TEXAS LIFE REVIEW STUDENT NOTES

Transcription

1 TEXAS LIFE REVIEW STUDENT NOTES April 2009

2 Basic and General Insurance 2 1. What is insurance? Transfer of the possibility of loss (risk) to an insurance company. 2. What is a risk? The uncertainty of financial loss. 3. What are the two types of loss? Pure and Speculative 4. Which risk is insurable? Pure Why? Loss must be financial and uncertain. No financial gain can occur. 5. What causes a loss? Peril; such as fire, accident or flood. 6. What causes a peril? A hazard. What is a hazard? Increases the likelihood of a loss; such as smoking. 7. What are the 6 elements that make pure risk insurable? Loss must be due to chance, Loss must be definite and measurable, Loss must be statistically predictable, Loss cannot be catastrophic, Loss exposure must be large and insurance must not be mandatory. 8. What is meant by loss cannot be catastrophic? Certain types of perils are unpredictable and thus uninsurable; such as war, nuclear risk and floods. 9. What is the concept called that predicts the appropriate number of deaths that should occur within a similar group of people (exposure) within a given period of time? Law of Large Numbers 10. What is adverse selection? People in bad health keep their policy in force longer than people in good health. 11. Why do people buy life insurance? Survivor Protection, Estate Creation, Viatical Settlements 12. What is a viatical settlement? Allows someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds when and where the need it most needed, before death. The policyowner sells it for a percentage of the face value. What would the beneficiary receive upon the death? Nothing 13. As an agent, you are the legal representative of the company. 14. The person who pays for the policy of insurance is the policyowner. 15. The beneficiary is the person who receives the benefits from the insurance policy. 16. The person covered by the insurance policy is the insured. 17. The insurance company is the insurer. 18. To buy insurance, the policyowner must have insurable interest in the insured at the time of purchase but not at time of insured s death. 19. The recognized areas of insurable interest are 1.your own life, 2.family members 3.business partners 4.key employee 5.financial obligation. 20. When determining life insurance needs using the Needs Approach, what is taken into consideration? Final Expenses, Housing Education, Monthly Income and Emergency Fund. 21. What are the business uses of life insurance? Buy-Sell funding, Key Person and Executive Bonus. 22. A company with an employee who could not be replaced without considerable expense might consider buying a key employee life insurance policy on that individual 23. Mutual Companies are owned by the policyowner and Stock Companies are owned by the shareholder. 24. An authorized insurance company is admitted to do business in a state 25. The three types of incorporation are: domestic (in the state), foreign (outside the state) and alien (outside the US). 26. The financial status of insurance companies is rated by: AM Best, Fitch, Standard and Poors, Moody s and Weiss. Life Insurance, Annuities and Qualified Plans

3 3 27. What is a contract? An agreement between two or more parties. 28. What are the 4 elements of a contract? 1) Offer and Acceptance, 2) Consideration, 3) Legal Purpose 4) Competent Parties. 29. The applicant s consideration consists of premium and statements on the application. The insurance company s consideration is the promise to pay contained in the policy. 30. Parties to a contract are required to be competent, of legal age, sane, and sober. 31. What does offer and counter-offer mean? Offer made by the applicant with application and acceptance of policy; counteroffer is the company offering an insurance policy with higher premiums due to the increase risk of the applicant. 32. What are the Distinct Characteristics of a Legal Contract? Contract of Adhesion, Personal Contract, Unilateral Contract and Conditional Contract. 33. Insurance contracts are unilateral because only one party, the insurance company, makes any legally enforceable promises. 34. What are the legal interpretations affecting contracts? Ambiguities in a Contract of Adhesion, Reasonable Expectations, Indemnity, Utmost Good Faith and Statements of the Insured. 35. What is reasonable expectation? Some coverage s must be provided by the insurance company, even though they are not specifically stated in the policy. 36. What is it called when both parties are trusted to reveal relevant facts? Utmost Good Faith 37. A warranty is the literal or absolute truth. 38. Representations are statements made by an applicant that are true to the best of his/her knowledge. Misrepresentation is a false statement given to the insurer with the intent to defraud. 39. What is it called when an applicant fails to disclose known material facts? Concealment 40. What is it called when someone deliberately conceals or misrepresents a material truth on an application? Fraud 41. What authority is granted in means of the agent s contract? Expressed 42. Which kind of authority not expressly granted but which the agent is assumed to have authority in order to transact business? Implied. 43. What kind of authority is the appearance of, the assumption of; because of the circumstances the principle created? Apparent (apparently there is a relationship between the agent and the insurance company).business cards 44. What is a person called who hold a position of special trust and confidence? Fiduciary 45. Waiver vs. Estoppel. Waiver is when you voluntarily give up your legal right. Estoppel is when you are denied the right to enforce a legal right that you have previously given up. Estoppel AKA The Loss of Defense 46. The basic source of information used in the company s risk selection process is the application. 47. The agent (producer), applicant and the policyowner must sign the application. You can never use white out to change an application. The agent is the field underwriter. 48. Information received from the applicant s private physician is known as an attending physicians report. 49. A Paramedical report is completed by a paramedic or registered nurse for small amounts of insurance and for applicants with no prior medical concern. 50. The medical information bureau (MIB) receives and maintains medical information from insurance companies. Allows companies to compare information they have collected on potential insured. Protects the company from adverse selection. Life Insurance, Annuities and Qualified Plans

