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Taxes, Retirement, and Other Insurance Concepts.
Earned Income - not…
Taxes, Retirement, and Other Insurance Concepts.
- Earned Income - not from investments, interests, etc.
- FIFO - first paid in first paid out.
- Gross Income - salary before taxes.
- LIFO - last in first out - asset management.
- Nonprofit org - surplus to fulfill its purpose.
- Policy Endowment - maturity date.
- Pretax Contribution - before taxes are deducted fro earnings.
- Rollover - withdraw from one plan to another.
Surrender - early termination of a policy.
- Vesting - The right of a participant in a retirement plan to retain part of all of the benefits.
- Tax deductible - reduction of taxable income, resulting in lower tax liability.
- Taxable - subjected to taxation, payable to state and federal government.
- Tax deferred - Tax on investment or gains (such as interest or gains) paid in the future.
Third-party Ownership
- When the insured is not the policyowner.
- Usually in business situations or for minors
Viatical Settlelments - company that buys the insurance from a person with eminent death (inoperable cancer as an example).
Life Settlements - Policyowner sells his policy for a better amount of surrender it to the insurance company.
- Usually senior citizens with a lifetreatning or low Life expectations.
Group Life Insurance
- Usually employee - employer.
- Usually Annually Renewable Term.
- Evidence of insurability not required.
- Insureds don’t receive a policy because they don’t have control of it, they just get the certificate of insurance.
- Aunally renew term insurance.
- Group needs to exist for another reason than only have a life insurance.
- The larger the number of the group the more accurate the projection of future loss experience.
- Turnover of the group should be steady and turn over of young in and old out.
- Premium based in age and ratio of men and woman that compose the group.
Conversion Priviledge
- if an employee terminates the contract with the company is able to convert it to an individual policy without proving insurability.
- Premium of course will be higher
- Usually converted to whole life.
- 31 days after terminating with the company.
- If the master contract is terminated , all insureds that are more than 5 years have the right to convert and have the same coverage.
Contributory vs. Noncontributory
- employees or insureds contribute or not for the premium payments.
- 75% of the employers need to be included in the contributory and 100% in the noncontributory.
Retirement Plans
Qualified vs Nonqualifield Plans
- Qualified is designed to employees and their beneficiaries only, not discriminate (officers, stockholders nd highly paid executives are prohibited), not managed exclusively by that group ,approved by the IRS and tax deductible ( tax deferred growth of the earnings)
- Only the last item is the same for non qualified and the excess over cost basis is taxed now in the qualified only the withdrawals are taxed.
Individual Retirement Accounts
- Contribute 100% of income if it is less than an IRS-specified limit per year.
- Excess contribution penalty of 6%.
- Regular rollover payor hold 20% of the transfer . Direct rollover is from one payor to another.
Individual Retirement Account
- Participant can contribute as much as they wish.
- Additional contributions over 50 years.
- Couples can contributute together even if only one of the person has income. Double of the individual amount and separate account.
- Can withdrawn anytime but under 59 1/2 owner needs to pay 10% of additional tax Restrictions as disability, medical expenses, post secondary education and down payment for first time house at $10k max.
- At age 72 must receive at least the required minimum distribution - RMD.
- tax deductible - pre-tax dollars.
Roth IRA
- Don’t have to receive the RMD at 72.
- Grows tax free as long as the account is open for at least 5 years.
- Not tax deductible. After tax dollars.
Self-employed plans HR-10 or Keogh .
- Pre-tax dollars as if a corporate retirement pension plan.
- if not self -employed at least part time owning 10% of a company.
- Tax deductible and it accumulates tax deferred until withdraw.
Simplified Employee Pensions - SEP
- designated to a small employer or self employed.
- Individual employer account separated from gross income.
-an IRS established annual dollar limit or 25% of the employee’s compensation, whichever is less
Simple Plans
- Savings Incentive match for employees.
Small businesses - no more than 100 employees that received at least 5k in the previous year and not have another plan.
Up to 3%of the annual compensation as an equal contribution as the company’s.
- Taxation’s is deferred on both contributions and earnings until funds are withdrawn
Profit Sharing and 401(k) Plans
- Profit sharing of the company. If no formula the amounts must be systematic and substantial.
- Equal participation or not of the company.
-Taxable cash compensation or CODA - arrangement plan.
- Dollar ceiling amount of contribution established and adjusted annually by inflation.
- Withdraw in case of death or disability or loan of 50% or a dollar limit set by the IRS.
- Any size of company.
403(b) Tax Sheltered Annuities - TSAs
- Nonprofit organizations and public school systems.
- Contributions can be made by bothparts and excluded from the current income.
- Maximun amount established by the IRS.
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Tax Treatment of Insurance Premiuns, Proceeds and Dividends.
- Premiums are not tax deductible.
- Death Benefit - if lump - sum is tax free, if installments than only principal is tax free. Interest is taxable.
- Dividend interest taxable in the year earned.
paid upon contribution or distribution. Never both.
Dividends
- Are not considered taxable income.
- Interest of that amount is subjected to taxation.
Cash Value Accumulations
- Cash value grow tax deferred.
- Surrender or endowment.
- Costs basis - premium payments excess is taxable only.
- Death benefits are paid tax free.
Policy Loans
- Are not income taxable.
- Interest charged on outstanding policy loans.
- Repaid by the owner, cash value on policy surrender or deducted from the death benefit.
Surrenders
- If the insured take more of the Premiuns paid that amount will be taxable income.
Accelerated Benefits
- Tax free for insureds for chronically and terminally ill .
- Amounts exceeding the dollar limit are taxable.
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Settlement Options
- Principal is tax free and Interest is taxable.
GROUP LIFE
- Premiums paid by the employers with the employees as beneficiaries are tax deductible as business expense.
- Key-employee, stock redemption or entity purchase agreement and spli-dollar are cases that premiums paid are not tax deductible.
Modified Endowment Contracts
- Fails the7 pay test.
- Overfunded Life Insurance Policy.
- Once a MEC, always a MEC.
- Distributions are taxed on LIFO (last in, first out) - interest first rule. Annuities are LIFO.
- Distributions before 59,5 aresubjected to10% penalty.
Key person
- Premiums are not tax deductible but benefit is tax free.
Social Security Benefits
- Fully Insured Status: 40 Quarters of Coverage = 10 years of work = max 4 credits per year = fully insured and entitle to receive retirement, premium-free Medicare part A and survivor benefits.
- Currently Insured Status - 6 credits during the 13th quarter period ending with the quarter the insured dies, becomes disable or entitle to old age insurance benefits.
Survivor Benefits
- Limited Benefits to spouse at age 60.
- Dependent parents , age 62 or older.
Unmarried children 19 or younger in full time elementary or high school.
- Divorced spouse carrying a 16 old child or younger or disable .
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