1 Topic 19: Life Insurance Risk factors Lifestyle Occupation Medical condition Family history High...
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Transcript of 1 Topic 19: Life Insurance Risk factors Lifestyle Occupation Medical condition Family history High...
1
Topic 19: Life Insurance Risk factors
Lifestyle Occupation Medical condition Family history
High risk individuals Denied coverage Increased premiums Exclusion of certain risks: skydivers
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Topic 19: Life Insurance
Concepts Mortality: death rates Morbidity: rates of disability
Expenses: greatest in early years Commissions
Insurable interest Required at time of policy inception Not at the time benefits are paid
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Topic 19: Life Insurance Term insurance: temporary
Renewable: to age 70 Convertible: to whole life
Whole life: permanent/forced savings Variable: separate account invested based on policy holder’s
allocation Whole life funds go into general account of company Can increase death benefits/cash value based on investment
performance Universal: can change
Premiums: can skip payments Death benefit
Cash value separated from death benefit Variable universal: combine features Survivorship: second to die policy
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Topic 19: Life Insurance Contract provisions
All language contained in contract Backdating: can be done up to six months Owner may not be insured One month grace period for premium payments Misstate age: adjust death benefit Loans: amount borrowed subtracted from death
benefits Assignment: generally policies may be assigned Common disaster: primary beneficiary must outlive
insured by 60 – 90 days
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Topic 19: Life Insurance Contract provisions
Incontestable: insurer has two years to challenge validity of policy
Exclusions: suicide (one to two years) and war
Settlement options Lump sum Annuity
Single or joint life; term certain Interest only
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Topic 19: Life Insurance Dividends
Cash Accumulate Reduce premiums Buy additional coverage
Interest credits Portfolio method: based on insurer’s
earnings of overall portfolio New money method: based on insurer’s
earnings on money invested that year
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Topic 19: Life Insurance
Riders Accelerated death benefits: pay benefits if expected
to die within year; in nursing home permanently Long-term care: benefits rider can be added to life
insurance policy Waiver of premiums: if disabled Guaranteed insurability: can buy more coverage
without showing insurability Double indemnity: twice policy amount if death
accidental
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Topic 19: Life Insurance Nonforfeiture options
After policy has cash surrender value, Can get cash within six months Can get a paid-up policy with a reduced
face amount Can get a term policy with the same face
amount
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Topic 19: Life Insurance Illustrations
Projection of financial results Incorporate present value or just nominal values? Optimistic assumptions? Clearly label what is guaranteed? NAIC model does not apply to variable
life/annuities Policy replacement
Regulated by many states High commissions May make sense due to reduced mortality charges
and in higher interest rate periods
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Topic 19: Life Insurance Accelerated death benefits
Allow terminally ill insured to obtain funds prior to death tax-free Pay for custodial care Preferable to viatical due to discounts on viatical
Viatical settlements Terminally ill insured transfers policy for lump sum
payment Benefits tax-free to insured if:
expected to die within two years can’t perform two activities of daily living
Life settlement Sell life insurance policy
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Topic 20: Income Taxation of Life Insurance Dividends: whole life policies
Not taxable unless total dividends > premiums paid on policy
Loans: whole life policies Not taxable
Withdrawal of cash value Not taxable unless withdrawals > basis If taxable, ordinary income
Surrender Not taxable unless proceeds > basis If taxable, ordinary income
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Topic 20: Income Taxation of Life Insurance Death benefit: not taxable MECs: premiums higher than necessary for insurance.