4 4 51. Investigative Consumer Reports investigate an applicant s finances, character, work, hobbies, and habits. Consumer must be notified. Consumer Reports look at credit, employment records and public sources. 52. The federal legislation that protects the applicant s right to be notified in the event that his credit history may be investigated is the fair credit reporting act. Consumer has the right to know reporting agency and reason for denial or modification of coverage. Does not have to have an actual copy. 53. Policies can be backdated in order to lower premiums. A policy can not be backdated for more than 6 months. 54. Underwriting cannot unfairly discriminate based on race or national origin. Multiple Choice Questions 1. Mutual Companies are owned by A. Stockholders B. Policyowners C. Insurers D. Board of Trustees 2. If an emergency fund is set up in the needs approach. What should it be used for: A. Unexpected Expenses B. Mortgage C. School Expenses D. Debt 3. When must insurable interest exist? A. Death of the insured B. Policy delivery date C. Policy issue date D. Date of the application 4. Two business partners own life insurance on each other. If one partner dies, which of the following contracts will allow the surviving partner to use the death benefit to purchase the deceased s business interests? A. Buy-Sell Agreement B. Key employee life insurance C. Survivorship life insurance D. Joint and Survivorship annuity 5. Which is not an element of a legal contract? A. Offer and Acceptance B. Consideration C. Competent Parties D. Unilateral 6. An insurance company doing business in this state must operate under A. An advisory board B. A resident board of directors C. A certificate of authority D. Articles of incorporation filed with the Secretary of State 7. ABC Insurance Company is incorporated in Georgia but is doing business in Texas, it is A. A domestic insurer B. A foreign insurer C. An alien insurer D. An export insurer Life Insurance, Annuities and Qualified Plans

5 5 8. All the following would have an insurable interest in an insured EXCEPT: A. Your spouse B. Your child C. Your mother D. Your close friend 9. An Agent s actions or deeds show what kind of authority A. Expressed B. Agent C. Implied D. Apparent 10. Investigative Consumer Reports are used to investigate an applicant in all the following areas EXCEPT: A. Hobbies B. Habits C. Employment D. Place of residency Life Insurance, Annuities and Qualified Plans

6 Policy Provisions, Riders, Options and Exclusions 6 Provisions Riders Options Rights and characteristics Add or modify coverage Choices on how to distribute a sum of money Required Provisions Entire Contract Premium Payment Clause Grace Period Reinstatement Clause Incontestable Clause Misstatement of Age and Sex Statement of the Insured Legal Action Payment of Claims Other Provisions Ownership Assignment Modifications Right to Examine (Free Look) Medical Examinations Exclusions Disability Riders Waiver of premium Waiver of cost of insurance Disability income benefit Accelerated (living) benefit provision/rider Riders covering additional insureds Spouse/other-insured term rider Children s term rider Family term rider Riders affecting the death benefit amount Accidental death Guaranteed insurability Cost of living Return of Premiums 1.Policy Loans, withdrawals and partial surrenders 2. Nonforfeiture Options 3. Dividends and dividend options POLICY PROVISIONS Required Provisions (Protect Policy Owner) Entire Contract Clause Entire Contract = Policy + Copy of Application Statements are REPRESENTATIONS (Statement of the Insured Provision) ONLY Executive Officer can change POLICY ( Modification Provision) Payment of Claims Heart of the Policy Companies Promise (within 30 days) Premium Payment Clause Due Date and how often (mode) Grace Period 30/31 days Still covered when premium not paid Reinstatement Clause 3 years to do 3 things: Payback all back premium plus interest Payback any loans (if cash value policy) Proof on insurability Incontestable Clause 2 years for insurer to contest death benefit Legal Action 2 years for claimant Misstatement of Age and Sex Make it Right; adjust face amount Free Look: 10 days new policy 20 days replacement policy Full Refund of Policy Medical Examination Ownership Clause Owner has all rights to the Policy Assignment Clause Owner can assign ownership either: Permanently = Absolute Temporarily = Collateral Discretionary Provisions/Exclusions (Protect Company) Military Service Clause Exclude Payment of DB if die from Military Service or War Aviation Clause Exclude Payment if Private Pilot Hazardous Occupation (or Hobby) Clause Exclude Payment of DB if Hazardous Occupation or Hobby BENEFICARY PROVISIONS Primary First Beneficiary Listed Secondary (Contingent all Beneficiaries Listed after Primary) Second Beneficiary Listed Revocable Policy Owner can change Beneficiary whenever they choose Irrevocable Policy owner can t change beneficiary without written consent Uniform Simultaneous Death Act If Insured and Sole Beneficiary should die at the same time, DB paid to Estate of the Insured Common Disaster Provision If Insured and Sole Beneficiary are in a Common Disaster and Sole Beneficiary out lives Insured by less than 30 days, DB paid to the estate of the Insured. Spendthrift Clause Creditors of the Insured CANNOT go after Beneficiary Death Benefit Life Insurance, Annuities and Qualified Plans

