MICHIGAN LIFE REVIEW STUDENT NOTES

MICHIGAN LIFE REVIEW STUDENT NOTES March 2007

2 Types of Policies (8 questions) LIFE EXAM REVIEW 1. Group Life insurance plans generally require participation by: A. 75% of eligible employees, under a contributory plan. B. 50% of eligible employees, under a noncontributory plan. C. 25% of all eligible employees. D. 75% of all employees dependents. 2. All of the following statements about Universal life insurance are true EXCEPT: A. It can be used to provide coverage over the entire lifetime of the insured. B. A mortality charge is subtracted from the cash value accumulations each month. C. Policy loans affect the amount of interest that is applied to cash value accumulations. D. Premiums must be paid on a monthly basis. 3. Decreasing term insurance could be recommended for all of the following EXCEPT A. to protect a family while children are growing up. B. for mortgage protection. C. for protection while a business loan is outstanding. D. to build a retirement fund. 4. If a policy that is primarily designed for accumulation of funds within a specific period fails the seven pay test, it is a(n) A. Annuity. B. 20-pay Life policy. C. Adjustable Life. D. Modified Endowment. 5. In a Whole Life policy, the age of 100 is significant because the insurance company: A. Assumes the insured will die before reaching that age. B. Will refund premiums only when the insured reaches that age. C. Will increase coverage when the insured reaches that age. D. Will reduce coverage by one-half when the insured reaches that age. 6. If an Adjustable Life policyowner makes an additional premium payment, the policy may be affected in all of the following ways EXCEPT the: A. Premium paying period may decrease. B. Value of the Nonforfeiture Options may decrease. C. Face amount may increase. D. Length of coverage may increase.

3 7. An insured receives monthly payments from her deceased husband s life insurance policy where he chose the fixed amount installment option. How is this income taxed? A. The whole payment is taxed. B. The whole payment is received tax free. C. The interest portion of the payment is taxed; the principal is not. D. The principal portion of the payment is taxed; the interest is not. 8. A living insured may receive cash from a straight whole life insurance policy and keep the coverage in force, by all of the following EXCEPT A. Through a policy loan. B. Through a cash surrender value. C. Through a partial cash value withdrawal. D. Through a dividend payment. Policy Provision, Options and Riders (7 questions) 9. 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. 10. 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 11. 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 12. A beneficiary receives $5,000.00 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 13. 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 14. A rider which guarantees that an insured can purchase additional insurance at specified dates, ages or events is a A. return of premium. B. accidental death. C. waiver of premium. D. guaranteed insurability. 15. A policyowner surrenders a whole life policy for a reduced paid-up policy. What will happen to the cash value? A. it is forfeited B. decreases C. remains the same D. continues to increase Annuity Questions (11 questions) 16. All of the following statements are correct about annuities EXCEPT: A. Fixed period payments are paid for a certain period of time. B. Fixed amount payments are paid for a certain amount of money. C. Interest earned on money paid into an annuity is not taxable when withdrawn. D. A life annuitant cannot change the pay-out process once the annuitant begins receiving payments. 17. What is the purpose of a fixed annuity? A. to allow the annuitant an income relating to the variations in the cost of living B. to allow the annuitant to pay off the annuity at different rates throughout the years C. to allow the annuitant a discount on the cost of an annuity D. to give the annuitant a guaranteed interest rate and benefit amount

5 18. Which of the following type of Annuities would be best suited for a retired couple who are seeking income for as long as either lives? A. Joint and Survivor Annuity B. Joint Life Annuity C. Personal Annuity D. Individual Annuity 19. Which of the following settlement options pays a specific amount to the annuitant with no residual value payable to a beneficiary? A. Fixed Period B. Fixed Amount C. Interest Only D. Life Income 20. Benefit payments in a non-qualified annuity consists of principal and interest. How is the benefit portion that represents a return of principal taxed? A. Taxed as earned income B. Tax-deferred C. Not taxable D. Taxed less than interest earned 21. In Equity Indexed Annuities, the equity is A. Invested by the insurance company. B. Tied to an index such as the S&P 500. C. Invested conservatively. D. Invested in bonds. 22. What are the tax consequences of surrendering a fixed annuity prior to age 59 1/2? A. Surrender charge of 2% B. 10% penalty on interest earned C. 10% penalty on interest and cash value D. There is no tax penalty 23. To discourage early termination of an annuity, what is written into an annuity contract? A. Interest rates. B. Surrender charges. C. Premium amounts. D. Cash value guarantees.

