THE TOOLS AND TECHNIQUES OF LIFE
INSURANCE PLANNING
4th Edition
Educational Objectives
CHAPTER 1 INTRODUCTION TO LIFE INSURANCE
Upon completion of this chapter, the student should be able to:
1. identify generally personal and business needs life insurance can satisfy
2. discuss favorable features common to all types of life insurance policies
3. describe in general terms standard provisions found in a typical life insurance contract
4. summarize in general terms basic tax rules applicable to life insurance
5. explain what is meant by the “savings” element and the “pure death protection” element of a life insurance policy
6. enumerate the factors that enter into an insurance company’s calculation of premiums
7. distinguish generally between “participating” and “nonparticipating” policies
CHAPTER 2 HOW TO ESTIMATE THE INSURANCE NEED
Upon completion of this chapter the student should be able to:
1. explain rule of thumb methods of estimating life insurance needs of a family and the shortcomings of these rules
2. explain the steps involved in estimating family insurance needs using the income replacement method
3. explain the needs analysis method of estimating a family’s insurance needs
4. discuss the need for key employee insurance and methods for estimating the amount of insurance needed
CHAPTER 3 HOW TO DETERMINE THE RIGHT COMPANY
Upon completion of this chapter, the student should be able to:
1. identify the major ratings services and the meaning of the ratings assigned by these services
2. discuss the kinds of financial information, in addition to ratings, that are useful and important in evaluating an insurance company’s financial stability
3. explain how to identify indications of a company’s service and fairness to customers
CHAPTER 4 HOW TO DETERMINE THE RIGHT POLICY
Upon completion of this chapter, the student should be able to:
1. discuss matching types of insurance product to the client’s preferences and needs
2. describe the different methods used to compare the cost of policies
3. explain the shortcomings and advantages of each method of comparing policies
4. make computations required by many of the methods for comparing policies explained in the chapter
CHAPTER 5 LEGAL ASPECTS OF LIFE INSURANCE
Upon completion of this chapter, the student should be able to:
1. explain what an “insurable interest’’ is and why it is important
2. describe provisions that are generally required by state law to be in life insurance contracts
3. discuss limitations on and the effect of beneficiary designations
4. describe available options for settlement of death proceeds
5. explain the nature of policy loans and automatic premium loan provisions
6. describe the significance of assignment of policies
7. discuss how “waiver’’ and “estoppel’’ can affect an insurer’s enforcement of rights under the contract
CHAPTER 6 SPECIAL POLICY PROVISIONS AND RIDERS
Upon completion of this chapter the student should be able to
1. recognize and explain different riders offered by insurance companies
2. explain the advantages and disadvantages of certain riders and provisions
CHAPTER 7 ADJUSTABLE LIFE
Upon completion of this chapter, the student should be able to:
1. compare adjustable life to universal life by explaining in what respects it is similar to universal life and how it differs from universal life
2. compare adjustable life to ordinary level-premium whole life insurance by explaining the similarities and differences
3. identify the general tax rules applicable to adjustable life insurance policies
4. discuss uses for which adjustable life is particularly suited and why
CHAPTER 8 ANNUITIES
Upon completion of this chapter, the student should be able to:
1. define an annuity contract and describe how annuity contracts are generally classified
2. discuss the tax treatment of commercial annuity contracts (both fixed and variable)
3. identify the differences between fixed and variable annuities
4. explain when the use of an annuity is indicated
CHAPTER 9 CURRENT-ASSUMPTION WHOLE LIFE INSURANCE
Upon completion of this chapter the student should be able to:
1. explain which characteristics of current-assumption whole life insurance are similar to universal life and which are similar to traditional level-premium whole life
2. explain how the amount in the accumulation account is determined
3. indicate what information in addition to the ledger statement is needed in order to evaluate a current-assumption whole life policy
4. explain “redetermination” and the “redetermination period”
CHAPTER 10 GROUP LIFE INSURANCE
