Chapter Recap

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This chapter touched on group life insurance, retirement plans, Social Security benefits, and the taxation of life insurance and annuities. Let's recap some of the important concepts.

Group Life Insurance

Topic	Key Points
General Concepts	Third-party contract — the policyowner and the insured are not the same person. Employer is the policyowner (receives a master contract); employees are the insured (receive certificates of insurance). No evidence of insurability. Conversion — no evidence of insurability, within a specified number of days (usually 30 or 31 days of termination). Noncontributory — employer pays 100% of the premium; requires 100% employee participation. Contributory — employer and employees share the cost of premium; requires 75% participation.
Eligible Groups	Single employers. Labor unions. Associations. Credit unions. Debtor groups.
Insured's Dependents	Coverage cannot exceed 100% of insurance on the insured employee. Dependents include a spouse, domestic partner, and children up to age 26 (and beyond the limiting age with proof of dependency).
Blanket Life	Covers groups exposed to the same hazards (for example, schools, airlines, entertainment venues). Issued for a term of no more than 1 year.

Qualified Plans

Topic	Key Points
General Characteristics	Approved by the IRS. Do not discriminate in favor of prohibited groups. Have tax advantages. Vesting requirements. Permanent.

Social Security Benefits

Topic	Key Points
Types of Benefits	Retirement. Disability. Survivor.
Insured Status	Fully insured (40 quarters of coverage) — qualifies for Social Security retirement, Medicare, and survivor benefits. Currently insured (6 quarters of coverage) — qualifies for some benefits.

Taxation

Topic	Key Points
Life Insurance	Premiums — not tax deductible. Cash value — taxable only if the amount exceeds premiums (taxed on the gain). Policy loans — not taxable; interest not tax deductible. Dividends — not taxable, as a return of premium; any interest is taxable. Accelerated benefits — tax free. Death benefit — not taxable if lump sum; any interest is taxable. Surrenders — taxable if the cash surrender value exceeds the amount of premium paid.
Annuities	Accumulation — tax deferred in individual annuities; not tax deferred in corporate-owned annuities. Withdrawal of principal and interest — Last In, First Out basis. Lump-sum cash surrenders — taxable. Premature distribution — tax and 10% penalty. Distributions at death — interest taxable.

Topic

Key Points

Life Insurance

Premiums — not tax deductible. Cash value — taxable only if the amount exceeds premiums (taxed on the gain). Policy loans — not taxable; interest not tax deductible. Dividends — not taxable, as a return of premium; any interest is taxable. Accelerated benefits — tax free. Death benefit — not taxable if lump sum; any interest is taxable. Surrenders — taxable if the cash surrender value exceeds the amount of premium paid.

Annuities

Accumulation — tax deferred in individual annuities; not tax deferred in corporate-owned annuities. Withdrawal of principal and interest — Last In, First Out basis. Lump-sum cash surrenders — taxable. Premature distribution — tax and 10% penalty. Distributions at death — interest taxable.

Other Related Concepts

Topic	Key Points
Modified Endowment Contract (MEC)	Created when a life insurance policy is overfunded (fails the 7-pay test). Accumulation — tax deferred. Distributions — taxable, Last In, First Out. Distributions before age 59½ — 10% penalty.
1035 Exchange	Nontaxable if on the same life, and if one of the following: cash value policy to another cash value policy, endowment, or annuity; endowment to another endowment or annuity; or annuity to another annuity.