Often single premium policy Then take cash value prior to death Test during first seven years of policy
Is it paid up in seven years? If policy is MEC,
Death benefit is still not taxable Withdrawals and loans taxed as ordinary
income with penalty if under 59 ½
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Topic 20: Income Taxation of Life Insurance
Transfer for value Sell policy to someone other than related
party (business, co-owner, family member) Seller not taxed if viatical settlement
Expected to die within two years Buyer will be taxed on death benefits if
greater than basis (ordinary income) Including premiums paid and purchase price
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Topic 20: Income Taxation of Life Insurance Section 1035 exchange
Trade an existing policy for a new policy Good idea??? Mortality/interest rate assumptions
Trade a life insurance policy for an annuity Makes IRS happy
Can also trade life insurance or annuity policy for long-term care policy
Can not trade an annuity for an insurance policy Would make the IRS sad
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Topic 21: Business Uses of Insurance
Buy-Sell Agreements Provides for the sale of business interest
on death of owner Allows heirs to cash out of business Keeps heirs from becoming co-owners Keeps ownership with existing owners Value generally based on formula
Valid for estate tax valuation
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Topic21: Business Uses of Insurance
Buy-Sell Agreements Cross purchase
Owners buy policies on each other Number of policies? Older owner Premiums not deductible
Entity Company buys policy on each owner
Premiums not deductible
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Topic 21: Business Uses of Insurance
Key Person Life Insurance Insures life of valued employee:
LeBron Janitor
Business is beneficiary Premiums not deductible Benefits tax-free
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Topic 21: Business Uses of Insurance Split Dollar Life Insurance
Employer and employee share cost of premiums Employer pays cash value portion Employee pays pure life insurance cost
If employer pays entire premium, coverage above $50,000 taxable
Endorsement method Employer owns policy
Receives reimbursement for premiums paid Employee gets balance Employer paid premiums income to employee
Collateral assignment method Employee owns policy
Again must reimburse business for premiums paid Premiums treated as loans: employee must pay interest
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Topic 22:Insurance Needs Analysis
Life insurance Anyone financially sad??? Financial needs approach: determine
cash needs, income needs, special needs and then subtract net worth Income replacement Debt elimination College education Less assets available to meet these needs
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Topic 22:Insurance Needs Analysis
Life insurance Human life value approach:
Present value of insured’s future income Does not consider assets, liabilities, other
sources of income Capital retention approach:
Not only provide present value of future income but capital is maintained also
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Topic 22:Insurance Needs Analysis
Life insurance Income retention approach:
Based on income needs of survivor rather than income generated by insured
How soon until surviving spouse will accidentally fall in love?
Income multiplier approach: five to fifteen times annual income
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Topic 23:Insurance Policy and Company Selection
Life insurance Temporary needs: term Permanent needs: whole life
Participating: pays dividends when premiums were “too large”
Cost analysis Net cost method per $1,000 of coverage =
(total premiums – cash value) / number of years policy held Ignores time value of money
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Topic 23:Insurance Policy and Company Selection Life insurance
Cost analysis Surrender cost index =
(future value of premiums – dividends – cash value)/fv factor for $1 for n years at i rate)
/$1,000 units of coverage Net payment cost index =
Same as surrender cost index but cash value is not subtracted
Benchmarks: Age 30: $2 cost per $1,000 Age 60: $25 cost per $1,000 Age 80: $125 cost per $1,000
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Topic 23:Insurance Policy and Company Selection Life insurance
Company selection: financial ratings Companies rated based on financial strength
A.M. Best, S&P, Moody’s Best: insurance companies only “A+” rating has different meanings
Variable products provide security of subaccounts
Company selection: underwriting Some companies only want certain types of risk
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Topic 18: Annuities Types
Immediate: payments begin now Deferred: payments begin later Single premium: one payment
Purchase annuity with 401(k) proceeds Periodic premium Single vs. joint and survivor Period certain: benefits continue for a
minimum number of years Even if die before period ends
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Topic 18: Annuities
Types Fixed: periodic payment known
Turn defined contribution plan into defined benefit plan
Variable: periodic payments based on investment performance Considered securities: must hold Series 6
and insurance license to sell Oversold/undersold????
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Topic 18: Annuities
Structured settlements Receive periodic payments instead of
lump sum For auto accident, medical malpractice, etc. Payments are tax-free if compensatory
including pain/suffering/wrongful death/loss of goodwill Effectively makes interest tax-free Punitive, non-physical damages are taxable
Companies buying structured settlements
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Topic 18: Annuities Taxation of annuities
Noncontributory-qualified plan All payments ordinary income
Contributory-qualified plan Basis / total expected payments = percent of each
payment not taxed Remainder of payment ordinary income
Subject to 10% penalty if not age 59 1/2 After recover entire basis, all taxable
If die before deferred annuity payments begin Refund of premiums paid generally not taxable
since payment equals basis No step-up in basis for annuities
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Topic 18: Annuities Taxation of annuities
Commercial annuity Ordinary income and return of capital based on expected
payments Corporate annuities
Must recognize income immediately on increase in value of annuity; no deferral
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Topic 19: Group Term Life Insurance
Must be nondiscriminatory Amount of coverage usually multiple
of salary Cost of coverage above $50,000 is
taxable
No evidence of insurability required Even if leave company and convert to
individual cash value policy Inexpensive form of life insurance
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Topic 19: Group Permanent Insurance Premiums
Deductible by employer Taxable to employee GULPs: employees pay for universal life coverage
Advantage Group underwriting Can continue as individual policy after leaving
employment No evidence of insurability required Must convert to permanent insurance