Course 102 Flashcards
(17 cards)
Annual Renewable Term (ART)
“Pure” life insurance with no cash value
element; initially, the highest death benefit for the
lowest premium.
Used to cover short to intermediate
needs.
Fixed and level death benefit.
Premiums increase exponentially.Whole Life
Guaranteed premium, death benefit, and cash value.
Policy dividends may:
• Reduce premium
• Purchase paid-up additions
• Accumulate at interest
• Paid in cash
• Purchase one-year term
Need for lifetime coverage with low risk.
Fixed and level death benefit.
Premium remains fixed and level:
• Straight whole life payments end at age 100.
• Limited pay whole life payments may end at 65.
Variable Life
Whole life type contract featuring a choice of
investment options; death benefit depends on
investment results.
Need for lifetime coverage coupled with
investment performance. Assets are held in
separate accounts. Higher risk tolerance.
Death benefit has a guaranteed minimum
(GMDB); can increase based on investment
performance, but cannot decrease below
policy face value.
Premium is fixed and level.
Universal Life (UL) A & B
Flexible premium adjustable death benefit policy:
• Policy elements unbundled
• Two death benefit options (A & B)
Flexibility in premiums and benefits. Assets part of
insurance company’s general account.
Adjustable death benefit:
• Option A like ordinary life (level)
• Option B like ordinary life plus term rider equal to
cash value
Premiums are flexible. Policy not recommended for
fixed-income clients.
Variable Universal Life (VUL)
Combines features of both universal and
variable life.
Need for performance and flexibility. Assets
are held in separate accounts.
Adjustable death benefit with no guaranteed
minimum.
Flexible premiums.
Other Types of Policies
First-to-Die Policy
• When income provider is more likely to die first.
• When there is a need to pay off debt or provide
an education fund.
• Sometimes used in business planning.
Second-to-Die Policy
• Used for estate liquidity purposes.
• Has a lower cost than first-to-die (single-life)
policies.
Modified Endowment Contracts
Discourages the use of contracts with high premiums
as investments
Fail the 7-pay test
Includes most single premium policies
Loans and withdrawals are included in the insured’s
taxable income to the extent that they exceeds the
total premiums paid.
Persons under age 59½ are subject to an additional
tax penalty of 10% on policy loans and withdrawals.
Policy Dividends
Represent a return of a deliberate premium
overcharge (rebate)
Dividends are not taxable when distributed until
the owner has received an excess over basis
Policy dividends may be:
• Paid in cash
• Applied as payment of premiums
• Left with the insurance company to accumulate
interest
• Used to purchase paid-up additions
• Used to purchase one-year term
Nonforfeiture Provisions
Cash surrender value
• The insurance company may delay payment for a
period of up to six months after surrender of the
policy.
• The insurance contract is terminated.
• Excess cash received over the net premiums paid
(basis) is taxable to the insured.
Reduced paid-up whole life
Extended term insurance
• Retains same face value
Benefit Settlement Options
Lump Sum - Tax-free
Interest Only - Taxable
Fixed-Period Installment - Interest portion of payment
is taxable
Fixed-Amount Installment - Interest portion of
payment is taxable
Life Income
• Straight-life annuity option
• Life annuity with period certain option
• Life annuity with refund option
• Joint and survivor annuity option
Other Provisions and Clauses
Other Common Policy Provisions:
• Free Look (10 days)
• Grace Period (31 days)
• Automatic Premium Loan (APL)
• Reinstatement (with proof of insurability)
• Incontestability (generally 2 years)
• Suicide (within 2 years, return of premium)
• Conversion
• Spendthrift
• Common Disaster
Common Policy Riders
Disability Waiver of Premium
Accidental Death Benefit
Guaranteed Insurability Option
Cost of Living Adjustment (COLA)
Viatical (Life) Settlements
The insured/beneficiary is expected to die within
24 months as certified by a doctor.
• The proceeds received from the sale of such a
policy are not subject to income tax.
A chronically ill person can exclude gain if the
proceeds are used for the long-term care of the
insured.
• Chronically ill means being certified by a doctor
as being unable to perform, without assistance,
certain activities of daily living.
Third parties who purchase life insurance policies on
terminally or chronically ill insureds do not qualify for
this tax
relief.
Buy/Sell Agreements
Provides for the continuation of the business by
employees, family members, or surviving owners.
Guarantees a market for the business interest.
Makes the business more attractive to creditors
because of the establishment of a plan for the
continuation of the business.
Policy premiums are not tax deductible and
proceeds are not includible in taxable income
Buy/Sell Agreements (cont.)
Cross-Purchase Arrangement:
• Under the cross-purchase arrangement a partner or
shareholder purchases a sufficient amount of life
insurance on the lives of all other partners or
shareholders to assure sufficient liquidity to buy out
the deceased partner or shareholder
Entity Arrangement:
• An alternative to the cross-purchase arrangement
where the entity itself buys the insurance policies
on each partner or shareholder. The main
advantage is that the number of policies is
reduced.
Split Dollar Life Insurance
Typically between an employer and an employee
Share costs and benefits of the life insurance policy
The “Endorsement Method”
• Employer owns the policy and pays the entire
premium.
• The employee will be taxed on the economic
benefit received.
The “Collateral Assignment Method”
• Employee owns the policy and is responsible for
premium payments.
• Since the employer advances the funds for the
premiums, it is considered a no-interest loan.
Split-Dollar Life Insurance (cont.)
Death benefits:
• The employer’s share and the employee
beneficiary’s share are generally income tax free.
• Under the endorsement method, the employer may
be liable for gift taxes on the benefit provided.
Exemptions to the transfer for value rule:
• Transfers to the insured.
• A partner of the insured, or to a partnership of
which the insured is a partner.
• A corporation of which the insured is a shareholder
or officer.
• Anyone in which the transferee’s basis is
determined, in whole or in part, by reference to the
transferor’s basis (e.g., a substituted or carryover
basis).
