Modified Endowment Contract (MEC)
A life insurance policy under which the amount a policy owner pays in during the first years exceeds the sum of net level premiums that would have been payable to provide paid-up future benefits in seven years.
Once a whole life policy is designated as a
Qualified plans include
401(k) plans, SEPs, Keogh plans, 403(b) tax-sheltered annuities, Section 457 Deferred Compensation, Section 529 plans, Simple plans, defined benefit and defined contribution plans. (1578)
Taxation of a whole life insurance policy
The death benefit paid by any life insurance policy to a designated beneficiary is received income tax free. The cash value that builds in a whole life policy does so on a tax-deferred basis. (1525)
Premiums paid by an employer for group term life insurance is
tax-deductible since it is considered a legitimate business expense. (1528)
Exclusion Ratio
method of determining which part of an annuity payment is taxable, and which part represents the tax-free return of the annuitant's after-tax cost basis.
What provision is required in pension plans that guarantee an employee minimum benefits in the event of termination of employment prior to retirement?
Vesting provisions are found in pension contracts to guarantee an employee specific minimum benefits in the event of separation of service (i.e., termination of employment). (1570)
1035 exchange
Internal Revenue Code 1035, known as a 1035 exchange, allows for like kind exchanges of property, including exchanges of life insurance and annuities. It is primarily used to exchange a less competitive (older) policy with a more competitive (newer) contr
In order to be considered "qualified" a plan must
satisfy IRS requirements including: (1) it must be in writing; (2) it must not be discriminatory; (3) it must be communicated to all employees; (4) it must be provided for the benefit of employees and their dependents; (5) it must satisfy minimum age and
Taxation of a whole life insurance policy?
The death benefit paid by any life insurance policy to a designated beneficiary is received income tax free. The cash value that builds in a whole life policy does so on a tax-deferred basis. (1547)
Early withdrawal of annuity
Premature distribution from a MEC, qualified plan or an annuity are subject to a 10% penalty if the withdrawal is made prior to age 59 1/2. This is also called an age-related penalty. The penalty, however, will not be imposed in cases of the owner's death
What may an individual use to fund a traditional Individual Retirement Account (IRA)?
An annuity contract may be purchased to fund any type of retirement vehicle. A flexible premium annuity is a contract characterized by funding each year of any amount the contract owner wishes to contribute. (1582)