualified retirement plan are taxable the year in which they are received if the money is not moved properly. There are 2 ways to accomplish this: - a rollover - a transfer from one account to another.

Taxable

subject to taxation, payable to state and federal government

Rollover

tax free distribution of cash from one retirement plan to another. Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor. The 20% withholding of funds can be avoided if the distribution is made directly from the first plan to the trustee or administrator/custodian of the new IRA plan. This is known as direct rollover.

Know this

taxes must be paid either upon contribution or upon distribution, NOT both (if taxed on on end, will not be taxed on the other)

tax deferred

taxes on investments or gains (such as interest or dividends) are paid at a future date instead of in the period in which they are incurred tax

In the event of death of a key employee:

the business would use the money for the additional costs of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage.

Cash Value

the cash value of a business owned life insurance policy or an employer provided policy accumulates on a tax-deferred basis and is taxed in the same manner as an individually owned policy.

Survivor Protection (Personal Life Insurance)

the death of the primary wage-earner will usually stop the flow of income to a family. The death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors. 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. Planning for survivor protection requires careful examination of current assets and liabilities as well as determining what survivors' needs may be.

noncontributory plan

the employer or other group sponsor may pay all of the premiums or share premiums with the employees. When an employer pays all of the premiums, the plan is referred to as a noncontributory plan. Under a noncontributory plan, an insurer will require that 100% of the eligible employees be included in the plan.