7 Riders- extra provisions attached to a policy- extra cost to the insured Accelerated (Living) Benefit Provisions Rider Early payment if insured is diagnosed with a specified catastrophic illness Benefit is a specified percentage or dollar amount of death benefit Death benefit reduced by amount paid plus earnings lost by insurer in interest income 7 Riders Covering Additional Insured s - Term Riders Spouse/Other Insured Term Rider Allows for addition of spouse for a limited time and limited coverage. Usually expires when spouse turns 65 Children s Term Rider Allows for addition of children for a limited time and limited amount, usually until age 18. Most provide option for converting to a permanent policy. Family Term Rider Incorporates spouse and children into one rider. Riders Affecting the Death Benefit Amount Accidental Death Usually pays double or triple indemnity if accidental death occurs as defined in the policy. Death must usually occur within 90 days of accident Guaranteed Insurability Allows for purchase of additional insurance at specified times without evidence of insurability. Additional coverage is purchased at the insured s attained age. Cost of Living Increases or decreases the face value by a cost of living factor, usually inflation, each year Return of Premium Increasing term added to a whole life policy that provides that if death occurs prior to a given age, not only is the death benefit payable to the beneficiary, but all premiums paid as well. Usually expires at a specific age, such as 60. Disability Riders Waiver of Premium Waives premium if insured becomes totally disabled 6 month waiting period before benefit begins / expires at age 65 Waiver of Cost of Insurance Found in Universal Life Insurance only Waives the cost of insurance if the insured is disabled Does NOT waive the cost of premiums to accumulate cash value Disability Income Benefit Insurer waives policy premiums and pays a weekly or monthly income to the insured Benefit amount paid is based on a percentage of the face amount of the policy Life Insurance, Annuities and Qualified Plans

8 Options- Choices on how to distribute a sum of money 8 Settlement Options (CLIFF) Cash Payment (Lump Sum) Not taxable to beneficiary Life Income Pays guaranteed installments as long as the recipient lives. Principle is forfeited upon death Payment is made up of principal and interest. Interest is taxable Interest Only Temporary option Until proceeds are paid Interest is taxable Fix-period Installments Deplete funds over a fixed period Fixed-amount Installments Pays fixed amount until proceeds are exhausted Joint and Survivor Life- guarantees income for two or more for as long as they live. Income reduces to ½ or 2/3 after death of one Joint Life- Payment stops at death of first Dividend Options (CRAPPO) Mutual companies (Participating Policies) Return of excess premiums Not taxable/not guaranteed Cash Reduction of Premium Accumulation at interest (interest taxable) Paid-Up Additions Paid-up Insurance One-year Term Policy Loans/Withdrawal Options Cash Loans Loans are not subject to income tax Automatic Premium Loans Prevents the policy from lapse due to nonpayment of premiums Withdrawal or Partial Surrender Universal life products only Surrender charge applies on withdrawals Could be taxed Nonforfeiture Options (REC) Reduced paid up- reduced face amount Extended Term-same face amount/term policy Cash- interest taxable, surrender charge (decreases over time) 1) The entire contract consists of the policy and a copy of the application. 2) The free look provision allows the policyowner 10 days to look over the policy and return it if dissatisfied. 3) Collateral assignment policy proceeds (just the dollar amount of the proceeds equal to the debt) are assigned to a creditor to secure a loan; partial assignment, once debt is repaid policyowner regains the policy benefits. 4) The first beneficiary is the primary, the next is the secondary (contingent), and third is the tertiary. All beneficiaries after the first in line are known as contingent. 5) Incontestability vs. Misstatement of Age. The incontestability clause prevents the company from denying a claim due to statements on the application after the policy has been in force for two years. The misstatement of age provision allows the insurance company to adjust the policy s face amount at any time due to this error. 6) Medical Examinations (including HIV testing) may be requested by the insurer for large policies, age of applicant and information discovered during the underwriting process. 7) If the policy has cash value, the insured may make a policy loan against the amount available. If not repaid, the company will deduct the outstanding loan plus any interest from the face amount upon insured s death. 8) The waiver of premium rider waives the premium for the policy if the insured becomes totally disabled. Most companies impose a six-month waiting period, and you must meet their definition of total disability. Expires at age 65. Life Insurance, Annuities and Qualified Plans

9 9 9) The accidental death rider will pay some multiple of the face amount if death is the result of an accident as defined in the policy. Death must usually occur within 90-days of such accident. Deaths from self-inflected injuries, war or certain hobbies are not covered. 10) What is a children s term rider? Children can be added to coverage for a limited time usually until age 18and can convert coverage at the end of that period. 11) What is the disadvantage of designating a trust as beneficiary? Cost to administer the trust. 12) The Accidental Death and Dismemberment Rider (AD&D) pays the principal for accidental death or loss of any two primary parts and the capital for the loss of any one primary part. 13) Accelerated death benefits or living riders allow for the early payment of a percentage of the death benefit due to insured having a terminal illness, the benefit payable at death will be reduced by that amount. 14) Nonforfeiture values are guarantees required by state law for insurance policies with cash values. 15) Extended Term the cash value is converted to term insurance for the same face amount. 16) Dividends are paid on participating policies (Mutual Companies). They cannot be guaranteed and they are not taxable EXCEPT for the accumulate at interest dividend option; the insured begins a savings account with the insurance company. The interest portion would be taxable. 17) With the life income option, the beneficiary or annuitant would receive income payments for life. 18) When the annuitant or beneficiary receive income payments for life but also are guaranteed this income for a specific number of years, the life income with period certain option was selected. 19) The life income joint and survivor option pays out on two or more lives. This option keeps paying until the death of the last person covered. 20) When the insurance company retains the policy proceeds, invests it, and sends the beneficiary or annuitant the growth, the interest only option has been selected. 21) When the insurance company pays out the policy proceeds to the beneficiary or annuitant over a specified time period, the fixed-period option has been selected. 22) When the insurance company pays out a specified dollar amount until the policy proceeds have been used up, the fixed amount option has been selected Life Insurance, Annuities and Qualified Plans