Upon completion of this chapter the student should be able to:
1. discuss the advantages and disadvantages of group life insurance
2. explain the tax rules applicable to group term life insurance benefits and be able to compute the taxable income, if any, received by an employee as a result of his coverage under his employer’s group term life insurance plan
3. describe group universal life and some of the advantages of its use as an employee benefit
CHAPTER 11 JOINT LIFE (FIRST-TO-DIE) INSURANCE
Upon completion of this chapter the student should be able to:
1. describe the features of joint life (first-to-die) insurance
2. explain when use of this form of insurance is indicated
3. recognize the tax implications of using joint life for personal and business insurance needs
4. discuss policy features and riders that may be desirable options in joint life
CHAPTER 12 LIMITED-PAY WHOLE LIFE INSURANCE
Upon completion of this chapter the student should be able to:
1. explain the principal characteristics of limited-pay whole life insurance and how they compare to ordinary whole life and single premium whole life
2. list uses for which this product is particularly suited
3. explain the most important tax implications of limited-pay whole life insurance
4. evaluate dividend projections by using the ledger statement of a participating whole life policy and additional information from the insurer
5. explain the significance of a projected rate of return on a participating policy
CHAPTER 13 ORDINARY LEVEL-PREMIUM WHOLE LIFE INSURANCE
Upon completion of this chapter the student should be able to:
1. describe the characteristics that define ordinary level-premium whole life insurance
2. discuss appropriate uses for level-premium whole life insurance
3. list several advantages of level-premium whole life insurance
4. explain general tax rules applicable to level-premium whole life insurance
5. describe how the “savings element” of level-premium whole life insurance works and how it is available to the policyowner
6. list criteria for evaluating the dividends a company pays on participating policies
7. explain dividend options and their uses and the “vanishing premium” option
8. explain policy loan provisions and interest options
CHAPTER 14 SINGLE PREMIUM LIFE INSURANCE
Upon completion of this chapter the student should be able to:
1. list the three types of single premium life insurance
2. describe the characteristics of each type of single premium life insurance, in what respects they are similar and how they differ
3. outline the tax rules that apply particularly to single premium life insurance
4. identify at least three contract provisions a buyer of single premium life insurance should pay particular attention to
5. explain how loan provisions in single premium policies can affect cash value growth
6. explain different methods of determining interest credited to single premium current-assumption policies
7. indicate when use of single premium life insurance is indicated
8. identify factors important in comparing single premium life insurance policies
CHAPTER 15 SURVIVORSHIP LIFE
Upon completion of this chapter, the student should be able to:
1. explain what survivorship life is and for what uses it is particularly appropriate
2. discuss how survivorship life insurance is taxed
3. explain what to look for in selecting a survivorship life insurance plan
CHAPTER 16 TERM INSURANCE
Upon completion of this chapter the student should be able to:
1. identify different types of term insurance and explain how they are used
2. enumerate the factors to consider in comparing different term policies
3. explain a level term ledger statement
4. discuss information needed in addition to the ledger statement to fully evaluate and understand a policy
CHAPTER 17 UNIVERSAL LIFE
Upon completion of this chapter the student should be able to:
1. describe three principal features of universal life insurance
2. discuss the advantages of universal life
3. discuss different methods used to credit interest to cash values
4. explain information found on a universal life ledger statement
5. request additional information from the insurance company in order to evaluate a particular policy
6. explain tax rules applicable to universal life
CHAPTER 18 VARIABLE AND VARIABLE LIFE AND VARIABLE UNIVERSAL LIFE
Upon completion of this chapter, the student should be able to:
1. explain the principal features of variable life and in what ways it differs from traditional life insurance
2. explain how variable universal life differs from variable life
