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PREFACE. WCS Publishing

PREFACE Over the years, life insurance contracts have evolved from simple documents that provided a death benefit into the numerous and various forms of life insurance in response to changing economic
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PREFACE Over the years, life insurance contracts have evolved from simple documents that provided a death benefit into the numerous and various forms of life insurance in response to changing economic situation. One of the main objectives in becoming an experienced and successful life insurance agent is knowing in detail all the types of life insurance products, including the benefits, options, riders and cash value aspects of a wide range of life insurance products available on the market today. This book is not intended to be a formal primer on financial, tax or legal aspects. However, in addition to a comprehensive understanding of the major issues of financial, legal, tax and insurance aspects of life insurance products, life insurance agents must have the ability to explain all the new advantages with the highest degree of professionalism, integrity and ethics. This course is designed to help life insurance agents to learn more about a wide range of life insurance products that serve as a tool in pure insurance protection and financial security in long-term planning, both for personal and business purposes. The course includes material on Term and Permanent life insurance products, and covers life insurance policies with flexible options, like Universal Life, Variable Life, Variable Universal Life and Adjustable Life insurance. The material in the book also includes both general aspects of life insurance policies and special features related to life insurance products and financial protection. The general aspects cover applications, receipts, underwriting and claims. The course also provides material on settlement options, death benefits, exclusions and premium provisions. Material is included on special options available in life insurance policies, focusing on financial security of individuals and their families. Developing a proper financial plan for retirement purposes may require the assistance of a certified financial planner, an accountant, a tax attorney and a lawyer in addition to the insurance agent. However, life insurance agents must understand the financial aspects of life insurance products as tools for retirement planning. That is why the course also provides extensive material on annuities, variable annuities and equity-indexed annuities; and retirement planning, including various pension plans, like IRAs, Roth IRAs, 401(k) and Keogh plans. To promote better sales of life insurance products, the book also gives information on agents responsibilities and provides assistance in dealing with various aspects of life insurance products. The book also includes extensive material on estate planning, the structuring of the estate planning process, and various types of trusts, wills and probate. INTRODUCTION... 1 CHAPTER 1 - GENERAL TYPES OF LIFE INSURANCE... 3 Settlement Options... 5 Other Provisions In Life Insurance Contracts... 5 Death Benefit... 6 Life span, Mortality & Rating... 7 Mortality Charges... 7 Other Premium Factors... 8 Non-Forfeiture Provisions... 8 Term Insurance Contracts Permanent Contracts Whole Life Contracts CHAPTER 2 - GENERAL ASPECTS OF LIFE INSURANCE Overview Legal Aspects Of Life Insurance Contract Intestate Succession and Wills Applications Policy Delivery Underwriting Claims CHAPTER 3 - COMPARISON OF LIFE INSURANCE POLICIES, PROVISIONS AND SETTLEMENT MODES General Aspects of Term Life Insurance Types of Term Life Insurance Policies Level Term Life Insurance Re-entry Premiums Decreasing Term Increasing Term Term Insurance Application General Characteristics Typical For Whole Life Insurance Insurance Protection Premiums and Methods of Payment General Characteristics of Whole Life Insurance Cash Value Whole Life & Taxes Term vs. Whole Life Insurance Advantages and Disadvantages of Term Life Insurance Disadvantages of Term Life Insurance Advantages of Whole Life Insurance Disadvantages of Whole Life Insurance Explanation of Terms Universal Life Problems with Underfeeding a Universal Life Contract Retaining Tax Benefits of Universal Life Insurance Variable Life Variable Universal Life Adjustable Life Insurance Settlement Modes CHAPTER 4 - ANNUITIES... 