Module 7
Joint and last survivor life annuity
popular between husbands and wifes. the survior still receives payments after the annutant dies.
equity indexed annuities
special class of annuity that earns interest based on a specified equity-based index, such as the S&P 500 Type of a fixed annuity Interest = Index Return x Participation rate *S&P 500 has a 10% return *Participation rate is 80% *Annuitant's Return is 8% (10% * 80%) some equity index annuities have caps (3%-14%): *pays a min. of 3% (even if the Index is down) *pays a Max. of 14% (even if the Index is up)
Pay out options for annuities
--Life Annuity -- payment for the liftime of the annuitant, highest pay out of all options --life annuity, period-certian -- payments for a set period of time or until the death of the annuitant, whichever is longer --Joint and last survivor life annuity -- payments for the life of the annuitant until the annuitant dies, transferring to payments for the survivor and continuing until the survivor dies --period certain -- payments for a specified number of years
Taxation of Life Insurance
-Premiums are post tax -Cash value grows tax-deferred -Withdrawals are taxed FIFO **Premiums first: tax free **Earnings next: Taxed as ordinary income -Loans are tax free -Death benefits are income tax free to beneficiary
Vesting schedules
All qualified plans are required to have a vesting schedule Vesting refers to ownership of assets within a plan employer contributions vest over time ***SEP and Keogh plans are the exception*** All employee contributions are immediately 100% vested
Profit-Sharing Plans
Allow companies to establish an employees retirement plan with the flexibility to vary the contributions according to the profitability of the company. amounts are determined by a percentage of the profit earned by the company. they can also be based on compensation, allowing higer-salaried employees to receive more in benefits. Guidelines must be established, it is possible that the company not contribute in a given year... the maximum amount that can be contributed is 25% of the employee's salary
Defined Contribution Plans
Allow empolyers and employees to establish retirement savings accounts for each individual employee. The following are defined as contribution plans: --Profit sharing plans --Money purchase plans --403(b) plans --401(k) plans --457 plans The employer can contribute on behalf of empolyees, the employer can match, or the employees can contribute the entire amount themselves Total amount that can be contributed in any one employee's name must be the lesser of $51k or 100% of the empolyee's earnings. the amount that an employee can contribute is currently limited to $17,500 per year. Age is not a consideration, there for defined contribution plans are better for younger employees because they have more time to contribute to the plan.
Simplified Employee Pensions (SEP)
Alternative to a Keogh Plan For self employed and Employees contributions are made to IRA Accounts that are set up for each employee Contributions can be $51k or 25% of income.. lesser of two. Employer funded, 100% vested immediately
Defined Benefit plan vs. Defined Contribution
DB: wont see to much on the exam --The defined benefit pension plan is the most popular type of defined benefit plan --benefit (payout) reveived at retirement is defined by formula --contribution is unknown --contribution is made solely by the employer --Employers shoulders all investment risks --old school pension plans DC: --401(k) is the most popular --Employer will match some predetermined amount
Point to point (equity indexed annuities
Determined by comparing index value at end of the term to the index value at the start of the term. --Interest is added at the end of the term (similar to annual reset, except interst is added at end)
Annual Reset (equity indexed annuities)
Determined each year by comparing index value at end of the year to the index value at the start of the year. --Interest is added each year during the term
ERISA
Employee Retirement Income Security Act of 1974... was created to ensure that employers would act to protect the financial interests of their employees. ERISA mandates that employers protect employees' retirement and pension interests and have a fiduciary responsibility to: --Provide benefits to participants and beneficiaries --Reasonably defray costs of administering the plan --Diversify the investments ERISA specifically requires that all private sector retirement plans establish and provide for fiduciaries who: --control and manage the operation of the plan --Describe any delegation procedures under the plan for its allocation of responsibilities in operation and administration ERISA does not specifically require a pension plan to have an INVESTMENT POLICY STATEMENT (IPS) in place, it basically anticipates that plan fiduciaries will conduct themselves as if they have one in place. The only plan that must ALWAYS include an IPS is the 529 college savings plan ERISA covers all "private sector" pension plans (Qualified) such as: --Defined benefit and defined contribution plans --Keogh/SEP plans --Profit-sharing plans --401(k) plans --"ERISA Covered" 403(b) plans not covered (Nonqualified: --Plans by the federal government --403(b) plans --Municipalities with 457 plans --IRAs A 404 (c) plan is defined by ERISA as: --An individual acct. plan (e.g., 401(k), profit-sharing, and money purchase) --A plan which is funded by the employer and in some cases, the employee, as with a 401(k) --A plan in which participants take control over their investments, and are able to choose from a broad range of investment alternatives that includes at least three diversified investment categories with different risk and return characteristics.
