session 7 types of life insurance modified endowment contract beneficiary designations
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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Planning Process & Insurance. Session 7 Types of Life Insurance Modified Endowment Contract Beneficiary Designations. Session Details. Life Insurance Diagram: Term. Term life insurance is for - PowerPoint PPT PresentationTRANSCRIPT
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Session 7Types of Life Insurance Modified Endowment ContractBeneficiary Designations
CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Planning Process & Insurance
Session Details
Module 5
Chapter(s)
2 & 3
LOs 5-2 &
5-3
Identify types, uses, and limitations of various types of individual life insurance policies.
Compare the purposes of the general provisions of a life insurance policy.
6-2
Life Insurance Diagram: Term
Term life insurance is for temporary needs:• mortgage costs• dependent education• consumer debts• large coverage, small
premium• cost rises with age 6-3
Life Insurance Diagram: Whole Life
Whole life insurance is for
permanent needs:• lifetime needs• last expenses• estate liquidity• business needs• premiums same for life6-4
Life Insurance Diagram: UL/VUL
Universal life:• unbundles premiums• increased
contributions
Variable life:• policyowner selects
investmentsBoth have separate accounts.
6-5
Taxation of Life Insurance
Death benefits
• Income tax free to beneficiaries
• Accelerated death benefit rules allow some distributions as income tax free – terminal illness, LTC benefits, etc.
• Exception if transfer for value (viatical settlement owner, etc.)
• Included in estate tax if any incidence of ownership
6-6
Taxation of Life Insurance
Tax free build up of cash value
• Accounts grow tax deferred
• Withdrawals up to basis tax free (includes loans)
• Distributions after basis taxed at ordinary income, NOT capital gains rates
• If MEC, gain is taxed each year independent of whether withdrawn
• If policies lapse, any loans taken that were above basis become taxable
• Some creditor protection6-7
1035 Exchanges
Section 1035 allows policies to
transfer without taxation if:
• cash value life insurance to cash value life insurance or annuities or LTC
• annuities to annuities or LTC
Allows flexibility for lifetime planning – cash value to annuity
or LTC when insurance is no longer needed.
6-8
Modified Endowment Contract (MEC)
A life insurance policy becomes a MEC if:
• it fails seven-pay test
• loans or withdrawals taxed as ordinary income (LIFO)
• 10% penalty on withdrawals taken before age 59½
• death benefits retain normal tax status
6-12
Withdrawals from a MEC
• MEC withdrawals prior to 59½ are subject to 10% penalty on taxable gains.
• Once a policy becomes a MEC, it remains a MEC forever.
• In the case of a 1035 exchange, a MEC is still a MEC.
• Policies that avoid MEC status in their first seven years may still be subject to MEC rules in the event of material change, such as a change of age or increase of coverage amount.
• A new seven-year premium limit is instituted.
• All single-premium life policies are MECs.
6-14
Per Capita/Per Stirpes Beneficiary Arrangements
Per Stirpes (by branch)
Grandchildren receive only the share of the deceased child
Per Capita (by head – depends on company definition)
Children of deceased child (grandchildren) share equally with surviving children
Per Capita at Each Generation – Primary beneficiaries keep their status, receive full share; remainder split evenly
Per Capita (2) – Secondary beneficiaries are not considered until all of the primary beneficiaries are deceased.
C
GC GC
CC
P
GC GC GC
C
GC GC
CC
P
GC GC GC
Per CapitaPer Stirpes6-16
Question 1
Which one of the following correctly identifies an acceptable 1035(a) exchange?a. an endowment contract for a term life
policyb. an annuity contract for a whole life
policyc. an annuity contract for an endowment
contractd. an endowment for an annuity contract
6-17
Question 2
Which one of the following is not an advantage of universal life (UL) insurance?a. It has flexible premium payments.b. It lends itself to a compulsory savings
program.c. It has an adjustable death benefit.d. It has an unbundled structure.
6-18
Question 3
Modified endowment contracts can only be created in which of the following types of life insurance policies?
I. term life policiesII. whole life policiesIII. universal life policiesIV. variable universal life policies
a. I and II onlyb. III and IV onlyc. II, III, and IV onlyd. I, II, III, and IV
6-19
Question 4
All of the following are true regarding life insurance beneficiaries, except a. primary beneficiaries are paid before
secondary beneficiaries.b. there is no limit to the number of
beneficiaries in any one class.c. spouses are the most commonly
named primary beneficiaries.d. most beneficiary designations are
irrevocable.
6-20
Question 5
Which one of the following is not true regarding second to die policies? a. The policy pays when the last person
dies.b. Premiums are generally lower than the
cost for two separate policies.c. They are generally not a very useful
tool for estate planning purposes.d. They may be generally advantageous
when one of the two insureds is older and highly rated.
6-21