Unit Vii

UNIT VII
GROUP INSURANCE AND ANNUITIES

(6 HOURS)
04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 1

GROUP INSURANCE
 Group insurance is an insurance that covers a
defined group of people, for example the members
of a society or professional association, or the
employees of a particular employer.
 A master contract is formed between the group
policyholder and insurer for the benefit of the
individual members.
 Employer—Employee Group.
 Association—member group.
 Creditor—Debtor Group

DIFFERENCES BETWEEN GROUP AND INDIVIDUAL
INSURANCE (OR CHARACTERISTICS OF GROUP INSURANCE)
Group insurance differs from individual insurance in several respects.
1. COVERAGE: A distinct characteristic is the coverage of many
persons under one contract. A master contract is formed between the
group policyholder and insurer for the benefit of the individual
members.
2. COSTS: A second characteristic is that group insurance usually costs
less than comparable insurance purchased individually. Employers
usually pay part or all of the cost, which reduces or eliminates
premium payments by the employees. In addition, administrative and
marketing expenses are reduced as a result of mass distribution
methods.

3. EVIDENCE OF INSURABILITY:
(Evidence of Insurability: It is essentially a statement of medical history,
which can be used to determine what kind of coverage, as well as what level
of coverage, is applicable)
A third characteristic is that individual evidence of insurability is usually not
required. Group selection of risks is used, not individual selection. The
insurer is concerned with the insurability of the group as a whole rather than
with the insurability of any single member within the group.
4. EXPERIENCE RATING: Finally, experience rating is used in group
insurance plans. Experience rating (insurance) is the amount of loss that
an insured party experiences compared to the amount of loss that similar
insureds experience. If the group is sufficiently large, the actual loss
experience of the group is a major factor in determining the premiums
charged.

BASIC UNDERWRITING PRINCIPLES
(GROUP INSURANCE)
The underwriting principles followed in group insurance are:
I. Insurance incidental to the group
II. Flow of persons through the group
III. Automatic determination of benefits
IV. Simple and efficient administration
V. Minimum participation requirements
VI. Third-party sharing of cost

Insurance incidental to the group: Insurance should be incidental to the
group, which means the group should not be formed for the sole purpose of
obtaining insurance. The purpose of this requirement is to reduce adverse
selection against the insurer. If the group is formed for the specific purpose
of obtaining insurance, a disproportionate number of unhealthy persons
would join the group to obtain low-cost insurance, and the loss experience
would be unfavorable.
Flow of younger persons through the group: Ideally, in group life
insurance, there should be a flow of younger persons into the group and a
flow of older persons out of the group. Without a flow of younger persons
into the group, the average age of the group will increase, and premium
rates will likewise increase. Higher premiums may cause some younger and
healthier members to drop out of the plan, while the older and unhealthy
members will still remain, which would lead to still higher losses and
increased
04/18/2024 rates. Copyright @ by Sangharsh Regmi All rights reserved 6
Automatic determination of benefits: Benefits should be automatically
determined by some formula that prevents individual selection of insurance
amounts. The amount of group life insurance can be based on earnings,
position, length of service, or some combination of these factors. The
purpose of this requirement is to reduce adverse selection against the
insurer. If individual members were permitted to select unlimited amounts of
insurance, unhealthy persons would likely select larger amounts, while
healthier persons would likely select smaller amounts. The result would be a
disproportionate amount of insurance on the impaired lives.
Simple and Efficient Administration: The group plan should be simple
and efficiently administered. Premiums are collected from the employees by
payroll deduction, which reduces the insurer’s administrative expenses and
keeps participation in the plan high.
Minimum Participation Requirements: A minimum percentage (say
70%) of the eligible employees must participate in the plan. If the plan
is a noncontributory plan , the premiums are paid entirely by the
employer and 100 percent of the eligible employees must be covered. If
the plan is a contributory plan , the employee pays part or all of the cost
and a large proportion of the eligible employees must elect to participate
in the plan. In a contributory plan, it may be difficult to get 100 percent
participation, so a lower percentage such as 50 to 75 percent is typically
required.
Third-Party Sharing of Cost: Ideally, individual members should not
pay the entire cost of their protection. In most groups, the employer
pays part of the cost.