6 24. In a deferred annuity contract, which of the following statements are true about the annuitant? A. The annuitant is the contract owner B. Annuity payments are based on the annuitant s life expectancy C. The beneficiary is named by the annuitant D. Premiums are paid by the annuitant. 25. Under a life income annuity, all the following factors influence the benefit payment amount EXCEPT: A. the settlement option chosen. B. the amount contributed during the accumulation period. C. guaranteed mortality and administrative costs. D. the annuitant s age on each annually renewal date. 26. An immediate annuity contract A. has a level death benefit. B. accumulates funds for educational expenses. C. benefits increase with the cost of living. D. systematically liquidates both principal and interest. Qualified Plans (7 questions) 27. Employer vesting schedules apply to All contributions made to qualified plans. Only employee contributions made to qualified plans. Only employer contributions made to qualified plans. All contributions made to nonqualified plans. 28. Premature distribution from a qualified plan or an IRA can result in the amount being taxed as income plus what penalty tax amount? A. 5% B. 10% C. 15% D. 25% 29. A rollover from one IRA to another or from a qualified plan to an IRA must be accomplished within what time limit if the owner is to avoid an income tax liability on the amount rolled over? A. 10 days B. 30 days C. 60 days D. 90 days

7 30. At what age is an individual no longer subject to early withdrawal penalties under an IRA? A. 55 B. 55½ C. 59 D. 59½ 31. Which of the following organizations would be eligible to offer a 403(b) arrangement? A. A fire department B. A public school system C. Any small business D. Any corporation 32. Which type of retirement plan would a self-employed worker set up for herself? A. SIMPLE Plan B. Keogh Plan C. 403(b) D. SEP 33. If an IRA owner is required to take a $2,000 minimum annual distribution from his IRA, but only takes $1,000 distribution, what taxes if any will he have to pay? A. Deductible tax of $1,000 B. Nondeductible tax of $1,000 C. Deductible tax of $500 D. Nondeductible tax of $500

Types of life policies 8 Types of Policies Term Life Level Premium Term Annual Renewable Term Decreasing Features of Term Life Renewable Convertible Description Pure protection, lasts for specific term, most insurance for least premium Coverage stays the same for the specified period. It pays a benefit if the insured dies. Renew policy each year without proof of insurability-premiums increase due to attained age Coverage decreases at predetermined times gradually best used when the need for protection declines from year to year, ex, mortgage, credit insurance Right to continue coverage at end of term, no insurability, cost increase due to attained age Change from term to whole life, no insurability, higher cost due to attained age Whole Life Everything guaranteed (face amount, premium, and cash value) until death or age 100. Cash value is dependent upon face amount, amount of premiums and how long the policy has been in force Continuous Premium (Straight Basic policy, level death benefit, Pay premiums for life or until age 100 Life) Limited-pay Pay until a certain age or time (20 Pay Life, Life paid up at 65) Coverage to age 100 Single Premium One lump sum premium, coverage to age 100 Graded Modified Interest Sensitive Whole Life Equity Index Flexible Premium Policies Adjustable Life Universal Life Term and Whole Life--Premiums start out low but gradually increases, then remains level Term and Whole Life--Starts low then increases in one step Initial premium set based upon current risk assumptions. Whole life with interest sensitive cash value, premium changes with changes in insurer s performance Permanent insurance linked with the public equity indexed fund like S&P 500 Guarantees a conservative return but can be higher Coverage, premiums, and plan is adjustable, insured chooses two and insurer one Flexibility by combining term and permanent into a single plan Interest sensitive cash value Death protection is ART Flexible coverage & premiums Two Death benefit options, A & B Can make partial surrender/cash withdrawal Flexibility through unbundling (separating). Mortality charge deducted each month from cash value for cost of insurance, and also expenses (loading) charges.

