group insurance
usually purchased by a company for its employees
two features of group insurance
-evidence of insurability is usually not required
-participants (insureds) under the plan do not recieve a policy because they do not own or control the policy
certificates of insurance
participants (insureds) evidence that they have coverage
master policy/ contract
issued to the sponsor of the group which is often an employer. the group sponsor is the policy holder and is the one that exercises control over the policy
characteristics of concern to a group underwriter
-purpose of the group- the group must be created for a purpose other than to attain insurance
-size of the group- the larger number of people in a group, the more accurate the projections of future loss experience will be.
-turnover of the group- the unde
conversion privileges
if an employee terminates membership in the insured group, the insured has the right to convert to an individual whole life policy without evidence of insurability at a standard rate based upon the insureds attained aged.
noncontributory plan
an employer pays all of the premiums. under this plan, an insurer will require that 100% of the employees be included.
contributory plan
when the premiums for group insurance are shared between the employer and employees. under this plan the insurer will require that 75% of employees be included
tax qualified plans- a qualified retirement plan
approved by the IRS which then gives both the employer and employee benefits in deductibility of contributions and tax deferral of growth
characteristics of qualified plans
-designed for the exclusive benefit of employees and their beneficiaries
-are formally written and communicated with the employees
-use a benefit or contribution formula that does not discriminate in favor of the prohibited group- officers, stockholders,
qualified retirement plans
most qualified plans provide that a 10% penalty be assessed if the individual attempts to take out money prior to the IRS retirement age of 59 1/2. many will also mandate that distributions must begin by age 70 1/2 in order to avoid penalties. it is impor
self employed plans (HR 10 or Keogh plans)
to be covered under this plan, the person must be self employed or a partner working part time or full time who owns at least 10% of the business.
upon a participants death, payouts can be available immediately
if a participant becomes disabled, he or she
eligibility requirements for self employed plans ( HR 10 or Keogh)
-must be at least 21 years of age
-has worked for a self employed person for one year or more
-worked at least 1000 hrs per year (full time)
-the employer must contribute the same amount of funds into the employees account as he contributes to his own acc
profit sharing and 401(k) plans
qualified plans where a portion of the companys profit is contributed to the plan and shared with employees. this plan allows employees to take a reduction in their salaries by deferring amounts into a retirement plan. the company can also match the emplo
profit sharing and 401(k) plans
under this plan, participants may choose to recieve either taxable cash compensation or have the money contributed into the 401(k), referred to as cash or deferment arrangement plans (CODA). contributions into the plan are excluded from the individual emp
a 401(k) plan may be arranged as
- pure salary reduction plan
-bonus plan
-reduction plan
under the bonus or thrift plan, the employer will contribute a certain amount or percentage for each dollar contributed by the employee; however, employee contributions are not always required. plan
403(b) tax sheltered annuities (TSA's)
a qualified plan available to employees of non- profit 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
individual retirement accounts
anyone with earned income who has not attained age 70 1/2 can have an IRA. an individual can contribute 100% of earned income up to a specified amount (currently $5000). a married couple could contribute a specified amount that is double the original amou
earned income
means salary, wages, and commissions, but would not include income from investments, unemployment benefits, income from trust funds etc. usually an individuals contributions to a traditional IRA are tax deductible fort he year of the contribution. any eli
IRA contributions
must be made in cash in order to be tax deductible. the money invested in the account can be used to buy stocks, bonds, mutual funds or annuities. the money used for IRA contributions cannot be used to purchase life insurance policies or collectibles such
early withdrawals
from an IRA are subject to income taxation and a 10% penalty, unless one of the following conditions is met:
-participant is age 59 1/2
-participant is totally disabled
-the money is used to make the down payment on a home (not to exceed $10,000, and usua
roth IRAs
a form of an individual retirement account with after tax contributions. in contrast with a traditional IRA, Roth contributions can continue beyond age 70 1/2 and distributions do not have to begin at age 70 1/2. roth IRAs grow tax free as long as the acc
summary of traditional IRA
- contribute 100% of income to an IRS specified limit
-excess contribution penalty is 6%
grows tax deferred
-contributions are tax deductible (made with pre- tax dollars)
-10% penalty for nonqualified distributions (some exceptions)
-payouts must begin by
summary of Roth IRA
- contribute 100% of income to an IRS specified limit
-excess contribution penalty is 6%
-grows tax free if account is open for at least 5 years
-contributions are not tax deductible (made with after tax dollars)
-qualified distribution cannot occur until
rollovers and transfers
ways to move monies from one qualified retirement plan to another qualified retirement plan.
rollover
a 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 participa
transfer (or direct transfer)
refers to the 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.