3. discuss advantages and disadvantages of variable life and variable universal life
4. identify the particular licensing requirement an agent must satisfy in order to sell variable and variable universal life products
5. explain the fees, loadings and expense charges associated with variable products
6. describe generally the tax rules applicable to variable life and variable universal life
CHAPTER 19 MODIFIED ENDOWMENT CONTRACTS
Upon completion of this chapter, the student should be able to:
1. identify the test for determining whether a policy is a Modified Endowment Contract (MEC)
2. explain what actions could cause a policy to become a MEC
3. explain the tax rules applicable to a MEC that distinguish a MEC from other life insurance policies
CHAPTER 20 SECTION 1035 EXCHANGES
Upon completion of this chapter, the student should be able to:
1. indicate when an IRC Section 1035 exchange of policies could appropriately be considered
2. describe the requirements of an IRC Section 1035 exchange
3. explain the tax effects of an IRC Section 1035 exchange of policies, including an exchange with “boot’’
4. discuss problems to be avoided in connection with an exchange (a) by a pension plan, (b) by a corporation, of a policy issued before June 21, 1986, (c) by an individual, of a policy purchased before June 21, 1988
CHAPTER 21 TAXATION OF BENEFITS
Upon completion of this chapter, the student should be able to
1. explain the income tax rules applicable to life insurance during the insured’s lifetime to cash value increases, dividends, policy withdrawals, policy surrender, policy loans, and premium payments
2. discuss the income tax rules applicable to death benefits received under various settlement options
CHAPTER 22 TRANSFER FOR VALUE PROBLEMS IN BUY-SELL PLANNING
Upon completion of this chapter, the student should be able to:
1. define and explain the transfer for value rule and its significance
2. list the exceptions to the transfer for value rule
3. analyze common fact situations in order to determine the possible applicability of the transfer for value rule
CHAPTER 23 ESTATE TAXATION OF LIFE INSURANCE
Upon completion of this chapter the student should be able to:
1. define life insurance for estate tax purposes
2. explain generally when the value of a policy is includable in a decedent’s estate
3. explain generally what are the incidents of ownership that can cause life insurance proceeds to be included in a decedent’s estate
4. explain generally when proceeds of insurance owned by a third party are includable in an insured’s estate
5. explain when insurance proceeds are includable because payable for the benefit of the insured’s estate
6. discuss the estate tax marital deduction
7. explain the estate tax charitable deduction
8. discuss the apportionment of estate taxes to beneficiaries of life insurance proceeds
CHAPTER 24 GIFT TAXATION OF LIFE INSURANCE
Upon completion of this chapter, the student should be able to:
1. explain several advantages gifts of life insurance have over gifts of income producing property
2. explain the difference between a gift of a present interest and a gift of a future interest and the significance of the difference
3. explain when a gift becomes complete and why that is important
4. discuss the problems associated with three party situations where one party owns the life insurance, a second party is the insured, and the proceeds are payable to a third party
5. explain the general rules for valuing a life insurance policy for gift tax purposes
CHAPTER 25 LIFE INSURANCE AND THE GENERATION-SKIPPING TRANSFER TAX
Upon completion of this chapter, the student should be able to:
1. explain in general terms what a generation skipping transfer is
2. explain when the tax is imposed at what rate and on what value
CHAPTER 26 ACCELERATED DEATH BENEFITS AND VIATICAL SETTLEMENTS
Upon completion of this chapter, the student should be able to:
1. explain the purpose of accelerated death benefits and viatical settlements
2. discuss the advantages and disadvantages of entering into a viatical settlement or taking accelerated death benefits
3. identify the tax issues regarding accelerated death benefits and viatical settlements
4. discuss alternatives to accelerated death benefits and viatical settlements
CHAPTER 27 BUY-SELL AGREEMENTS
Upon completion of this chapter, the student should be able to:
1. explain the purposes of a buy-sell agreement
2. describe four kinds of buy-sell arrangements
3. discuss the tax issues associated with buy-sell agreements
4. describe the requirements for an effective buy-sell arrangement
CHAPTER 28 CHARITABLE USES OF LIFE INSURANCE