9 Types of Policies Specialized Policies Joint Life (First-to-die) Survivorship Life Juvenile Life Modified Endowment Group Life Credit Life Description 2 or more insureds - Pays death benefit when the FIRST one dies 2 or more insureds - Pays death benefit when the LAST one dies Written on the lives of children from birth or with some age restriction Same features as regular whole life but endows earlier by age or time (before age 100) Is more expensive When cash value grows too fast, policy fails the seven-pay test and loses its insurance tax advantage. Funds withdrawn by LIFO Usually written for employee-employer groups. Group meets underwriting requirements Contributory members pay Noncontributory-owner pays Ratings-previous group claims experience determines premiums Master Contract goes to the sponsor, usually employer. Certificate of Insurance goes to member Issued on the life of a borrower to protect creditors, usually Decreasing term, & amount over debt goes to second Beneficiary 1- How long are premium payments paid on a Straight, Whole Life Policy? 2- When does a Whole Life policy endow? 3- What is meant by Limited Pay? 4- What is modified about Modified Whole Life? 5- What policy was designed for the same reason as Modified Whole Life? 6- Name the Death Benefits for a Universal Life Policy 7- What is Option 1 in a Universal Life Policy? 8- Can the Premium change on an Interest Sensitive Whole Life Policy, how, and why? 9- What is the Rate of Return on an Interest Sensitive Whole Life Policy? 10- What must an insured do when converting a Convertible Term policy to Permanent Insurance?

Business Insurance 10 Key Employee Company is owner and Beneficiary Employee is Insured Premium NOT tax-deductible to Company Third Party Ownership Buy and Sell Agreement (Funding) NOT INSURANCE A legal document that states WHO may purchase a deceased partners share of the business and for HOW MUCH MONEY Life Insurance can be used to fund a Buy and Sell Agreement Drawn up by an Attorney Executive Bonus Plan An arrangement where an employer can purchase life insurance for selected employees. The employer pays cash bonus to the employee in the form of premiums Usually for a key executive Beneficiary must be someone other than the employer. Corporate Owned Life Insurance Life insurance used to fund deferred compensation plans. Can be used to fund buy sell agreements also. Life Insurance Taxes Life Insurance Premiums Cash Value Policy Loans Policy Dividends Death Benefits Taxes Not tax deductible Taxable only if amount exceeds premiums (taxed on gain) Not taxable & Interest Not deductible Not taxable, return of excess premium any interest earned on dividends is taxable Lump Sum not taxable-any interest earned on benefit is taxable Modified Endowments Taxes Withdrawals Taxable on a last in first out basis (LIFO ) Penalties If withdrawn prior to age 59½ a 10% penalty is charged Death Benefit No for lump sum- interest is taxable for other settlement options Group Life Premiums paid by employer Premiums paid by business for Key person, Buy Sell Executive Bonus Policy Loans Death Benefit & Cash Value Taxes Not taxable to employees up to $50,000 life insurance Not deductible, but benefits is not taxable if business is beneficiary. Not deductible but proceeds not taxable Deductible to employer and taxable as income to employee in year received Not taxable to business and can deduct interest Same as Individual life policies