qualified plans
- contributions currently tax deductible
- plan approved by the IRS
-plan cannot discriminate
- earnings grow tax deferred
- all withdrawals are taxed
nonqualified plans
- contributions not currently tax deductible
- plan does not need IRS approval
- plan can discriminate
- earnings grow tax deferred
- excess over cost basis is taxed
Buy- Sell agreements
used to contractually establish the intent of someone else to purchase the business upon the insureds death and sets a value (purchase price) on a business. life insurance is used to fund the buy sell agreement
partnership buy- sell agreements
allow the surviving partner or partners to purchase the deceased partners share of the business from the deceased's family. a buy sell agreement can either be a cross-purchase plan or an entity plan.
cross purchase plan
each partner involved purchases insurance on the life of each of the other partners. with this plan each partner is the owner, premium-payor, and the beneficiary of the life insurance on the lives of the other partners. the amount of life insurance is equ
entity plan
the business itself is obligated to buy out the ownership interest of any deceased or disabled partner.
executive bonus (also known as IRS section 162 plan)
is 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 all control. since the employer treated the premiu
social security benefits and taxes
a federal program enacted in 1935, which is designed to provide protection for eligible workers and their dependants against financial loss due to old age, disability, or death. in other words, social security can be thought of as federal life and health
fully insured
refers to someone who has earned 40 quartes of coverage (equivalent of 10 years of work), and is therefore entitled to recieve social security retirement, medicare, and survivor benefits.
partially insured
when an individual has earned 6 credits (or quarters of coverage) during the 13 quarter period ending with the quarter in which the insured:
- dies
- becomes entitled to disability insurance benefits
- becomes entitled to old age insurance benefits
retirement benefits
begin when a worker has earned the required work credits (40 calendar quarters or 10 years of work), reaches age 65. reduced benefits are available at age 62 (approximately 80% of the benefits that would have been payable at age 65).
primary insurance amount (PIA)
the amount of retirement benefits a worker will recieve under social security, and is based on the workers average earning, the workers age at retirement, and any additional earnings the worker makes after retirement. in addition to the worker, the worker
disability benefits
available for the fully insured worker who becomes totally or permanately disabled prior to reaching age65. social security benefits are extremely difficult to qualify for as they require the covered worker to be unable to engage in any substantial, gainf
survivor benefits
death benefits paid to the workers survuving spouse and dependant children under specified circumstances. a lump sum burial benefit of $225 is available for a spouse living with the worker at the time of death, or a spouse or child who is eligible for soc
individual life premiums
the premiums that an individual pays for his or her own life insurance are considered to be a personal expense and are not tax deductible by the individual
individual life death benefit/policy proceeds
the life insurance policy death benefit is not subject to income tax even if it exceeds the premiums paid
cash value
the policyowner is not taxed on the annual increase in cash value as this accumulates on a tax deferred basis. if the policyowner withdrawals any of the cash value or surrenders the policy for the cash value, the amount of cash value that exceeds the sum
policy loans
a loan from the cash value of a life insurance policy is not taxable to the policyowner. an individual cannot receive a tax deduction for interest paid on a life insurance policy loan.
estate taxation
the death benefit of a life insurance policy may be included in the insureds taxable estate at death and can be subject to the federal estate tax.
permanent life features vs. 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
group life insurance
the premiums that an employer pays for life insurance on an employee, whereby the policy is for the employees benefit, are tax deductible to the employer as a business expense. this includes group. in group term insurance, the premiums that are attributab
policy loans
are not taxable to a business. unlike an individual taxpayer, a corporation may deduct interest on a life insurance policy loans for loans up to $50,000
policy death benefits
paid under a business owned or an employee provided life insurance policy are received income tax free by the beneficiary (in the same manner as individually owner policies)
modified endowment contracts (MECs)
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 p
taxation rules that apply to MECs 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% pe
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 is in force)
- cash value gains - taxed at surrender
- dividends - not taxable (return of unu
the cash value under a MEC accumulates
on a tax deferred basis
a unique benefit life insurance has over other types of insurance
it performs the function of cash accumulation
what is the best reason to purchase life insurance instead of annuities
to create an estate
a participant contributes more than the maximum amount to her Roth IRA. what kind of tax penalty will she have to pay?
6%
what does "liquidity" refer to in a life insurance policy?
cash value can be borrowed at any time
key person life insurance does not reimburse a company for which of the following?
for increased pension liability resulting from a key persons death
which of the following types of life insurance policies would perform the function of cash accumulation
whole life
in a direct rollover, how is the money transferred from one plan to the new one?
from trustee to trustee
a tax sheltered annuity is a special tax-favored retirement plan available to
certain groups of employees only, such as public educators
which type of life insurance policy performs the function of cash accumulation
whole life
social security is funded by a payroll tax imposed on a percentage of an employees income. this percentage is called?
taxable wage base