10 10 Multiple Choice Questions 1. An insured intentionally understates her age on her application for a life policy. At death the insurer will take which of the following actions? A Refuse to pay the claim based on material misrepresentation on the application B Pay the face amount of the policy if the death occurred after the end of the incontestable period C Pay a reduced Death benefit based on the insured s actual age D Pay the stated Death benefit less the unpaid premium owed to the company as a result of the understated age. 2. Which of the following terms refers to the transfer of some or all of the ownership rights of a life insurance policy from one individual to another? A Nonforfeiture B Endorsement C Transfer of Value D Assignment 3. Reinstatement of a life insurance policy requires an insured to take all of the following actions EXCEPT: A provide evidence of insurability B make collateral assignment to the insurer C pay back interest on any outstanding policy loan D pay all past-due premiums 4. Stephanie receives $5, a month until the principal and interest on her husband s life insurance policy has all been paid out. Which settlement options did she choose? A Life Income option B Fixed amount option C Cash Payment option D Interest only option 5. Which of the following features allows an insurance policy to remain in force for a specific number of days beyond the premium due date? A Reinstatement provision B Nonforfeiture Option C Grace Period provision D Consideration clause 6. All the following are nonforfeiture options EXCPT: A. Automatic Premium Loans B. Cash Surrender Value C. Extended Term D. Reduced Paid-Up Insurance Life Insurance, Annuities and Qualified Plans

11 11 Annuities Classification Premiums Paid Date Payment Begins Payment Options Investment Single Immediate Guaranteed Amount Straight Life Fixed Annuities Periodic Deferred Refund Variable Fixed Cash Flexible Installments Period certain Joint and Survivor Annuity principles and concepts Liquidation of an estate by providing payments Reduces the risk of outliving your money Mainly used for retirement planning,accumulate a sum of money and ability to grow money tax-deferred Accumulation period versus annuity period Accumulation period- pay-in period Building your estate Grow tax deferred Money belongs to the policy owner Annuitization, annuitization period or liquidation periodpayout period Money controlled by insurance company Policy owner gets payout Insurance aspects of annuities Annuities are not life insurance/build an estate Life insurance creates an immediate estate Do not pay death benefit/return of premiums + interest earned Annuities concerned with how long someone lives Life insurance concerned with when someone will diemortality table Owner, annuitant and beneficiary Owner- purchases the contract annuity Annuitant-receives the payments Beneficiary- receives cash value or premiums which ever is higher, if annuitant dies. Interest is taxable Qualified retirement plans including group versus Individual Qualified Group purchased by a company must designate a human annuitant if not company will be taxed as ordinary income Contributions by employee/employer not taxable Individual Qualified Retirement Plans (Roth/IRA) During Accumulation Phase Surrender or Withdrawals Nonforfeiture does not forfeit money paid into the annuity Event-surrendering the Annuity One-lump sum cash surrender- immediate taxation on earned interest. Under age 59 ½ 10% tax penalty. Surrender Charge (from the company) Surrender charges is a percentage which reduces over time. Event- Policy Loans/Withdrawals Taxable dollars out first (LIFO). Then premiums paid come out without tax Interest earned are the taxable dollars 10%Penalty tax before age 591/2 Life Insurance, Annuities and Qualified Plans

12 12 How can premiums be paid? Single Premium- one lump sum Level premium- same payment frequency- accumulate funds for retirement Flexible-What I want when I want it/periodic payments Premiums are not tax deductible When do benefits begin? Immediate versus deferred annuities Single premium immediate annuities (SPIAs) Immediate Annuity- payment begin within 12 months Single premium payment only Deferred annuities Deferred Annuities- after 12 months SPDAs Single, Level or flexible payments How are premiums invested? Fixed Annuities Interest rates guaranteed (minimum vs current) General Account Level Benefit Payout Risk (insurance company assumes) Variable Annuities Premiums invested in a separate account. Interest rate is tied to ups-and-downs of stock market. There are no guarantees Hope to keep pace with inflation. Two licenses (insurance & securities) Regulated by NASD/SEC How long are benefits paid? Annuity (benefit) payment options Exclusion Ratio Portion of payout is taxable (interest) and a portion is not (premium paid). Cash- one time payment Interest immediate tax Before age 59 1/2-10% penalty Annuities certain (temporary) Guaranteed for fixed period or fixed amount Guaranteed Payment for Life Your entire life- (three choices) Life contingency options Straight Life/Pure Life Provide the largest monthly income. Die insurance company keeps the money. Life with period certain- Guaranteed Minimum- benefit for life plus a guaranteed amount of time. Refund life- benefits paid for life, at death refund of principal is given to the beneficiary- installments or cash refunds Single life versus multiple life Joint and Survivor- guaranteed income for two that cannot be outlived Survivor receives ½ or 2/3 of what was received Joint life- Payment stops at the death of first annuitant Level benefit payment amount Fixed Annuity- benefit guaranteed Inflation may decrease purchasing power Variable Annuity- benefits vary Life Insurance, Annuities and Qualified Plans