ELIGIBILITY REQUIREMENT IN GROUP INSURANCE
Insurers typically require that certain eligibility requirements must be satisfied
before the insurance is in force. The eligibility requirements generally are
designed to reduce adverse selection against the insurer .
A. Eligible group:
Eligibility for group status depends on company policy and state law Eligible
groups include individual employer groups, multiple employer groups, labor
unions, creditor-debtor groups, and miscellaneous groups, such as
fraternities(share common professional interest/experience), sororities(a society for female students i),
and alumni groups.
 Usually a minimum defined size is required

B. Eligible requirements: Employees must meet certain
participation requirements:
 Be a full time employee
 Satisfy a probationary (testing period of employee) period
 Should have applied for coverage during the eligibility
period
 During the eligibility period, the employee can sign up for
coverage without furnishing evidence of insurability
 Be actively at work when the coverage begins

GROUP LIFE INSURANCE
Life insurance coverage provided to a group of people, most often
employees of the same company. These policies carry a lower cost than the
policies offered to individuals, due to the tax cuts offered to the insurer, and
the sharing of expenses by employee and employer.
GROUP LIFE INSURANCE PLAN
Group life insurance is a popular and relatively inexpensive employee
benefit. Group life insurance plans include the following:
1. Group term life insurance
2. Group universal life insurance
3. Group accidental death and dismemberment insurance (AD&D)

1. Group term life insurance
Group term life insurance is the most important form of group life
insurance. Most group life insurance in force today is group term life
insurance.
Basic characteristics:
 First, the insurance provided is yearly renewable term insurance, which
provides low-cost protection to the employees during their working
years, especially to younger employees.
 Second, the amount of term insurance on an employee’s life can be based
on the worker’s earnings, position, or it can be a flat amount for all. The
amount of insurance is typically some multiple of the employee’s salary
or earnings, such as one to three times earnings. The term insurance
remains in force as long as the employee is part of the group.

 Third, if employees leave the group because of termination of
employment or retirement, they can convert their term insurance to an
individual cash value policy within 31 days without evidence of
insurability.
 Fourth, most group plans allow a modest amount of life insurance to be
written on the employee’s spouse and dependent children. (Benefit
payable to spouse and dependent children)
Types of Group Term Coverages include:
 A basic amount of term coverage, which is usually a multiple of salary
or earnings.
 Voluntary supplemental term insurance, whereby employees can
purchase additional amounts without evidence of insurability.
 A portable term insurance option that allows employees to continue
their term insurance protection if they lose their eligibility for group
coverage.
2. Group universal life insurance
A group universal life policy is a type of
permanent life insurance that features a savings
component. Employees may choose to pay only the
cost of the insurance premium or to make
additional payments to the cash value of a policy,
which can be accessed through loans or
withdrawals

Group accidental death and dismemberment
insurance (AD&D)
In insurance, accidental death and dismemberment (AD&D) is a
policy that pays benefits to the beneficiary if the cause of death is an
accident. This is a limited form of life insurance which is generally
less expensive, or in some cases is an added benefit to an existing
life insurance policy.
 Pays additional benefits if the employee dies in an accident or

incurs certain types of bodily injuries.
 Employees pay the full cost.

GROUP ACCIDENT INSURANCE
 Accident insurance is a sensible way for your company to deal with the increasing costs
due to many of today’s medical plans. Available at affordable group rates, accident
insurance allows you to deliver a comprehensive employee benefits package while
protecting your company’s bottom line.
 Offering group accident insurance as part of your benefits package can provide your
employees with an extra level of financial protection to help cover out-of-pocket medical
expenses
 This policy is basically designed to offer some sort of compensation to the insured person
who suffers bodily injury solely as a result of an accident which is external, violent and
visible. Hence death or injury due to any illness or disease is not covered by the policy.