11 Review by covering up right side of chart, and asking Why? questions Life Insurance Individual premiums Group premiums by employer. Premium paid by business for Key Person, Buy Sell funding,... Lump sum death benefit of life insurance... Cash value exceeding premiums. Policy Dividend... Interest earned on policy dividends. Policy loans. Settlement Options (other than lump sum) Interest Life Income. Fixed Period, Fixed Amount... Modified Endowment Contract (MEC).. Not tax deductible Tax deductible up to premium for $50,000 death benefit Not tax deductible Not taxable Taxable when withdrawn (tax deferred) Not taxable Taxable, in the year earned (current) Not taxable, also interest paid not deductible Taxable, in the year earned (current) Interest taxed, principal is not Interest is taxed, principal is not Life insurance that is over funded, failed the 7 pay test, and lost its life insurance tax advantages Types of Policies Multiple Choice Questions 1. Flexibility, high current interest crediting rates, and "unbundling" are characteristics of which one of these life insurance products? A. Whole life B. Endowment C. Term D. Universal life 2. Which of the following is NOT one of the characteristics of a renewable term insurance policy? A. The insured can demand renewal at the end of the original term. B. Premiums for a renewal policy cannot be increased. C. Evidence of insurability cannot be required at renewal. D. Limits may be placed on the number of permitted renewals.

12 4. Buy and Sell agreements would most likely be funded by A. Joint Life Insurance. B. Joint and Survivor Life Annuity. C. Survivorship Life Insurance. D. Decreasing Term Insurance. 5. Which type of term policy would be most appropriate for protecting the unpaid balance of a home mortgage? A. Level term B. Increasing term C. Decreasing term D. Convertible term 6. A straight life policy A. Requires a single payment after which coverage is afforded for the whole life of the insured. B. Requires the insured to pay the premium for life and endows at age 100. C. Is paid up at some specific time and endows at age 65. D. Is paid up at some specific time and endows at age 100. 7. An insured has purchased a $100,000 whole life insurance policy. After a period of years, the cash value of the policy has grown to $42,000. If the insured dies at this time, the beneficiary will receive A. $142,000. B. $ 42,000. C. $ 58,000. D. $100,000

Provisions 13 POLICY PROVISIONS Required Provisions (Protect Policy Owner) Entire Contract Clause Entire Contract = Policy + Copy of Application Statements are REPRESENTATIONS 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 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 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) Suicide within 2 years return of premiums paid After 2 years full benefits paid BENEFICIARY 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

Riders 14 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 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.

15 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 Payor Benefit Life/Disability (Juvenile Insurance) If payor becomes disabled or dies insurer will pay premiums until child is no longer a minor Also used when payor and insured are two different individuals

16 Options Choices on How to Distribute a Sum of Money 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)

17 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. 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) A payor benefit rider found in a juvenile insurance policy will waive a child s premium when the owner dies or becomes disabled. 15) Nonforfeiture values are guarantees required by state law for insurance policies with cash values.

16) Extended Term the cash value is converted to term insurance for the same face amount. 17) 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. 18) With the life income option, the beneficiary or annuitant would receive income payments for life. 19) 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. 20) 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. 21) 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. 22) 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. 23) 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 18

19 Annuities Contrasting Life Insurance and Annuities Life Insurance Annuity Has Income tax free benefit Protects against dying too soon Tax Free death benefit Protects against living too long Creates an estate upon death Systematically liquidates the estate for the lifetime Need to be healthy to buy Insurers prefers you are unhealthy when a life income begins

20 Accumulation period versus annuity period Accumulation period- pay-in period Building your estate Interest earn grow tax-differed Owner controls the annuity- only time changes can be made Annuitization, annuitization period or liquidation period- payout period Annuitant begins to receive benefit payments Money controlled by insurance company/ No changes can be made by the policyowner The annuitant is either in the accumulation or annuitization phase-they can not be in both. Owner, annuitant and beneficiary Owner- purchases the annuity contract Annuitant-receives the payments, whose life expectancy premiums are based on Beneficiary- receives cash value or premiums which ever is higher-interest is taxable The person who purchases the annuity contract does not have to be the one who receives the benefits. Most case Owner/Annuitant are the same person The owner of the annuity has all of the rights such as naming the beneficiary and surrendering the annuity. Premiums are based on: Life expectancy, annuitants age at the start of the annuity (the older you are the more you receive) Premiums paid + interest rate- expenses Sex of the annuitant (women live longer will receive less than men)