13 13 ACCUMULATION Annuity Federal Income Tax ANNUITIZATION Withdrawals Taxed on LIFO basis (Last In, First Out) Taxable dollars out first(interest earned) then premiums paid (cost basis) come without tax Plus 10% Penalty if before age 59 ½ Lump Sum Surrender Immediate tax on interest Plus 10% Penalty if before age 59 ½ Benefit Taxation Exclusion Ratio Portion of each benefit payment consists of principal (not taxed) and interest (taxed) Cash Immediate tax on interest Plus 10% Penalty if before age 59 ½ Death- Lump sum to the beneficiary Interest Taxable 1. When can an annuity be surrendered? During the accumulation period. Who can surrender the annuity? The Policyowner 2. Why and how do surrender charges change? Surrender charges are percentages that reduce over time- the longer the annuity is in existence the less the surrender charge will be. 3. If a person age 34 withdrawals money from their annuity, how would if be withdrawn? Interest then Principal (Last-in-First-Out). 4. If a policy owner pays a premium over a period of time, they most likely bought what type of annuity? Deferred Annuity 5. Sue is 40 years old and purchased an annuity with a single premium payment, she plans to begin her benefit payments at age 60, what type of annuity did she purchase? Deferred Annuity 6. In a joint life annuity, what payment benefit would the wife receive if her husband died? Nothing 7. In a joint survivor annuity, what does the second receive after the first dies? 1/2 or 2/3 of the original benefit. 8. What account are funds held in for a fixed annuity? General Account Who bears the responsibility for the general fund? The Insurer 9. What is the penalty for premature distribution? 10% before age 59 ½ Life Insurance Federal Income Tax Taxable Events Cash Surrender Interest Earned Settlement Options (other than lump sum) Interest-Fully taxable Fixed Period- Interest is taxed; principal is not Fixed Amount-Interest is taxed; principal is not Life Income- Interest is taxed- principle is not Non-Taxable Events Death- Cash (Lump Sum Settlement Option) Cash Value Growth Policy Loans (Up to Premiums Paid) Policy Dividends (Participating Policies) Policy Premiums are NOT Tax-Deductible 10. What type of coverage is used for Mortgage Insurance? Decreasing Term 11. What can be adjusted in an Adjustable Life Policy? Premium and coverage can be adjusted simultaneously upon the insured s request. 12. What is net cash value? Gross cash value minus any loan amounts owed. Life Insurance, Annuities and Qualified Plans

14 In Universal Life you can pay the minimum premium, the targeted premium, or even skip your premiums as long as there is enough cash value to pay your insurance cost and expenses 14. Universal Life is comprised of two components, 1) annually renewable term, and 2) a cash account which accumulates on a tax deferred basis. The cash account earns either the current interest rate or the guaranteed interest rate, whichever is higher. 15. With Universal Life, you can access your cash value by simply doing a partial surrender/withdrawal. 16. Variable whole Life offers a minimum death benefit, fixed level premiums and a cash value that increases or decreases depending on market fluctuations. 17. Are policy dividends taxable? No, return of premiums 18. If the insured has a policy loan what will happen to the death benefit? It will be reduced by the amount of the loan. 19. If $100,000 of life insurance proceeds were used to purchase a settlement option paying 13,000 per year for 10 years what portion would be taxable and which portion would not? 10,000 would be tax free income and 3,000 would be income taxable. 20. If an insured purchased a limited policy, what does that mean? The premiums will be paid up much earlier than age 100 but coverage does continue to age If there is a material change in a Modified Endowment Contract, what will happen? The seven-pay test will have to be recalculated. Multiple Choice Questions 1. If an insured inherited a large amount of money at age 40 and desired to use it to provide a guaranteed income after her retirement at age 60, she would probably buy an Annuity that is which of the following? A. Immediate B. Flexible premium C. Deferred D. Variable 2. The pay in time is known as the A. Annuity period B. Accumulation period C. Installment period D. Payment period 3. What is the primary purpose an annuity? A. To eliminate paying taxes B. To shelter money to avoid paying taxes C. To systematically withdraw an accumulated sum of money to provide for retirement D. To provide an estate 4. An annuity that guarantees a minimum rate of return A. Immediate annuity B. Variable annuity C. Fixed annuity D. Deferred Annuity Life Insurance, Annuities and Qualified Plans

15 15 5. An annuity begins paying a month after it is purchased. What type is it? A. Single premium immediate annuity B. Periodic premium deferred annuity C. Single premium deferred annuity D. Flexible premium deferred annuity 6. If a beneficiary chooses to receive the Interest Option on a death benefit, he/she should expect to pay: A. Federal Income tax on the death benefit and the interest earned B. Federal Income tax on the death benefit, but not on the interest earned C. Federal Income tax on the interest earned, but not on the death benefit D. No Federal Income tax on either the death benefit or the interest earned 7. For a Modified Endowment Contract (MEC) any loan or withdrawals must come first from A. Taxable dollars B. Premiums C. 50% taxable dollars and 50% premiums D. 70% taxable dollars and 30% premiums 8. On a MEC, if withdrawals of cash value are made prior to age 59 ½, the tax penalty is A. 5% B. 10% C. 15% D. 20% Life Insurance, Annuities and Qualified Plans

16 Qualified Plans Know These 16 Deductible-subtracting or taking away from earned income which lowers the taxable income. Tax Deferred-No taxes are paid on the earnings of the account until funds are withdrawn. Vesting-The employee s right to funds or benefits contributed by the employer if the employee should leave the employer. The rights usually depend on time worked for the employer. Any contributions made by the employee are immediately 100% vested. Distribution the paying out of the funds in the qualified account, which usually occurs at any age when employment is ended or at retirement age. Premature Distribution releasing funds prior to age 59 ½. A 10% tax penalty is usually applied in addition to the income tax due Tax Penalty Tax punishment 10% for early withdrawal, 6% for excess contributions and 50% for not beginning distributions at 70 ½ for traditional IRAs. Rollovers-participant of a qualified plan moves the money to another plan. Will be tax consequences if money is paid directly to the participant of the plan. Transfer-moving money from one plan to another through the plan administrators. There are no tax consequences since the owner did not personally receive the funds. Qualified Plans Must be exclusively for employees and their beneficiaries Must be formally written and communicated to employees Must be permanent Types of Plans Must have vesting requirement Must be Approved by the IRS Individual Small Group- Self Employed Large Group Special Tax Favored Traditional SEP Profit Sharing 403(B)TSA ROTH KEOGH SIMPLE 401K Life Insurance, Annuities and Qualified Plans

