Chapter 6- AD Banker Life and Health
Industrial (Home Service)
- Individual policies written to low-income workers with a required medical exam - Normally have face amount of $1,000 or less and are written to reduce funeral costs - 4 weeks grace period - Settlement = lump sum - Facility of Payment Clause: No designated beneficiary = insurer pays entitled relative
Know what the differentiates the 2 types of Buy-Sell Agreements.
- Policy ownership, the business owners own Cross Purchase. - The Entity Plan is owned by the business itself.
4 Parts of Social Security - " RDDM "
- Retirement - Death/Survivor - Disability - Medicare
The cost of the plan is determined by:
-The average age of the group - The average size of the group - Industrial classification (nature of the work involved) - Financial stability of the group sponsor - Experience rating (the group's claim) and - The personnel turnover history These factors are more important than the actual overall health of the group. The employee's family is normally covered at a percentage of the employee's coverage.
Group Underwriting
-looks at broad characteristics of group to determine rates -still must control adverse selection
3 Survivor Income Periods:
1. Family Dependency Period- when the survivor has 1 or more children with youngest child under 16 2. Widow's/Widower's Blackout Period- When the youngest child reached age 16 until the surviving spouse reaches retirement age. 3. Retirement Period- When the survivor reaches retirement age.
Group Dependent Status
A child may be considered a dependent beyond the age of 19 or 21 if the child has been permanently, mentally or physically disabled prior to the specified age.
Supplemental Executive Retirement Plan (SERP)
A nonqualified deferred compensation plan that allows employers to provide additional retirement income to key, highly compensated employees. It allows employers to provide benefits beyond those of traditional qualified plans, such as 401(k) plans.
Third Party Ownership
A policy owned by one person insuring the life of another person. The three parties involved in a Third Party Ownership are the policyowner, insured and insurer. Examples of Third Party Ownership policies are: -A husband buying a policy on a wife -A parent buying a policy on one of their children -A business buying a policy on a key employee -A business partner buying a policy on another business partner
Currently Insured
A worker must earn at least 6 quarter credits during the full 13-quarter period ending with the quarter in which the worker dies, becomes disabled, or is entitled to retirement benefits.
Industrial life insurance is typically sold in the face amounts of:
A. $1,000 or less B. $5,000 multiples C. $10,000 to $20,000 D. up to $50,000
The Master Policy for a group life plan goes to the employer. What does the employer receive?
A. Certificate of Insurance B. Change of beneficiary form C. Copy of the Master Policy D. Claim form Package
Buy-Sell Agreement Advantages/Disadvantages
Advantages of agreement -It is legally enforceable - The value of the business is previously agreed upon - It is an immediate and automatic method of transferring the deceased's interest Disadvantages of agreement -Income to surviving family member stops - Surviving business owner(s) may suffer a loss of income - Asset reduction due to forced liquidation - The estate transfer may be delayed due to forced business liquidation - Share(s) of ownership transfer to surviving relatives
A primary purpose of key person life insurance is to do which of these?
B. Provide the business with money to recruit and train a replacement employee
When a group insurance plan is identified as contributory, it means all of the following EXCEPT:
B. employers must enroll 100% of eligible employees A. employees pay a portion of their cost of their benefit C. Employees must be eligible to participate D. Employers are responsible for collecting the premiums employees pay
In a group life insurance plan, the employee has control over which of the following?
C. Choice of beneficiary A. Choice of insurance company B. Type of Policy D. Mode of premium payments
One of the purposes of a buy-sell agreement is which of these?
C. It acknowledges the commitments of the partners to each other and to their heirs to assure the continuation of the business in the event one of them dies unexpectedly
Credit Life Insurance (Individual and Group)
Credit Life Insurance is either a form of individual coverage on the life of a debtor, or group insurance issued to a creditor providing coverage on debtors for the benefit of creditors. Both types of plans are normally a form of Decreasing Term and the amount of insurance reduces as the amount of obligation reduces. Usually the individual debtor pays the premium. A few dollars of a monthly payment are credited toward premiums for the insurance and the debtor is entitled to cancel the insurance if and when the loan is prepaid or refinanced. The premiums are based on a flat amount. The amount of insurance benefit must not exceed the total amount of indebtedness. The coverage begins when the debtor becomes obligated to the creditor. The creditor (who normally is both policyowner and the beneficiary) must apply the insurance proceeds to discharge the loan.
In order for a worker to be qualified for all the benefits available from Social Security how many credits must be earned?
D. 40 Credits
In a credit life plan, who is the beneficiary?
D. The creditor A. the wife of the insured B. The husband of the insured C. The children of the insured
FEGLI
Federal Employees Group Life Insurance
Underwriters are also concerned about the stability from a couple of angles.
First, how long has the group existed? Secondly, if the group has been around a while, how often does it switch providers? Thirdly, what is the unifying characteristic? Individual turnover is less important.
Characteristics of Group Insurance Plans
In a group insurance plan, the insurer issues a Master Policy to the plan sponsor and each participant receives a Certificate of Insurance covering the participant; and if offered, his/her spouse and dependents. Participants in the plan do not have personal control of the policy or policy changes as with an individual policy. Group insurance is a contract between the sponsor and the insurance company. The sponsor may set the terms and determine which classes of employees qualify, such as full-time vs. part-time employee. The plan cannot discriminate so all members of the eligible class of employees must be eligible for predetermined benefits based on a single formula, such as the same percentage of annual income. The sponsor can elect to discontinue the plan and the insurance company can increase the rates it charges. To be eligible for a group plan, the group must be a natural group, meaning it was formed for a purpose other than for procuring or reducing the cost of insurance. Group plans must also have a grace period of typically 31 days and is usually written as Annual Renewable Term. Evidence of insurability is not required if the individual enrolls when eligible.