71 Overview Definitions Purchase Options Annuity Pay-Out Options Deferred Annuities Variable Annuities Definitions Advantages Disadvantages Long-Term Care Riders Advantages Disadvantages Living Income Benefits Advantages Disadvantages Extra Credit Sign-Up Bonuses/Bonus Credits Advantages Disadvantages Waivers Death Benefit Waiver Nursing Home Waiver Terminal Illness Waiver Disability Waiver Variable Annuity Charges Options, Other than Cashing Out Variable Annuities and Investments Family of Funds Investment Options for Variable Annuities Liquidity Options Requirements and Responsibilities of Agents Regarding Sales of Variable Annuities Customer Information Liquidity and Earnings Accrual Investment in Tax Qualified Accounts Protection by State Guaranty Associations Equity-Indexed Annuities Some of the Contract Features Indexing Methods Conclusion The Tax-Deferred Advantage CHAPTER 5 - LIFE INSURANCE & RETIREMENT PLANNING Overview Addendum Identifying Retirement Goals and Insurance Needs Projected Annual Retirement Expenses Computation of Retirement Income Retirement Distribution Options Taxation of Retirement Distributions The Major Retirement Threats and Retirement Insurance Needs Major Health Problems Long-term Care Insurance Disability Insurance Definitions Social Security and Disability Individual Disability Insurance Disability Income Insurance Group Disability Benefits Options and Features of Disability Policies Extent of Disability Residual Benefits Presumptive Disability Size of Benefits Waiting (elimination) Period Length of Coverage Inflation Business Protection Taxes and Disability Retirement Death of a Spouse Possible Income Sources Social Security Social Security and Inflation Social Security Changes Retirement Income and Social Security Pension Plans and Pension Income Role in Secure Retirement Eligibility Individual Retirement Accounts (IRAs) Insurance Products for Retirement Personal Savings Laws and Regulations as Related to Retirement and Pensions Employer Based Pension Plans Factors Affecting the Design of Employee Benefit Plans Death Benefits Waiver and Spousal Consent Rules for Qualified Pre-retirement Survivor and Qualified Joint and Survivor Annuities Minimum Distribution Rules Money Purchase Pension Plans Distributions and In-service Withdrawals Profit Sharing Plans Withdrawals Employee Stock Ownership Plans (ESOPs) Savings Plans Withdrawals Distributions Cash or Deferral Arrangements (CODAs) Keogh Plan Simplified Employee Pension, SEP SIMPLE Plans Contributions Distributions Pension Fund Money Protection Individual Retirement Accounts IRA Definitions Types of IRAs IRA Deduction Limitations Guidelines for Roth IRA Accounts Advantages of Roth IRA Roth IRA Contributions Income Limitations Other Differences of Roth IRA Contributions from Regular IRA The Roth IRA Withdrawals Qualified Distributions Accessing IRA Funds Before Retirement & Early Withdrawals Penalties on Conversion from a Regular IRA to a Roth IRA Income Acceleration IRS Ordering Rules Impact of Taxes and Tax Brackets The Roth IRA Beneficiaries Highlights of an IRA Highlights of a Roth IRA Cash or Deferred Plans under Section 401(k) Definitions Eligibility Objectives Contributions Distributions Rollover Administration Fees and Expenses Common Investment Options and Related Fees Variable Annuities and 401(k) Plans (k) Plan Investments and Asset Allocation CHAPTER 6 - CASH VALUE ACCUMULATION FEATURE OF LIFE INSURANCE Overview Investment Risks Different Classes of Assets Definitions Aggressive Growth Funds Growth Funds Mutual Funds Options to Earn Money in the Fund Kinds of Mutual Funds Aggressive Growth Funds Funds Comparison Fees and Sales Loads Advantages of Mutual Funds Disadvantages of Mutual Funds Stocks Bonds Market Indicators Asset Allocation Dollar Cost Averaging CHAPTER 7 - TAX TREATMENT OF DISTRIBUTIONS Types of Pensions and Annuities Rollovers and Simplified Method Direct Rollover Option Receiving Benefits from More than One Plan Qualified domestic Relations Order (QDRO) Variable Annuities Fully Taxable Payments Deductible Voluntary Employee Contributions Partly Taxable Payments Non-periodic Distributions Tax-free Exchange Taxation of Non-periodic Payments Distribution Before Annuity Starting Date From a Qualified Plan Distribution Before Annuity Starting Date From a Non-qualified Plan Loans Treated as Distributions Exception for Qualified Plans, TSA plans, and Government Plan Loans Lump-Sum Distributions Alternate Payee under a Qualified Domestic Relations Order Taxable and Tax-free Parts of the Distribution CHAPTER 8 - ESTATE PLANNING, TRUSTS, WILLS, AND TAX ISSUES Overview Estate Planning Calculation of Estate and Gift Taxes Structuring the Estate Planning Process Property Ownership Tenancy by the Entirety Tenancy in Common Community Property Beneficiaries and Fiduciaries Irrevocable Trusts Insurance and Irrevocable Insurance Trusts Split-dollar Arrangements Changes Unified Credit Increased Estate Tax Return Filing Requirement Increased Tax and Unified Credit Gift Tax Gift Splitting Application of the Unified Credit to Gift Tax Estate Tax and Unified Credit Gross Estate and Unified Credit Taxable Estate Maximum Benefits Bypass Trust Generation-Skipping Trusts Grantor Trusts Charitable Remainder Trusts CRT Combined with Other Strategies Wills and Intestacy Laws Rights of Other Children Advancements Debts to Decedent Other Provisions Elective Share of Surviving Spouse The Will Wills and Probate Business Entities and Estate Planning Buy-Sell Agreements Business Succession Planning Procedures Retained-Interest Gifts Qualified Personal Residence Trusts (QPRTs) Assets at Risk and Basic Asset-Protection