17 17 Topic Contributions Growth Nonqualified Distributions Distributions IRAs Traditional Pre-tax Tax deferred 10% penalty Begins at 70½ - 50% penalty if not Roth After-tax Tax free if open for 5 years 10% penalty After five years can be after 70½ Exceptions See previous list (medical, death, divorce, loan, etc) Excess Contributions 6% 6% Small Employer Plans(Self Employed) SEP =Simplified Employee Pension For self employed persons, partnerships, sole proprietors Employer makes contributions into employee's IRA Difference is SEP Allows larger contributions than traditional IRAs SIMPLE (Savings Incentive Match Plan for Employees) No more than 100 employees Employees who earned at least $5,000 Can be structured like an IRA or 401(k) Matching based on some % Keogh Plans (HR-10) Self-employed individuals, owners of unincorporated businesses etc. 100% of income up to a maximum Funded with pre-tax $ Own at least 10% Meet the rule Are at least twenty-one years of age Have been employed by the employer for at least ONE year and Works at least One thousand hours per year Life Insurance, Annuities and Qualified Plans

18 18 Large Employer Plans Profit Sharing Plans A portion of the company s profits is shared with the employee through a retirement plan Allows employer to vary contributions Contributions must be regular & substantial by dollar or percentage 401K Employer matches contributions Contributions are excluded from the gross income up to a ceiling amount, which is adjusted annually Employees may borrow up to 50% of vested amount TSA, Rollovers, Transfers and 1035 Exchanges Special Tax Sheltered Annuities (403(B) or TSA) Designed for charitable organizations or 501c(3) s Educational, religious and other other organizations including public education Rollover-Money from transfer paid directly to the participant 20% of distribution withholding tax Must be completed in 60 days Transfers- money goes directly from old trustee to new trustee- no tax penalty 1035 Exchanges a provision of the internal Revenue code allowing exchanges Life Insurance, Annuities and Qualified Plans

19 19 Qualified Plans General tax treatment Tax Treatment Employer contributions are tax deductible Employer contributions are not taxed as income to the employee Plan earnings accumulate tax deferred Lump sum distributions have favorable tax treatment Individual Plans Traditional IRA 10% penalty for early non-qualified distributions with some exceptions If traditional rolled to Roth, taxes must be paid on contributions Must begin to receive payment by 70½ or 50% tax penalty of what should have been withdrawn 6% tax penalty for excess contributions Qualified Plans ROTH Tax Treatment Contributions are not tax deductible Grow tax free Qualified distribution is a 5 year old account and 59½ years Distributions are not taxed 6% tax penalty for excess contributions Small & Large Employer Plans & Special Tax Favored plans Keogh 401K SEP TSA/403(c) SIMPLE Profit Sharing Plans Tax deductible contributions Tax deferred until withdrawal Rollovers, Transfers and 1035 Exchanges Rollovers & Transfers 1035 Exchanges Direct transfer from one company to another-- taxes deferred until withdrawal Funds paid to owner, must be reinvested in 60 days to avoid ordinary income tax or penalties if under 59 1/2 No taxes on trustee to trustee exchanges Life Insurance, Annuities and Qualified Plans

20 20 Qualified Plans Questions 1. Which of the following phrases best describes a KEOGH (unincorporated) Pension plan? A. Qualified retirement plan for a sole proprietor and the company employees B. A qualified retirement plan for employees of a publicly held corporation C. A not-qualified retirement plan for employees of charitable and not-for- profit organizations D A non-qualified retirement plan for the owner of a closely held corporation and its employees 2. Which of the following is not a requirement of a qualified plan A. Can discriminate as to who will participate B. Must have a vesting schedule C. Must be written and communicated to all participants D. Must be permanent 3. All of the following retirement plans are not special tax favored plans for nonprofit, charitable, educational or religious groups except A. Hr10/Keogh B. 401k C. Tax sheltered Annuity 403(B) D. Simplified Employee Pension 4. Unqualified distributions from a Retirement Plan are subject to tax and how much penalty if the distribution is made before 59 ½? A. 5% B. 10% C. 15% D. 50% 5. All of the following statements are true regarding Keogh (HR-10) retirement plans except A. Interest earned on contributions is subject to current income taxes B. The plan limits contributions C. Full time employees must be covered after one year of service D. The plan is mainly designated for self-employed 6. All of the following persons who do not have any employer sponsored retirement plan would be eligible to set up contributions to IRAs except A. Jason, Age 26 a copywriter B. Marsha age 40, a proofreader C. Arlene age 72, a nurse D. Tom, age 60 a mechanic Life Insurance, Annuities and Qualified Plans

