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Session 7 Types of Life Insurance Modified Endowment Contract Beneficiary Designations

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Planning Process & Insurance. Session 7 Types of Life Insurance Modified Endowment Contract Beneficiary Designations. Session Details. Life Insurance Diagram: Term. Term life insurance is for

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Session 7 Types of Life Insurance Modified Endowment Contract Beneficiary Designations

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  1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Planning Process & Insurance Session 7 Types of Life Insurance Modified Endowment Contract Beneficiary Designations

  2. Session Details

  3. Life Insurance Diagram: Term • Term life insurance is for • temporary needs: • Mortgage costs • Dependent education • Consumer debts • Large coverage; small premium • Cost rises with age

  4. Life Insurance Diagram: Whole Life • Whole life insurance is for • permanent needs: • Lifetime needs • Last expenses • Estate liquidity • Business needs • Premiums same for life $$

  5. Life Insurance Diagram: UL/VUL • Universal life: • Unbundles premiums • Increased contributions • Variable life: • Policyowner selects investments Both have separate accounts. $$

  6. Selected Characteristics of Life Insurance

  7. Selected Characteristics of Life Insurance continued

  8. Selected Characteristics of Life Insurance continued

  9. Selected Characteristics of Life Insurance continued

  10. Question - Universal Life • Which one of the following is not an advantage of universal life (UL) insurance? • It has flexible premium payments. • It lends itself to a compulsory savings program. • It has an adjustable death benefit. • It has an unbundled structure.

  11. Modified Endowment Contract (MEC) A life insurance policy becomes a MEC if: • it fails seven-pay test • loans or withdrawals taxed as ordinary income (LIFO) • 10% penalty on withdrawals taken before age 59½ • death benefits retain normal tax status

  12. Seven-Pay Test • Seven-pay test compares amount deposited into a policy in first seven years with seven annual net level premiums. • If a policy fails the seven-pay test it is classified as a modified endowment contract (MEC) • Loans or withdrawals are taxable on a last-in, first-out (LIFO) basis. • Death benefits maintain normal life insurance tax status (generally tax-free to beneficiaries).

  13. Withdrawals from a MEC • MEC withdrawals prior to 59½ are subject to 10% penalty on taxable gains. • Once a policy becomes a MEC, it remains a MEC forever. • In the case of a 1035 exchange, MEC is still a MEC. • Policies that avoids MEC status in their first seven years, may still be subject to MEC rules in the event of material change • such as a change of age or • increase of coverage amount. • A new seven-year premium limit is instituted. • All single-premium life policies are MECs.

  14. Question - Modified Endowment Contracts • Modified endowment contracts can only be created in which of the following types of life insurance policies? • Term Life Policies • Whole Life Policies • Universal Life Policies • Variable Universal Life Policies • I and II only. • III and IV only. • II, III, and IV only. • I, II, III, and IV.

  15. Beneficiary Designations/Provisions

  16. Per Capita/Per Stirpes Beneficiary Arrangements Per Stirpes (by branch) Grandchildren receive only the share of the deceased child Per Capita (by head – depends on company definition) Children of deceased child (grandchildren) share equally with surviving children Per Capita at Each Generation – Primary beneficiaries keep their status, receive full share; remainder split evenly Per Capita (2) – Secondary beneficiaries are not considered until all of the primary beneficiaries are deceased. P P C C C C C C GC GC GC GC GC GC GC GC GC GC Per Capita Per Stirpes

  17. Question - Beneficiary Designations • All of the following are true regarding life insurance beneficiaries, except that • primary beneficiaries are paid before secondary beneficiaries. • there is no limit to the number of beneficiaries in any one class. • spouses are the most commonly named primary beneficiaries. • most beneficiary designations are irrevocable.

  18. Question - Second to Die Policy • Which one of the following is not true regarding second-to-die policies? • The policy pays when the last person dies. • Premiums are generally lower than the cost for two separate policies. • They are generally not a very useful tool for estate planning purposes. • They may be generally advantageous when one of the two insureds is older and highly rated.

  19. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Planning Process & Insurance Session 7End of Slides

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