Common coverages under group accident
 Accidental Injury Benefit
 Pays the actual charges for medical treatment due to accidental injury up
to a certain amount per unit.
 Accidental Death Benefit
 Pays a fixed amount per unit if an insured suffers a fatality as a result of
an accident.
 Ground or Air Ambulance
 Pays a fixed amount per day if an insured is hospitalized for an
accidental injury.
 Dismemberment Benefits
 Pays a fixed amount if the primary insured suffers dismemberments as a
result of accidental injury.
EXCLUSION FOR GROUP ACCIDENT
 It doesn’t pay any benefits for losses that are caused by, contributed to
by or occur as a result of: crime or illegal occupations; hazardous
work/; racing; semi-professional or professional sports; sickness;
suicide or injuries which any covered person intentionally does to
himself; war or armed conflict.
 The covered person must incur a charge and the certificate must be in
force for benefits to be payable.

GROUP HELATH INSURANCE
 Group health insurance
 Employer-based
 Discounted coverage for a large pool of mostly healthy people
 Costs of premiums are split by the employer and employee
 Group medical expense insurance is an employee benefit that pays the cost of
hospital care, physicians’ and surgeons’ fees, and related medical expenses.
 The plan is extremely important in providing financial security to employees
and their families.
 Coverage is available through:
 Commercial insurers
 Blue Cross and Blue Shield Plans
 Managed Care organizations
 Self-insured employer plans
COMMERCIAL INSURERS
 Commercial life & health insurers sell both individual and
group medical expense plans.
 Most individuals and families insured by commercial insurers
are covered under group plans.
 Commercial life & health insurers sell medical expense
coverage and also sponsor managed care plans that provide
benefits to members in a cost effective manner.

BLUE CROSS AND BLUE SHIELD PLANS
 Blue Cross and Blue Shield plans are medical expense plans that cover
hospital expenses, physician and surgeon fees, ancillary charges, and other
medical expenses.
 Blue Cross and Blue Shield plans sell individual, family and group
coverages.
 Blue Cross plans cover hospitalization and related expenses. The plans
typically provide service benefits rather than cash benefits to the insured,
and payment is made directly to the hospital rather than to the insured.
 Blue Shield plans cover physicians’ and surgeons’ fees and related
medical expenses
 In most states, plans operate as non-profit organizations, but some have
converted to for-profit status to raise capital.

3. MANAGED CARE ORGANIZATIONS
What is a managed care organization (MCO)?
An MCO is a health care company. It is often called a "health plan." It is a group of
doctors, hospitals and other providers who work together to meet your health care needs.
What does an MCO do?
An MCO gives you covered health services. After you join an MCO, you will get health
care from doctors, hospitals and other providers in the plan you choose.
 Managed care plans offer medical expense benefits in a cost effective manner
 Plans emphasize cost control and services are monitored.
 A managed care organization typically sponsors a health maintenance organization
(HMO)
 Comprehensive services are provided for a fixed, prepaid fee

SELF INSURED PLANS BY EMPLOYERS
Self-funded health care, also known as Administrative Services Only (ASO), is a self insurance
arrangement whereby an employer provides health or disability benefits to employees using the
company's own funds. This is different from fully insured plans where the employer contracts an
insurance company to cover the employees and dependents. Typically, a self-insured employer will
set up a special trust fund to earmark money (corporate and employee contributions) to pay
incurred claims
In self-funded health care, the employer assumes the direct risk for payment of the claims for
benefits. The terms of eligibility and covered benefits are set forth in a plan document which
includes provisions similar to those found in a typical group health insurance policy.
 Plans are usually established with stop-loss insurance.