21 21 7. Which of the following phrases best describes vesting? A. The time at which a worker meets the eligibility requirements for plan participation B. The age at which an employee must begin to make withdrawals from retirement plans C. The right of a worker s spouse to be considered in retirement income needs D. The employee s right to funds or benefits, contributed by the employer, should the employee leave that employer 8. All of the following statements are false Except A. Profit sharing plan are used by the employer to invest profits for its top executives. B. A tax deduction is granted to all contributions to an Individual Retirement Account. C. Any employee contribution to a 401(k) program is 90% vested. D. Self-employed persons can plan for retirement by using a Keogh plan. Life Insurance, Annuities and Qualified Plans

22 Texas Insurance Regulations Numbers, Dollars, Days and Dates 22 The Commissioner 5 years of experience in administration, government, CPA or as a practicing attorney 2 year term of office February 1 of odd numbered year new term begins Must give 10 days notice to hold hearing Education & Experience 18 years old to apply for a licensed Pass exam in last 12 months to be licensed 2 year term for license 30 hours Continuing Education every two years (15 hours annually) 3 years experience as an agent to become a Counselor 5 years employment history for agent license application If 20 years or more licensed by 9/1/92, no Continuing Education requirements Agent/Producer Fees $50 agent licensing fee $16 for each additional appointment $25,000 for corporations and banks to prove financial responsibility to be agents Penalties & Fines 2 year waiting period to get a license after acting as an agent without one 5 year waiting period for license denied, refused or revoked License expired for one year can t be renewed, must reapply and complete all requirements 5years waiting period for license if convicted of a felony for breach of fiduciary duties 10 years maximum prison term for false and fraudulent act $500 for acting without a license and banned from having a license for two years $25,000 for violating a cease and desist order and/or must make restitution $25,000 for violating the Insurance Code $50,000 for false and fraudulent act Notification 3 days notice to consumer for Investigative Consumer Report 5 days for the insurer or reporting agency to provide additional information if requested 10 days notice of hearing days for hearing due to denial or revoked certificate of authority 1 month for agent to report change of address 1 month to report felony convictions 1 month for corporation to report additions and removals of officers, partners etc. 30 days for agent to request hearing after emergency cease and desist order 90 days grace period after renewal date for agents to pay fees and complete CE before license expires Temporary License 90 days without a written exam (not renewable) Can only be issued once in every 6 months Examination of Records Once every year for the first 3 years by commissioner for new insurers Every 3 years by the commissioner for existing insurers Each year CPA examines the financial statements of insurers Limits Maximum 25% of agent s business for calendar year can be controlled business 5,000 minimum population in a town for bank to become agent

23 Multiple Choice Question Answers 23 Basic and General Insurance 1. B 2. A 3. D 4. A 5. D 6. C 7. B 8. D 9. D 10. D Riders, Options and Exclusions 1. C 2. D 3. B 4. B 5. C 6. A Annuities 1. C 2. B 3. C 4. C 5. A 6. C 7. A 8. B Qualified Plans 1. A 2. A 3. C 4. B 5. A 6. C 7. D 8. D

24 LIFE MATCH GAME Match the term in the left column with its definition in the right column. Not all definitions will have a matching term. 1. Assignment 2. Convertible Term 3. Nonqualified Plans 4. Medical Information Bureau 5. Representations 6. Insurable Interest 7. Policy Dividend 8. Insuring Clause 9. Universal Life 10. Reinstatement 11. Whole Life 12. Annuities 13. Fair Credit Reporting Act 14. Term Insurance 15. Waiver of Premium 16. Warranty 17. Adjustable Life 18. Variable Contracts 19. Mode 20. Entire Contract 21. Modified Endowment Contract A. Statements Believed to be True B. Company s Consideration C. Juvenile Insurance Rider D. Return of Unneeded Premium E. Federal Law Consumer Reports F. Not for Profit Association G. Annual Renewable Term + Cash H. Seven Pay Test I. Permanent J. Change of Policy Ownership K. Pure Cash-Tax Deferred L. Pays on Death of First M. Must Lose Something of Value N. Absolute Truth O. Disability Rider P. Policy + Application Q. Temporary to Permanent R. Frequency of Payment S. Term or Permanent T. Estate Planning Tool U. Requires Securities License V. No Special IRS Tax Treatment W. Pure Protection X. Pay Overdue Premiums + Answer Medical

25 LIFE Match Game ANSWERS 1. J Assignment 2. Q Convertible Term 3. V Nonqualified Plans 4. F Medical Information Bureau 5. A Representations 6. M Insurable Interest 7. D Policy Dividend 8. B Insuring Clause 9. G Universal Life 10. X Reinstatement 11. I Whole Life 12. K Annuities 13. E Fair Credit Reporting Act 14. W_ Term Insurance 15. O_ Waiver of Premium 16. N Warranty 17. S Adjustable Life 18. U Variable Contracts 19. R Mode 20. P Entire Contract 21. H Modified Endowment Contract A. Statements Believed to be True B. Company s Consideration C. Juvenile Insurance Rider D. Return of Unneeded Premium E. Federal Law Consumer Reports F. Not for Profit Association G. Annual Renewable Term + Cash H. Seven Pay Test I. Permanent J. Change of Policy Ownership K. Pure Cash-Tax Deferred L. Pays on Death of First M. Must Lose Something of Value N. Absolute Truth O. Disability Rider P. Policy + Application Q. Temporary to Permanent R. Frequency of Payment S. Term or Permanent T. Estate Planning Tool U. Requires Securities License V. No Special IRS Tax Treatment W. Pure Protection X. Pay Overdue Premiums + Answer Medical

26 Insurance Company Basics Word bank ALIEN AUTHORIZED BENEFICIARY DIVIDEND DOMESTIC EXPIRE FACE FOREIGN INSURED INSURER MATURES MUTUAL NONPARTICIPATING OWNER PARTICIPATING STOCK Across 5. Type of policy where dividends are paid to the owner. 9. When a policy's face amount becomes payable. 11. Type of insurer owned by stockholders. 13. Type of policy where dividends are not paid to the owner. 14. When policy coverage ends but face amount is not payable. 15. amount is the value of the policy upon maturation. Down 1. The Policy controls all the rights of a policy and pays the premiums. 2. How an insurer is classified in states other than the one where it is headquartered. 3. How an insurer is classified in the state where it is headquartered. 4. The return of unneeded premium. 6. An insurer licensed to do business in a particular state. 7. How an insurer is classified when it is headquartered in another country.