Traditional IRA Distributions
LIFO Earning first: Taxable as ordinary income distributions funded with tax-deductible dollars are taxed as ordinary income distributions funded with after tax dollars are treated as a tax free return of principle distributions from IRAs do not receive preferential Capital Gains Treatment
Fixed Annuities
Must have a insurance license to sell. Not a security, therefore, an agent is not required to be registered as an agent to sell fixed annuities.
Supervisoin of coverdell & 529 plans
Opening an acct. for a Coverdell Education Savings plan and/or a 529 Qualified Tuition Plan must be supervised by a Series 53 Municipal Securities Principal, a Series 51 Municipal Fund Securities Principal, or a Series 9/10 Branch Office Manager Principal. any of these persons are considered licensed to supervise all forms of municipal acct. openings, sales, and trading. Investment Policy Statements are required for all 529 plans. The statement provides the fiduciary who is responsible for the plan with guidelines for selecting, reviewing, and changing the plans investments while also establishing its performance ovjectives. these statements must be reviewed by the fiduciary annually to isure that the investments are suitable for the 529 participants
Qualified vs non qualifed
Qualified: --Tax deductible contributions --earnings grow tax deferred --zero cost basis --Entire amount taxed at distribution Non-qualified: --Contributions are NOT deductible --Earning grow tax deferred --cost basis = Contributions --Only earning are taxable upon withdrawal as ordinary income (are withdrawn on a LIFO basis... earning come out first and are taxed, contributions last and are not taxed, as they were orginally taxed)
Life annuity, period certain
The annuitant can choose a minimum length of time to receive payments from the insurance company. length of time can be choosen (5-10-20yrs) and if the annuitant dies beofre the period expires, the beneficiary receives the remaining payments. If they live longer they continue to recieved payments until death.
Life annuity
The annuitant receives payments from the insurance company until death. Upon death, payments stop, and any money that is in the acct. reverts to the insurance company.
Capital needs Requirement
This process determines the target amount of money that is needed and paid out in the future. IAs must identify their clients Capital needs Requirement, first.
Roth IRAs
Were established as part of the TAXPAYER RELIEF ACT OF 1997. The funds that are saved in a Roth are after tax funds, and the interest and other gains grow tax free in the account for retirement. Major differences between a traditional and Roth IRA are the following: --The money contributed to a Roth IRA is after tax money. Any withdrawals upon retirement are not traxed if the money has been invested in the account for five years or more and the person is over 59 1/2 --The income limits for Roth are for contributions not deductibility --Individuals earning greater than $127k ($188 for married couples) may not contribute to a Roth. --The maximum contribution for individuals under age 50 is the lesser of $5500 or 100% of earned income for the year. --If individuals are over 50 yrs of age, they can contribute $6500 max --Since not all of the proceeds in the account are taxed as ordinary income upon withdrawal, a tradtional IRA acct. may be better for those who expect to have lower taxes when the retire --The money must be maintained in the Roth acct. for a minimum of five years before the funds can be withdrawn tax free --If more than one IRA account is owned, the total for all IRA account contributions is limited to the annual contribution limit. --Roth accts do not require that funds be withdrawn upon reacihng age 70 1/2 Limits: under $110k good over $125 can't contribute (single) under $173k good over $183k can't contribute (joint)
Qualified Retirement plans
What is Qualified Retirement plan? --subject to the provisions in ERISA **ERISA regulates private sector retirement plans Qualified plan contributions are PRE-TAX Qualified plans may NOT DISCRIMINATE in favor of Highly compensated employees What are the benefits: --Employees can contribute on a pre-tax basis --Regulates employee's taxable income --Tax-Deferred growth of assets Qualified plan eligibility --21 years old --Full time status (1000 hrs/yr) --Employed for a min. of one year
Variable universal Life Insurance