 A commercial insurer will pay claims that exceed a certain limit.
 Some employers have an administrative services only (ASO) contract with a commercial
insurer.
 The commercial insurer only provides administrative services, such as claim processing
and record keeping.
 Self-insured plans are exempt from state laws that require insured plans to offer certain state-
mandated benefits.
TYPES OF GROUP MEDICAL EXPENSE PLANS
Group medical expense plans have changed dramatically over time. Older plans generally
were indemnity plans while newer ones are managed care plans. Older plans were called
indemnity plans or fee-for-service plans.
 Under a traditional indemnity plan:
 Physicians are paid a fee for each covered service
 Insureds have freedom in selecting their own physician
 Plans pay benefits for covered services up to certain limits
 Cost-containment has not been heavily stressed
 These plans have declined in importance over time
 Common types include basic medical expense insurance and major medical
insurance.

Basic medical expense insurance is a generic name for group plans
that provide only basic benefits.
 Covers routine medical expenses
 Not designed to cover a catastrophic loss
 Coverage includes:
 Hospital expense insurance
 Plans pay room and board or service benefits
 Surgical expense insurance
 Newer plans typically pay reasonable and customary
charges
 Physicians’ visits other than for surgery
 Miscellaneous benefits, such as diagnostic x-rays

Major medical insurance is designed to pay a high proportion of the covered
expenses of a catastrophic illness or injury.
 Can be written as a supplement to a basic medical expense plan, or
combined with a basic plan to form comprehensive coverage
 Supplemental major medical insurance is designed to supplement the benefits
provided by a basic plan and typically has:
 High lifetime limits
 A coinsurance provision, with a stop-loss limit
 Comprehensive major medical insurance is a combination of basic benefits
and major medical insurance in one policy, and typically has:
 High lifetime limits
 A coinsurance provision
 A plan may contain a family deductible provision

INDIVIDUAL ANNUITIES
Simply put, an annuity is a contract between you and an insurance company. It is
designed to protect and grow your money, and then provide a stream of income
during your retirement. In fact, other than pensions, annuities are the only products
that provide guaranteed lifetime income.
How do annuities work?

1.You purchase an annuity by making a payment to an insurance company.
2.Your annuity can grow over time.
3.When you're ready to start receiving retirement income, your annuity is turned
into a steady stream of income payments.
04/18/2024 Copyright @ by Sangharsh Regmi All rights 27

reserved
types of annuities – essentially two ways in which the individual receives the
annuity payout:
Immediate annuity
he begins to receive payments soon after the initial investment. This is ideal for
someone approaching retirement age
Deferred annuity
it accumulates money as opposed to paying out annuity regularly. Deferred annuity
can be converted into immediate annuity based on the individual’s preference.
What Are Tax Implications Of Annuities?

Annuities do not offer any tax benefit to policyholders. It is added to income and
taxed at the marginal rate of taxation in India.

reserved
All annuities are returns on an investment or insurance policy that are paid in regular installments,
usually monthly and often for life. Within that broad definition, however, there are choices: either
fixed or variable returns, and either an immediate or a deferred payment.
In any case, annuities are available through insurance companies and also can be purchased
through banks and independent brokers.
KEY TAKEAWAYS
1. A fixed annuity guarantees payment of a set amount for the term of the agreement. It(term of
agreement) can't go down (or up).
2. A variable annuity fluctuates with the returns on the fund it is invested in. The payments can go
up (or down).
3. An immediate annuity begins paying out as soon as the investor makes the lump-sum payment.
4. A deferred annuity begins payments on a future date set by the investor.
An annuity is usually purchased to provide a regular income supplement after retirement, and a
substantial amount of money is needed to generate a meaningful monthly income payment.
That makes it a major investment, so it's important to carefully consider the two big decisions
below.
reserved
Fixed vs. Variable Annuities
The money deposited in an annuity is invested along with the money of many other clients.
Much like a mutual fund, the combined funds are invested in order to generate the returns
that are used to make annuity payments.
Fixed Annuities
In a fixed annuity, the money is invested in government bonds and highly-rated
corporate bonds. These are the safest types of investments and guarantee a steady if
unspectacular rate of return. Thus, the insurance company can commit to a set dollar payment
every month.
The downside is that your payment won't go up even if the returns on bonds get better. The
upside is that your payment won't go down even if returns on bonds fall.
Fixed annuities are a good fit for people who have a low tolerance for risk. They are counting
on that monthly income, and they don't want to take chances with it.
reserved
reserved
Taxation of Annuities
Qualified Annuity Taxation
If an annuity is funded with money on which no taxes have been previously paid, then it’s
considered a qualified annuity.
When you receive payments from a qualified annuity, those payments are fully taxable as income.
That’s because no taxes have been paid on that money.
Non-Qualified Annuity Taxation