27 Insurance Company Basics Down 8. Insurance company 9. Type of insurer owned by policyowners. 10. Receives policy proceeds when the policy matures. 12. Covered by a policy.

28 Contracts Word bank AGREEMENT APPLICATION CAPACITY CONCEALMENT CONDITIONAL CONSENT CONSIDERATION CONTRACT ESTOPPEL INTEREST MINORS MISREPRESENTATION PURPOSE REPRESENTATIONS WAIVER WARRANTIES Across between the two parties. 2. Legal states that all parties 12. Preventing a waived right from being used. entering into a contract must be legally competent and capable. 13. A receipt provides coverage if certain criteria are met. 5. Not fully disclosing a known fact. 14. Made by an applicant on the application and 9. Legal states that all parties true to the best of knowledge and belief. entering into a contract must have legal intent. 15. Insurable means being in a 10. If one party makes an offer that is accepted position to suffer a financial loss if something by another party then there is an happens to another party. 16. Permission granted by one party to another

29 Contracts Down 1. Are not legally competent and require the consent of someone else in order to enter into a contract. 3. Insurable Interest is only required at the time of. 4. An exchange of value. 6. An agreement between two or more individuals 7. A lie on an application. 8. Made by the insurer and guaranteed to be absolutely true. 11. Giving up a known legal right.

30 Insurance Basics Word bank AVOID HAZARD INSURANCE MORAL MORALE PERIL PHYSICAL PREDICTABLE PURE REDUCE RETAIN RISK SPECULATIVE TRANSFER Across 4. The chance that a loss will occur. 6. Social mechanism for the transfer of risk from individuals to companies. 8. Type of hazard involved during intentional losses. 9. Increases the likelihood that a loss will occur. 11. Cause of a loss. 12. The Law of Large Numbers says many similar risks grouped together makes outcomes more. 4. The type of risk that insurance deals with, no chance for gain. Down 1. Method of responding to risk by being self-insured. 2. Type of hazard involving material situations and conditions. 3. Method of managing risk when purchasing insurance. 5. Type of risk insurance does not deal with, chance for gain.

31 Insurance Basics Down 7. Type of hazard involving indifference. 10. Method of responding to risk by not flying. 13. Method of responding to risk by stopping smoking.

32 Insurance Policies Word bank AFFORDABLE CONVERTIBLE DECREASING INCREASING INSURABILITY LEVEL LIMITED MATURITY MODIFIED MORTALITY PERMANENT PREMIUM TERM Across 2. Term Insurance that is renewable does not require proof of in order to start another policy. 5. A policy that grows cash value faster the a Sever-Pay Whole Life policy is known as a Endowment Contract. 9. When a life insurance policy pays out the face amount Pay is purchasing Whole Life Insurance over a shorter period of time. 11. This type of Term Insurance allows additional amounts of coverage to be added. 13. Whole Life provides this type of protection. Down 1. Level is a characteristic of Term and Whole Life Insurance policies. 3. This type of Term Insurance maintains a constant level of protection. 4. These statistical tables predict the likelihood of death. 6. Term insurance that lowers the amount of coverage. 7. Term Insurance that contains the right to change the policy into permanent protection. 8. Term insurance is often known as the most. 12. Temporary Insurance

33 Advanced Policies Word bank ABSOLUTE APPLICATION BENEFICIARY CASH COLLATERAL DEATH DISCRETIONARY FACE GRACE INCONTESTABLE IRREVOCABLE OWNERSHIP PREMIUMS PRIMARY PROMISE REQUIRED REVOCABLE SECONDARY TERTIARY Across 2. Payable in advance. 5. After a certain period of time policies become this and an insurer cannot deny paying a death benefit because of statements made on the application. 9. Death during the grace period adjusts the benefit. 10. Will receive the death benefit if the first two levels of beneficiaries are not alive. 12. A beneficiary that cannot be changed without his/her consent. 13. The permanent assignment of policy rights by the policyowner to another party. 15. The amount of the policy will be adjusted if there was a misstatement of the application about age or gender. 16. Policy provisions that must be found in all policies. 17. The first beneficiary in line to receive the death benefit.

34 Advanced Policies Across 18. The second beneficiary in line to receive the death benefit. 19. The Uniform Simultaneous Death Act assumes this party dies first. Down 1. The Entire Contract is made up of the policy and the. 3. A short period of time after a premium payment is due when the policy stays in effect even if the payment hasn't been paid. 4. Policy provisions that a company may or may not choose to include in their policies. 6. A beneficiary that can be changed by the policyowner. 7. The Insuring Clause is the heart of the policy and is the between the company and the policyowner. 8. Policies that have value make loans to the policyowner. 11. The temporary assignment of some or all the policy rights by the policyowner to another party. 14. This required provision is the clause that states all the rights of the policy belong to the policyowner.