combines the features of universal life insurance and variable life insurance --like variable life, variable universal life allows the investor to pay premiums with earning s from holding in a separate acct., and like universal life, variable universal life allows the policyholder to modify the death venefits. Variable universal life is excellent for people who want control over the cash values in the plan. this is also good for those who need retirement growth along with insurance. --Permanent coverage --flexible premium --flexible death benefit --Cash value >>separate accounts and can borrow against up to 90% Is a security
Keogh plans
aka HR-10 retirement plans, considered qualified retirement plans for self employeed does not need to be exclusively self employed to make a contribution Consulting income is considered self employed income are retirement plans for self-employed individuals and their qualified employees. Keogh plans are typically established as employer-funded defined contrbution plans. This can be established for self-employed individuals as a retirement plan, however, if the individual has employees, contributions must also be made for any employees who are eligible for the plan. Eligible is defined as: --21 years of age --1 year with the company --minimum of 1000 hours worked in past 12 months contributions must be the same percentage as the owner gives himself. up to 100% of earned income can be contributed to the plan, maximum deductible contribution that can be made per employee is $51k per year or 25% of earned income, whichever is less. can have a IRA (traditional or Roth)
401(k) plans
allow employers to match the contributions made by employees. SIMPLE 401(k)s are a subset of the 401(k)plan. they are for companies with up to 100 employees. If established these plans cannot have any other retirement plans SIMPLE 401(k)s allow employees to contribute up to $12k per year but, unlike regular 401(k)s, the employer must make either: 1. A matching contribution up to 3% of each employee's pay or 2. A non-elective contribution of 2% of each eligible employee's pay. All contributions are immediately 100% vested to the employee, with the SIMPLE.. last, No top-heavy testing
403(b) plans
are for employees of certain nonprofit organizations. Commonly referred to as TAX-SHELTERED ANNUITY PLANS (TSA PLANS) Nonprofit organizations allowed to have these plans include: --Public schools --colleges and universities --Chruches and public hospitals --501(c)(3) charities Investments allowed with a 403(b) plan are limited to low-risk investments, as per ERISA, including: --Annuities and variable annuities --Mutual funds No Stocks Contributions are made on a pretax basis, or are tax-deductible to the employee. When the employee withdraws funds upon retirement, the investment is fully taxable as ordinary income. Like other retirement plans, there are penalities for premature distributions prior to the age of 59 1/2 and participants are required to take mandatory distributions upon turing 70 1/2 yrs of age. can be rolled over into a IRA account if employee leaves nonprofit organization.
Individual retirement Accounts (IRAs)
are retirement plans that can be established by any individual who has earned income and can be established at a B/D, bank, or insurance company. Some restrictions: --An individual must have earned income --A working individual with a nonworking spouse can set asidemoney in a separate spousal IRA account --The maximum contribution to a traditional IRA is the lesser of 100% of that years earned income, or $5500 --If the individual is 50 or older during the tax year, the maximum contribution increases to $6500 --If individuals have other retirement assets in a given year, the amount they can contribute to the IRA account is limited. **Anyone with earned income may contribute to an IRA, though the contribution is only tax-deductible under certain circumstances.** the following investments are allowed in IRA accounts: --Equites --bonds --Mutual funds --Covered calls --Gold and silver coins minted in the U.S. or by U.S. states --High quality gold, silver, platinum, and palladium bullion Not allowed: --Short stock --Long stock purchased on margin --Short puts --Real estate --Certain collectibles (works of art, rugs, antiques, metals, gems stamps, foreign coins, and alcoholic beverages) **A 6% penalty is charged for any overpayment into an IRA, and the amount of overpayment will be taxed every year until it is withdrawn.** ***failure to take RMD is a 50% penalty*** Required Minimum Distribution.. has to be done by April 1st on the year following when you turn 70 1/2 year of age.
