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Taxes and Retirement
Taxes, Retirement and Other Insurance Concepts
| Term | Definition |
|---|---|
| Third-Party Ownership | Any situation in which the owner and the insured are not the same person; examples: Group life, Juvenile life, Key person |
| Viatical Settlement | When a terminally-ill insured (a viator) sells his policy to a viatical settlement broker for a percentage of the face amount to pay for medical expenses, etc. A viatical settlement broker is licensed by the State Corporation Commission (SCC) |
| Life Settlement | An absolute assignment option that allow policy owners who can no longer afford to pay premiums for their coverage or no longer need their coverage to sell their policies for compensation, usually cash. |
| Group Life Insurance | Written on more than one individual, such as employer/employee groups; evidence of insurability is not required. The master policy is issued to the sponsor of the group and each member receives a certificate of insurance |
| Conversion Privilege | The right to convert group coverage to an individual policy within 31 days of being terminated or voluntarily leaving the group. No proof of insurability required to do a conversion; new premium will be based on attained age. |
| Contributory Plan | The employer and employee each pay a portion of the premium; at least 75% of eligible employees must participate in the plan |
| Noncontributory Plan | The employer pays the entire premium and 100% of eligible members must be covered under the plan |
| Qualified Plans | Permanent plans approved by the IRS and benefits both employer and employee by offering tax deductible contributions and tax deferred growth; cannot discriminate in favor of officers, stockholders or highly paid employees; must have a vesting requirement. |
| Vesting | The amount of years an employee has to work before the employer matches them. |
| IRA | A qualified plan; contributions are tax deductible. Anyone with earned income under age 70 ½ can contribute to an IRA up to 100% of earned income up to the IRS limit. Individuals age 50 or older can make additional catch-up contributions. |
| IRA Penalties | - Penalty for excessive contributions is 6% - Contributions beyond 701 1/2 is a 50% penalty - Withdrawals prior to age 59 ½ which do not have an exception are considered a premature distribution and subject to income tax and a 10% penalty |
| IRA Withdrawal Penalty Exceptions | Exceptions to the 10% penalty includes: Death; Disability; First time home purchase (maximum limits apply); Post-secondary education purposes; Catastrophic medical bills |
| Roth IRA | A qualified plan funded with after tax dollars and contributions are not tax deductible; contribute 100% of earned income up the IRS limit to a Roth IRA past age of 70 ½; Qualified distributions are received tax free for accounts opened at least 5 years |
| Keogh Plan (HR-10) | A qualified plan for the self-employed or a partner working part or full time who owns at least 10% of the business. Contributions are made with earned income, the limits are either the lesser of an established amount or 100% of the total earned income. |
| Keogh Plan (HR-10) Eligibility Requirements | -Must be 21 years old -Have worked for a self-employed person for 1 year or more -Have worked at least 1,000 hours per year (full time) |
| SEP (Simplified Employee Pension) | A qualified plan for small employers or the self-employed. Contributions can be either a dollar amount specified by the IRS or 25% of the employee’s compensation, whichever is less |
| Non-qualified Plans | These plans can discriminate; the employer can pick and choose who is eligible for the plan. Contributions are not tax deductible, but earnings do grow tax deferred (e.g. Executive Bonus) |
| Personal Life Insurance Needs | Survivor protection, Estate Creation, Cash accumulation, Liquidity (cash value can be borrowed) and Estate conservation |
| Business Life Insurance Needs (Key Person) | Insurance on an employee who is important to the company, and if they were to die, the company would suffer a financial loss. Company is the owner and the beneficiary; Employee is the insured. Premium is NOT tax deductible, death benefit is NOT taxable |
| Suitability | Determines whether an insurance or annuity product is appropriate for a client; agent should evaluate the consumer’s age, income, financial situation and experience, needs, objectives, risk tolerance, tax status, and use of annuity |
| Social Security | Also known as Old Age Survivors Disability Insurance (OASDI). Social Security is funded through a payroll tax (FICA) based on a certain percentage of the employee’s income |
| Currently Insured (SS) | A person under Social Security have earned 6 quarters of coverage. Currently Insured receives some of the Survivor benefits |
| Fully Insured (SS) | A person under Social Security who have earned 40 quarters of coverage. Fully Insured Benefits: Disability income benefits, Retirement benefits and Survivor Benefits |
| Modified Endowment Contract | If a whole life policy does not pass the 7-pay test, it’s a MEC. Any distributions, withdrawals (10% prior to 59 1/2) and policy loans are taxable. Earnings are withdrawn first (LIFO; Last In, First Out), resulting in taxable income immediately |
| General Life Insurance Taxation | Premiums are not tax deductible; death benefit is tax free if received as a lump sum; the death benefit of any other settlement option is tax free, but any interest earned is taxable |
| Policy Owner (Amounts Payable) Taxation | Cash values grow tax-deferred; Dividends, not taxable ; Policy loans, not taxable and interest paid is not tax deductible; Surrender, amount that exceeds the amount of premiums paid is taxable; Accelerated benefits, tax free up to a certain limit |
| Beneficiary (Amounts Received) Taxation | Death benefits paid to a named beneficiary are free of federal income tax to the beneficiary; any settlement options in which the beneficiary receives payments consisting of both principal (death benefit) and interest, the interest portion is taxable |
| Group Life Taxation | Premiums paid (employer) for group life (up to $50,000) are deductible to the business as a business expense and not taxable to the employee. Death benefits are received tax free under a group life insurance policy with the same rules on interest as with |
Created by:
KHodge5812
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