Upon completion of this chapter the student should be able to:
1. identify different ways in which life insurance can be used in charitable giving
2. explain what gifts qualify for an income tax deduction and how the amount of the deduction is determined and limited
3. explain the gift and estate tax consequences of a charitable gift
4. discuss the advantages and disadvantages of charitable gifts of life insurance
5. explain the role of life insurance in replacing for heirs wealth removed from an estate through charitable gifts
CHAPTER 29 DEATH BENEFIT ONLY (DBO) PLAN
Upon completion of this chapter, the student should be able to:
1. describe the principal purposes and the characteristics of a death benefit only plan
2. list several times when use of a death benefit only plan is appropriate
3. explain the features of a properly designed death benefit only plan
4. discuss the tax aspects of a properly designed death benefit only plan
5. discuss how life insurance is used in financing a death benefit only plan
CHAPTER 30 IRREVOCABLE LIFE INSURANCE TRUSTS
Upon completion of this chapter, the student should be able to:
1. discuss the advantages and disadvantages of ownership of life insurance by an irrevocable life insurance trust
2. identify federal gift tax traps to avoid in setting up an irrevocable life insurance trust
3. explain what a Crummey trust is and some of the problems associated with its use
4. identify federal estate tax traps to avoid in setting up an irrevocable life insurance trust
5. describe the income tax consequences of an irrevocable life insurance trust
CHAPTER 31 KEY EMPLOYEE LIFE INSURANCE
Upon completion of this chapter, the student should be able to:
1. explain what key employee life insurance is and when its use is indicated
2. explain the tax issues and implications of key employee life insurance
3. discuss the advantages and disadvantages of key employee insurance
CHAPTER 32 LIFE INSURANCE IN QUALIFIED PLANS
Upon completion of this chapter the student should be able to:
1. enumerate several reasons for using life insurance in a qualified plan
2. explain disadvantages of having life insurance as a qualified plan asset
3. describe the limits on the amount of death benefit a qualified plan may provide
4. explain the tax aspects of life insurance in a plan to the employer, the participant, and the beneficiary of the death benefit
CHAPTER 33 NONQUALIFIED DEFERRED COMPENSATION
Upon completion of this chapter, the student should be able to:
1. discuss when use of nonqualified deferred compensation is indicated
2. identify different kinds of nonqualified deferred compensation
3. explain the role of life insurance in nonqualified deferred compensation plans
4. identify tax issues related to nonqualified deferred compensation plans
5. explain the advantages and disadvantages of nonqualified deferred compensation plans
6. explain how a nonqualified deferred compensation plan is established
CHAPTER 34 PENSION MAXIMIZATION
Upon completion of this chapter, the student should be able to:
1. explain what is meant by “pension maximization”
2. explain when pension maximization is indicated
3. explain the advantages and disadvantages of pension maximization
4. identify tax issues regarding pension maximization
CHAPTER 35 REVOCABLE LIFE INSURANCE TRUSTS
Upon completion of this chapter the student should be able to:
1. define a revocable life insurance trust
2. explain why an individual might want a revocable life insurance trust
3. discuss advantages and disadvantages of the use of a revocable life insurance trust
4. identify income, estate, and gift tax implications of revocable life insurance trusts
CHAPTER 36 SECTION 162 PLANS
Upon completion of this chapter the student should be able to:
1. describe the features of an IRC Section 162 plan
2. explain the tax treatment of an IRC Section 162 plan
3. identify appropriate uses for an IRC Section 162 plan
4. discuss the advantages and disadvantages of an IRC Section 162 plan
CHAPTER 37 SPLIT DOLLAR LIFE INSURANCE
Upon completion of this chapter, the student should be able to:
1. explain what a classic split dollar insurance plan is
2. describe variations on the classic split dollar plan
3. illustrate how split dollar insurance can be used for different purposes
4. discuss how benefits under a classic split dollar plan are taxed, and how variations on it are likely to be taxed to the parties involved, and name some potential tax traps
5. discuss the different methods of policy ownership under split dollar plans (e.g. collateral assignment, etc.)