Tools Business and Liability Insurance, Umbrella Policies Risk Management for Small Business General Aspects Insurance Coverage for Different Businesses Business property Actual Cash Value Replacement Coverage Agreed Amount Alternative Risk Funding Insurance Perils Insured Against Liability Coverage Home Business Insurance Homeowners Insurance Endorsements Business Owners Policy (BOP) Extended Coverage Umbrella Policies Workers Compensation Insurance GLOSSARY INTRODUCTION 1 Life insurance is a financial protection against losses that may result due to the death of the insured. It has been designed to protect the loved ones so they can keep up their standard of living and to meet the needs and goals of all financial family burdens. Protection against the risk of a premature death is a common feature of all life insurance contracts and is the primary purpose for buying life insurance. Death benefit is the unique feature that is provided only by life insurance, as by law only life insurance contracts can pay death claims. Life insurance is a unique asset, which is a valuable addition to an insured s overall estate due to its potentially high yield and tax-favored benefits. Over the decades life insurance has evolved from a relatively simple concept based on the method by which groups of individuals equalize the burden of financial loss from death by distributing funds to the beneficiaries of those who die into a complex of concepts that provide not only a death benefit, but also a great number of other benefits that policyholders can enjoy while they are alive. Numerous forms of life insurance have appeared on the market to satisfy the demands of consumer preferences and in response to changing economic situation. With a variety of new products of life insurance on the market, it can be said that life insurance can provide a security blanket so that if something happens to a family s breadwinner or, increasingly, breadwinners the surviving spouse and their children are protected from financial hardships. Cash reserve that has become an integral part of many life insurance products is available for a variety of purposes and provides policyholders with an automatic saving plan, which may help with a policy loan or accumulation of funds for retirement. Life insurance has achieved its greatest acceptance in Canada, the United States, Belgium, Australia, and Japan, countries in which the face value of life insurance policies in force generally exceeds the national income. In the United States in 1990 nearly $9.4 trillion of life insurance was in force. The assets of the more than 2,200 U.S. life insurance companies totaled nearly $1.4 trillion, making life insurance one of the largest savings institutions in the United States. Much the same is true of other wealthy countries, in which life insurance has become a major channel of saving and investment, with important consequences for the national economy. There is a debate among financial planners as to whether life insurance should be viewed as a channel of savings and not an investment, as there is an opinion that Americans waste billions on policies they terminate early. The credo of financial writers used to be Buy term, and invest the rest. However, there appeared another look at life insurance as an investment. The tax sheltering aspects of Whole Life, combined with its inherent stability of principle, made life pretty much the only show in town heading into the 1970s said Mandell Winter Jr., MBA, CLU, ChFC, and an academic associate with the College for Financial Planning, a division of the National Endowment for Financial Education (NEFE). Numerous changes have been introduced in life insurance products since then, and now there appeared a unique chance to use life insurance as a great financial vehicle in overall financial planning. Due to a unique complex of capital accumulation features and tax advantages, life insurance can help not only in death but in life too. Contractual guarantees provided by a life insurance contract are based on life contingencies and is the unique feature of life insurance. Though the savings feature of cash value life insurance can be effected through many other financial vehicles, such as mutual funds, CDs, etc., only life insurance provides a guaranteed death benefit. State insurance regulation prevents any other contracts from making payments based on living or dying. Life insurance is a unique asset and can be used for any number of reasons, as creating an estate, paying estate taxes and other estate settlement costs, funding a business transfer, paying off the house mortgage, funding college for children, creating a retirement fund and providing guaranteed loans. This course will introduce you to various types of life insurance contracts, highlighting main advantages and disadvantages and application of the contract specific features for different purposes. Life insurance riders, policy options and provisions, aspects of long-term financial planning using life insurance as a vehicle, retirement planning and annuities, trusts