Personal Uses of Life Insurance
Survivor protection, estate creation and conservation, cash accumulation and liquidity, tax free
Business Uses of Life Insurance
-Key Person: the key employee is insured; the business is the applicant, policyowner, premium payer and the beneficiary-Buy-sell: a business continuation agreement-Does not go to employee family
Qualified Plan Requirements
-Has to be approved by IRS; exclusively for employees and their beneficiaries, finally written and communicated, cannot discriminate, permanent, and have a vesting schedule "management
Qualified vs Non-Qualified
-Non qualified plans is any plan that doesn't meet IRS requirement- has no guidelines, able to discriminate, not deductible, and taxable to employee
Plans for Employers
-Retirement Plans-HR-10 Kroger is only for self employed "employer matches"-SEP is for both self employed and small employer "employee+employee"SIMPLE is for small employer to <100 employees "employer matches"401K is for any employer "employer matches"403(b) TSA is for non profit "employee + employee
Tax Treatment Of Permanent Life Insurance Products
-Can not deduct premiums and policy loans for tax deductible -policy dividends and death benefit is not taxable -Anything that excess cash value and interest on dividends is taxable
Amounts Available to Policyowner
Cash Value Increases-grow tax deferred and any amount in excess of cost basis is taxable as ordinary income.Policy Loans-not taxable as income, the interest accumulates on outstanding policy loans, and unpaid loans subtracted from cash value upon surrender OR from death benefit upon insureds death.Dividends-not taxable as income (return of unused premium) and any interest earned is taxable as ordinary income.As a policy owner you can actually surrender policy which means the amount that exceeds premium paid is taxable income, in universal policies partial surrenders reduce cash value and death benefit, and accelerated benefits is all tax free to terminally ill insured and chronically ill insured and any amount received must be included in the insured gross income.
Taxation of Deferred Annuities
-Tax deferred accumulation -withdrawals |gain before the principal (LIFO)-early withdrawals is 10% penalty-cash surrender: taxable interest
Premature Annuity Distribution -59 1/2 rule
-A distribution form an IRA is subject to income taxation in the year the withdrawals is made. In case of an early distributor (prior age 59 1/2) is a 10% penalty.Exceptions- is if you are disabled, medical expenses, down payment on a first home, and post secondary education
Values Included in Insured's Estate
the death benefit or face amount of a life insurance policy may be included in the insured's taxable estate at death and subject to the federal estate tax.-Incidents of Ownership- Tax free to beneficiary but maybe not tax free depending on estate-Estate Beneficiary -Transfer of Ownership- anything transferred within 3 years will still be taxable since it's considered still your estate.
Taxation of IRAs and Roth IRAs
Traditional IRA's-must be made in cash-tax deductible and tax deferred earnings-Income taxable the year received IRA Rollovers can be done in either rollover or direct transfer.
Modified Endowment Contract (MEC) - 7 Pay Test
Life Insurance Policy to Modified Endowment Contract Once a MEC, always a MEC
How many credits must be earned in the last 13 quarters to attain currently insured status under Social Security?
6 credits