21 During Accumulation Phase -Surrender or Withdrawals Nonforfeiture does not forfeit money paid into the annuity 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. Policy Loans/Withdrawals Taxable dollars out first (LIFO). Then premiums paid come out without tax Interest earned is the taxable dollars 10%Penalty tax before age 591/2 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.-accumulate funds for retirement 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 a single premiums payment can be used to purchase a deferred annuity Single, Level or flexible payments How are premiums invested? Fixed Annuities Minimum interest rate is guaranteed in the contract or current interest rate, higher returns from insurance company investment will result in a higher interest rate for the annuitant Insurance Company assumes the risk of investment,-invest in general account, conservative investments-bonds Level Benefit Payout/ does not protect against inflation Equity Indexed Annuities Interest rate is tied to an index, such as the S&P 500; possibility to beat inflation but sill has a guaranteed interest rate in annuity contract Market Value Adjusted Annuities Guarantees a fixed interest rate for a specific period of time. Tied to the bond market Market Value adjustment is only made if annuity is surrendered prior to maturity If surrendered and interest rate is higher than fixed interest rate in contract; the market adjustment is negative annuitant owes a higher surrendered charge and vice versa

How long are benefits paid? 22 Settlement Options are defined by how you get the money and what happens to it after you die Annuity Payment Options Payments to the Annuitant Amount received by the Guaranteed for Life Beneficiary Life Only Guaranteed for the entire life of the annuitant None Regardless of remaining principal Refund Life Options Guaranteed for life Unpaid principal is paid to the beneficiary either cash or installments Life with Period Certain. Joint and Survivor Joint Life Guaranteed Minimum- benefit for life plus a guaranteed amount of time Guaranteed for life of the annuitant and the survivor-income for two that cannot be outlived Guaranteed until the death of the first annuitant Payments for any remaining guaranteed amount of time (Period Certain) Survivor receive 1/2 or 2/3 None Not guaranteed for life Annuity Certain Guaranteed for a specific period or time or amount Payments reflecting remaining time period or amount Annuity Federal Tax Consideration Individual Premiums Not tax deductible Lump sum surrender Interest immediately taxed, plus 10% penalty if surrendered before age 59 ½ Cash Withdrawal During accumulation period interest comes out first, then the principal (LIFO). Interest is taxable, plus 10% penalty if surrendered before age 59 ½ Income Benefit Exclusionary Rule Payments are based on: Exclusion Ratio Portion of payout is taxable (interest) and a portion is not (premium paid).

When can an annuity be surrendered? During the accumulation period. Who can surrender the annuity? The Policyowner 23 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. If a person age 34 withdrawals money from their annuity, how would if be withdrawn? Interest then Principal (Last-in-First-Out). If a policy owner pays a premium over a period of time, they most likely bought what type of annuity? Deferred Annuity 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 In a joint life annuity, what payment benefit would the wife receive if her husband died? Nothing In a joint survivor annuity, what does the second receive after the first dies? 1/2 or 2/3 of the original benefit. What account are funds held in for a fixed annuity? General Account Who bears the responsibility for the general fund? The Insurer What is the penalty for premature distribution? 10% before age 59 ½