If the annuity was purchased with after-tax funds, then it’s non-qualified. Non-qualified annuities
require tax payments on only the earnings.
The amount of taxes on non-qualified annuities is determined by something called the exclusion
ratio. The exclusion ratio is used to determine what percentage of annuity income payments is
taxable and how much is not. The idea is to determine the amount of a withdrawal or payment from
an annuity is from the already-taxed principal and how much is considered taxable earnings.
The exclusion ratio involves the principal that was used to purchase the annuity, the amount of time
the annuity has existed and the interest earnings.

reserved
Taxation of Annuities
An annuity is an investment instrument that promises income over a given time
span. It is made between you and a third party, usually an insurance company.
The annuity promises asset growth over time and a death benefit.
Immediate Annuity
An immediate annuity starts paying right away. If you pay with after-tax
money, a part of each payment from the annuity is taxable earnings. However,
your original investment is paid out in equal tax-free installments over the
length of the payment period. If the payments are set to stop when you die, the
IRS determines the payment period up to the life expectancy for someone your
age. Taxes are owed only on parts of the payout after the tax-free return.
In order to understand how this works, consider the following example. You
open an annuity account with $50,000 in post-tax dollars. The annual payments
are $3,000. The IRS thinks you will live another 25 years. Divide $50,000 by 25 to
figure out the amount of each tax-free payout. In this case it is $2,000.
Therefore, $2,000 from each $3,000 payout is tax-free. The rest is taxed as
ordinary
04/18/2024 income. Copyright @ by Sangharsh Regmi
reserved
All rights 34
Deferred Annuity
Unlike an immediate annuity, a deferred annuity, you may not have any payouts for
years. These are used to invest for retirement: You usually buy the annuity while
you're working and the money grows tax-free. Taxes are paid upon withdrawal.
If you bought the annuity with pre-tax dollars, the ENTIRE balance is taxable. But, if
you purchased with after-tax dollars, only the earnings are taxed.
However, if you take out the entire amount in a lump sum, you'll pay income taxes
on all earnings over and above your original investment. If you withdraw in
installments, the IRS taxes the money as interest and earnings: which means you'll
be taxed on ALL withdrawals until all interest and earnings are withdrawn from the
account. Once that is done, the principal can be taken out tax-free.
Let's look at an example:
You invest $100,000 in a deferred annuity. Over the life of the annuity, it grows by
$30,000 to $130,000. The first $30,000 that is taken out is taxable earnings, meaning
you'll be paying taxes on all withdrawals until you can take out the original $100,000
tax-free.
reserved
Fix Annuity Payment benefit: Fixed annuity income payments can be paid
immediately, or at a future date:
 An immediate annuity is one where the first payment is due one payment
interval from the date of purchase. For example, if the income is paid
monthly, the first payment starts one month from the purchase date, or
one year from the purchase date if the income is paid annually.
 Provides a guaranteed lifetime income that cannot be outlived.
 A deferred annuity provides income payments at some future date.
 A deferred annuity purchase with a lump sum is called a single-
premium deferred annuity.
 A flexible-premium annuity allows the owner to vary the premium
payments.