and charitable giving through life insurance, life insurance for business owners, and many other aspects of life insurance will be discussed in the book. 2 CHAPTER 1 - GENERAL TYPES OF LIFE INSURANCE 3 Protection against the risk of a premature death is a common feature of all life insurance contracts and is the primary purpose for buying life insurance. It is also one of the primary uses of life insurance proceeds. The options of actual insurance products extend far beyond the original concept of life insurance and the types of insurance benefits and non-insurance features are more than the only feature of the death benefit that was primarily the only benefit of first life insurance contracts. Most of us fear our own death and fear for the financial security of those who we love and leave behind. Contemplation of death is difficult and life insurance is one of the tools we most often use to provide financial security for our loved ones. It is paid when it is most needed in a lump sum or an annuity. Moreover, it usually is tax-free, and, if appropriately structured, can escape any estate taxes. Life insurance, originally conceived to protect a man's family when his death left them without income, has developed into a variety of policy plans. Actually, in the simplest way life insurance is a legal contract between an individual or a group of individuals and an insurance company under which, in exchange for premium payments, the insurance company agrees to pay a beneficiary a death benefit upon the insured's death. Death benefit is the one element that unites all types of life insurance contracts. Since life is being insured, it is the loss of life that triggers payment of the benefit. In most cases it is the fear of premature death that motivates most purchasers to get life insurance protection. Life insurance is a legal contract between an individual, who is the insured and pays premiums, and the insurance company or carrier that provides insurance protection if the insured dies while the policy is in force. If death occurs while the policy is in force, the insurer pays a sum of money specified in the contract/policy free of income tax in the form of cash benefits to the persons named as beneficiaries in the policy. Today life insurance products extend far beyond the original concept of a death benefit. Life insurance is an integral complex of legal, tax and economic elements that protects the family of the insured person. The insured person usually produces the major part of income for a family. When the insured person dies, the cash accumulation feature provides a tax shelter that is a financial vehicle to solve many personal and business problems while the insured is still alive. Though there are numerous types of life insurance policies with various features focused on death benefits, investments, cash value accumulation, borrowing options, etc., generally speaking there are two basic types of life insurance: term and permanent. If term insurance is purely life insurance, permanent policies include a savings element. Out of numerous types of life insurance policies, we can distinguish the following major types of life insurance contracts: Term Life Whole Life Universal Life Variable Life Universal Variable Life There are also innumerable combinations of these basic types, which are sold today. If Term Life is the simplest and least expensive type of policy, it is also pure insurance with no cash value account. A Term Life policy has only one function, namely to pay a specific lump sum to whoever is designated as a beneficiary, upon a specific event, the death of the insured. The death benefit and the policy limit are the same. Other types of life insurance provide both a death benefit and a cash value account. The premiums for these types of policies are typically larger than Term Life premiums, as they fund the savings account in addition to buying insurance. These types of policies are often referred to as cash value policies. Before proceeding to types of life insurance in detail, it is very important to understand the basics of the main types of life insurance. Let us review the basic types and define some of the terms used in the book. The owner of a policy is the applicant, it is the person who applies for the insurance, agrees to pay premiums and, as a policyholder, enjoys ownership rights. It can be said that life insurance contracts are owned as a piece of property. The owner is entitled to exercise control over the contract, and can exercise his or her prerogatives with regard to the policy without agreement or consent of beneficiaries or anyone else. Some of these rights are to elect or change the beneficiary, to assign ownership to another person, to select settlement options. If a person owns a cash value policy, he or she is also entitled to the following: To borrow against the cash proceeds To cash in the policy To determine how dividends will be dealt with when they are declared by the company The insured is an individual
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