20 Retirement Plans Q u alified P lan s Must be exclusively for employees and their beneficiaries Must be formally written and com municated to em ployees Must be perm anent Types of Plans Must have vesting requirem ent Must be Approved by the IRS Individual Small Group- Self Employed Large Group Special Tax Favored T raditional ROTH SEP KEOGH SIM PLE P rofit Sharing 401K 403(B)TSA Traditional IRA 10% for non qualified W/D Employer Contributions not taxed as income Earnings accumulate Tax Deferred Must begin benefits at 70½ or 50% tax penalty of what should have been withdrawn 6% tax penalty for excess contributions Roth IRA Contributions not tax deductible Grows tax free Qualified distribution is a 5 year old account and 59½ years Distributions are not taxed 6% tax penalty for excess contributions Rollovers Money from transfer paid directly to the participant 20% of distribution withholding tax. Must be completed in 60 days SEP Self employed, Partnerships, sole proprietors Employer makes contributions into employee s IRA SEP allows larger contributions than traditional IRAs KEOGH Self-employed individuals, owners of unincorporated businesses 100% of income up to maximum Funded with pre-tax $ Must own at least 10% Simple Maximum 100 employees Must earn at least $500 Can be structured like IRA or 401K Matching based on some % Transfers Money goes directly from old trustee to new trustee-no tax penalty Profit Sharing A portion of the company s profits is shared with employees 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 403(b) or Tax-sheltered Annuities Designed for charitable organizations or 501c(3) s Educational, religious, Public Educators, etc 1035 Exchanges A provision of the internal Revenue code allowing exchanges A Life policy for a Life policy A Life policy for an Annuity An Annuity for an Annuity

25 1-Unqualified distributions from a Retirement Plan are subject to tax and how much penalty if the distribution is made before 59 ½? 2- Who may use a Keogh plan? 3- Can a Non-Qualified plan discriminate in favor of highly compensated employees? 4- What is the maximum number of employees for a SIMPLE plan? Taxes & Retirement Multiple Choice Questions 1. Which of the following insurance benefits could NOT be subject to federal income taxes in whole or in part? A. Cash value in excess of premium B. Installment payments of a death benefit C. Lump sum settlement of a death benefit D. Interest only settlement of a death benefit 2. Mary receives monthly payments from her deceased husband s life insurance policy where he chose the fixed amount installment option. Each payment consists of principal and interest. How is this income taxed? A. The whole payment is taxed. B. The whole payment is received tax free. C. The interest portion of the payment is taxed; the principal is not. D. The principal portion of the payment is taxed; the interest is not 3. A pre-established plan used to outline the terms of purchase of a deceased partner s share in a business is known as a A. Key employee plan. B. Qualified retirement plan. C. Deferred compensation agreement. D. Buy and Sell Agreement. 4 A plan which must define contributions or benefits, must be formalized in writing, must be designed for the exclusive benefit of the employees or their beneficiaries, and must not discriminate in favor of officers, stockholders or highly paid employees is A. Business Continuation Plan. B. Split Dollar Plan. C. Deferred Compensation Plan. D. Qualified Retirement Plan.

26 5. The penalty for early withdrawals from an IRA or other qualified retirement plan before age 59 1/2 is A. 20% of the amount withdrawn. B. 12% of the amount withdrawn. C. 10% of the amount withdrawn. D. 6% of the amount withdrawn. 6. A plan in which typically both the employee and the employer pay premium and share in the benefits is A. Business Continuation Plan. B. Split Dollar Plan. C. Deferred Compensation Plan. D. Qualified Retirement Plan. 7. A retirement plan for self-employed individuals and their eligible employees is A. Keogh Plan. B. 401K. C. Profit Sharing. D. IRA. 8. A qualified pension plan has all the following characteristics EXCEPT: A. contributions are tax-deductible. B. it must be formalized in writing. C. it must be for the exclusive benefit of employees or their beneficiaries. D. it must be funded with life insurance

27 Multiple Choice Answers Types of Policies 1. A 2. D 3. D 4. D 5. A 6. B 7. C 8. B Types of Policies 1. D 2. B 3. A 4. C 5. B 6. D Provisions, Options & Riders 9. D 10. D 11. B 12. B 13. C 14. D 15. D Taxes & Retirement 1. C 2. C 3. D 4. D 5. C 6. B 7. A 8. D Annuities 16. C 17. D 18. A 19. D 20. C 21. B 22. B 23. B 24. B 25. D 26. D Qualified Plans 27. C 28. B 29. C 30. D 31. B 32. B 33. D