Key Person (Key Employee)
Key Person - Key persons = employees whose contributions have significant impact on revenue/profitability of the company - Proceeds from key person life insurance policy provides funds to recruit, hire, and train a replacement employee, restore lost profits - Term or permanent coverage - They are: * Part of the management team * More Highly Paid * Respected by customers, creditors, suppliers, and vendors * Have direct responsibilities for sales, production, or service
Multiple Employer Trust (MET)
Legal entities in which two or more financially unrelated companies join together to provide group insurance
Death Benefits
Pays benefits to the family of a covered worked. A one-time payment of $255 may be made after the taxpayer's death. This benefit may be paid to a surviving spouse or minor children if they meet certain requirements.
Retirement
Pays monthly income benefits equal to a retired worker's PIA at Full Retirement Age (FRA) and their dependents, or reduced benefits as early as at age 62.
Deferred Compensation
Plan that provides income to employees at some future time as compensation for work performed now.
Section 303 Stock Redemption
Provides liquidity of corporate stock of a deceased stockholder to the corporation for the purpose of paying estate taxes, administrative and funeral costs only, so the remaining stockholders are not liable for these fees.
Types of Social Security Benefits
Retirement- pays benefits to workers (age 65 or reduced benefits at age 62) and their dependents. Death/Survivor -pays benefits to the family of a covered worker. Disability Income - pays benefits to a covered worker and dependents. Medicare - helps cover health insurance costs for qualifying individuals.
SGLI
Service Members Group Life Insurance
Survivor Benefits
The Survivor Benefit is the amount of income that may be expected from Primary Insurance Amount (PIA) of the insured. This benefit is calculated on the amount of current Social Security Insurance income benefit the deceased had earned which is the PIA. Children are covered to age 18 and may continue to age 19 if enrolled in an accredited elementary or secondary school. When the youngest child reaches age 16, the widow's/widower's blackout period begins and continues until the surviving (non-remarried) spouse reaches age 60. At this time the widow or widower may receive a Social Security income benefit as per the calculations using the PIA of the decreased spouse.
Single Employer
The employer may be a partnership, a corporation, or a sole proprietorship. There are two legal employer-employee groups fitting one of the following definitions: Contributory- Employees must contribute to the premium payments and at least 75% of all eligible employees must participate. Noncontributory- Employer pays the entire premium with a mandatory 100% of the eligible employees participating. The percentage participation requirements are used to reduce the adverse selection.
Labor Union Groups
The plan must be for the benefit other than the union. The Taft-Hartley Act prohibits employers from turning over funds directly to a union.
Group Conversion
There is a conversion period of 31 days in which the employee may, upon termination of eligibility and without evidence of insurability, convert his/her group life insurance benefit to an individual permanent policy The conversion period is also a grace period.
Executive Bonus Plans
These plans are an arrangement under a Corporate Cross Purchase Buy-Sell Agreement where the corporation bonuses the premium to each shareholder to cover the cost of the policies they own on the other shareholders' lives. 1. Each shareholder reports the premium he/she is bonused as additional compensation that, presumably, is deductible by the corporation. 2. Corporate records need to be established treating the premiums as compensation to shareholders, not dividends. 3. There typically is added a policy provision that forbids any surrenders, withdrawals or other actions unless endorsed by the corporation.
Buy-Sell Agreement
This agreement contractually establishes a price with the intent to purchase, at a predetermined value, the assets of a business should one of the contract participants predecease the others. It may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation. Any type of life insurance may be used to provide funds for the Buy-Sell Agreement. Premiums are not deductible, and policy proceeds are received income tax-free.
Split-Dollar Plans
This is not a tax-qualified plan, but it does provide a benefit for the employee's family upon the death of an employee. Upon an employee's termination of employment the policy may be purchased from the employer at an agreed price.
fully insured
To be considered fully insured, the taxpayer needs to have worked and paid Social Security taxes for a certain length of time in order to get Social Security benefits. The amount of time needed to work depends on date of birth. Fully insured status requires a minimum of 6 quarters and 1 quarter per year from age 21 with a maximum of 40 quarters (or 10 years). Benefits that may be received monthly under a fully insured status are: -Retirement at age 62 or older -Spousal retirement at age 62 or older -Dependent child of retired worker -Spouse of retired worker at any age if caring for a dependent child -Widow or widower at age 60, or at age 50 if disabled -A dependent parent of a deceased worker
Entity Plan
Under this plan, a business entity enters into an agreement in which it is obligated to purchase the deceased person's interest. The entity typically buys life insurance policies on each of the partners. The entity would then name itself as the beneficiary of each policy.
Cross Purchase Plan
Used when parties purchase life insurance on each other or the employer. For example, if there are 3 partners in a company valued at $300,000 , then each would have a $100,000 interest in the company. Each partner would purchase a policy on the other partners, providing for a total of 6 policies (3 x 2 = 6). Each policy would be valued at $50,000 (6 x$50,000 = $300,000).
Funding
is provided by both employee and employer through the Federal Insurance Contributions Act (FICA) tax, which may also be known as Social Security Payroll Tax. The employer withholds the employee's tax and pays it along with the employee's portion.
Risk Selection
may have several aspects, such as size, stability, and industry. For example, group life insurance products may require a minimum number of participants in order to avoid claims that are inadvertently skewed higher because of a couple of very substandard individual risks.
Franchise (wholesale) :worksite plan
the group insurance is unique in that a Master policy is not issued since underwriting is on an individual basis and individual policies are issued. It allows very small groups to obtain some benefits of large group insurance, in particular the lower cost. Therefore, evidence of insurability may be required.