Term Life Insurance
defined as a life insurance policy or contract inwhcih the insured pays premiums to a life insurance company in exchange for a guaranteed payment upon the death of the insured. "term" indicates that it is only valid for a specific period of time.\ Term life insurance does not build up cash value; therefore, unlike whole life insurance, the policyholder cannot borrow against term life insurance. --Temp. coverage --Pure Insurance --very cheap when young --Very expensive when old --no cash value, no borrowing Not a security
High-water mark (equity indexed annuities)
determined by looking at various points during the term and comparing index value at highest point to index value at the start of the term --Interest is added at the end of the term
529 plan
distributions from a 529 plan account are tax exempt from federal taxes. Investor is 529 plans are now entitled to receive the following tax breaks: --Distributions from 529 plans are excluded from gross income for both the acct. owner and the beneficiary of the acct.s procceeds, provided the money is used for qualified higher education expenses. Contributors can contribute any amount to the plan as long as it does not exceed the amount necessary for a college education. However to avoid the gift tax, contributions would have to be $14k per year, or $70k with no more contributions being made for 5 years. States establish 529 college savings plans and are the issuers of the plans interests, which are purchased by customers. The states determine the features of their 529 plans. If a state has more than one plan, it selects the options available for each. Investors can invest in any states plan, and more than one. The contibutor (owner of acct. until withdrawn) can decide on the accts. investments upon making the initial contribution that sets up the acct., but cannot make changes thereafter in that acct. 529 plan is an investment in a trust. The contributor can change the plans by rolling the assets over to another plan.. this can be done once a year without tax consequenses provided they are reinvested within 60 days. Only cash can be contributed to a 529 plan. If a distribution is used for the beneficiary's qualified higher education expenses, the distribution is exempt from federal taxes.
Varible Annuities
do not guarantee a specific return... returns based on the underlying investments and their performance. fees for variable annuities are typcally higher than mutual fund fees.
Coverdell Education Savings Plans
formerly known as an education IRA, can be used for any level of education fo rthe individual named on the acct. Plan must meet certain criteria: --Any individual, including a child, may contribute to the plan, as long as the total contributions do not amount to more than $2k per year for children under 18. Not deductible to the donor. --The plans principal and earnings may be distributed tax free for qualified educationalk expenses, which include: 1.tuition and fees 2. Cost of books, supplies, and equipment 3. Cost of room and board, have to be atleast a half-time student. --acct. must be rolled to another person within 30 days if the original beneficiary reaches 30 or dies
Defined Benefit Plans
is a pension plan in which the benefit is determined based on the participants current compensation. the main difference between defined benefit plans and the other types of pension plans is that age is taken into consideration. Older employees benefit more than younger empolyees, because they are able to take withdrawals sooner and use their money in retirement, rather than funding the plan for others until their retirement.
Universal Life Insurance
is a variation of whole life insurance. universal allows flexiblity in how the premiums are paid for the insurance policy, and the insurance coverage (death benefit) can be modified to suit the individual needs of the insured. The policyholder can adjust the insurance coverage and premiums as needed. Whole and Univeral allow the insured to borrow against the policy. Universal life policies are good for younger people with small children and are also very good for the business market of insurance. The flexible premiums and the flexible coverage are great assets needed by these groups. --Permanent coverage --flexible Premiums --flexible death benefit --cash value >>guaranteed and can borrow against Not a security
Whole life insurance
is similar to term life insurance, but the length of time the insured pays premiums for the life insurance policy extends beyond a defined term. Usually, the insured pays until a maximum age or until death. If the insured dies, the beneficiaries of the policy receive the face value of the policy regardless of the age of the insured. --Permanent coverage --fixed premium --fixed Death benefit --Cash value >>Guaranteed and can borrow Not a security
Variable Life Insurance
is similar to term life, whole and universal life insurance, because the policy includes a death benefit. The difference is the investment that underlies the cash value of the policy. Variable allows the policyholder t odirect the investment portion of the policy into a separate acct. that can be invested in securities with hgiher potential returns. --The cost of insurance is paid for by premiums and by gains in the value in the separate acct. --the variable life insurance guarantees a minimum death benefit, but if the value of the subaccts. appreciates, the policyholder reveives a higher death benefit. --this second part of the ppolicy is referred to as the "variable component" of the life insurance. --Permanent coverage --fixed premiums --fixed death benefit --Cash value >>separate accounts and can borrow against, but only up to 90% of the total value It is a security
Money Purchase Pension Plans
very similar to a profit-sharing plan; however, the employer is obligated to contribute annually to funding employee accounts, regardless of the companies profits. Contributions to the plan are based on a percentage of the employees salary.