Annuity settlement options: The annuity owner has a choice of annuity
settlement offers:
 Most annuities are not annuitized.
 Under the cash option, the funds can be withdrawn in a lump sum or in
installments.
 A life annuity option (no refund) provides a life income to the annuitant only while
the annuitant remains alive.
 A life annuity with guaranteed payments pays a life income to the annuitant with a
certain number of guaranteed payments.
 An installment refund option pays a life income to the annuitant.
 If the annuitant dies before receiving the total income payments, the payments
continue to a beneficiary.
 A cash refund option is similar, but pays the beneficiary a lump sum.
 A joint-and-survivor annuity pays benefits based on the lives of two or more
annuitants. The annuity income is paid until the last annuitant dies.
 An inflation-indexed annuity option provides periodic payments that are adjusted
for inflation.
B. VARIABLE ANNUITY
A variable annuity pays a lifetime income, but the income payments vary
depending on common stock prices.
 The purpose is to provide an inflation hedge by maintaining the real
purchasing power of the periodic payments during retirement.
Basic characteristics of a variable annuity:
 Premiums are used to purchase accumulation units during the period prior
to retirement.
 The value of an accumulation unit depends on common stock prices at
the time of purchase.
 At retirement, the accumulation units are converted into annuity units
 The number of annuity units remains constant during the liquidation
period, but the value of each unit changes with common stock prices.
Guaranteed death benefits:
 A guaranteed death benefit protects the principal against loss due to
market declines.
 Typically, if the annuitant dies before retirement, the amount paid to the
beneficiary will be the higher of two amounts: the amount invested in the
contract or the value of the account at the time of death.
 Some variable annuities pay enhanced death benefits
 Some contracts guarantee the principal plus interest
 Some contracts periodically adjust the value of the account to lock in
investment gains. Examples include:
 A rising floor death benefit (principal + 5%)
 A stepped up benefit (Investment gain locks in every 5 years)
 An enhanced earning benefit (additional amount for income
tax)
Fees and expenses: Variable annuities contain the following fees and
expenses:
 Investment management charge, for brokerage services
 Administrative charge, for paperwork, etc.
 Mortality and expense risk charge, to pay for
 The mortality risk associated with the death benefit
 A guarantee on the maximum annual expenses
 An allowance for profit
 Surrender charge, if annuity is surrendered in the early years of
the contract
Total fees and expenses in most variable annuities are high

C. EQUITY-INDEXED ANNUITY
An equity-indexed annuity is a fixed, deferred annuity that:

 allows the owner to participate in the growth of the stock market.
 provides downside protection against the loss of principal and prior
interest earnings if the annuity is held to term.

TAXATION ON INDIVIDUAL ANNUITIES
 An individual annuity purchased from a commercial insurer is a non-
qualified annuity.
 It does not meet Internal Revenue code requirements.
 It does not quality for most income tax benefits.
 Premiums are not income-tax deductible.
 Investment income is tax deferred.
 The net cost of annuity payments is recovered income-tax free
over the payment period, but the amount that exceeds the net cost
is taxable as ordinary income.
 In addition, the taxable portion of a premature distribution before
age 59½ is subject to a 10 percent penalty tax, with certain
exceptions.

 An exclusion ratio is used to determine the taxable and nontaxable portions of the
payments
Investment in the contract
Exclusion ratio 
Where, Expected return
• Investment in the income= Total cost of the annuity, which generally is the total amount of
premiums, contributions, or other amounts paid less certain adjustments.
• Expected return= total amount that the annuitant can expect to receive under the contract
based on life expectancy = Annual payments*life expectancy
 Annuities can be attractive to investors who have made maximum contributions to
other tax-advantaged plans.
 However, annuities are not for everyone, especially a variable annuity. You should
not purchase a variable annuity if you will need the funds before age 59½; the
period of investing is less than 15 years; and you have not made maximum annual
contributions to other tax-advantaged plans, such as a Section 401(k) plan and an
IRA.
Example:
Ben, age 65, purchased an immediate annuity for $108,000 that
pays a lifetime monthly income of $1000. Based on the IRS
actuarial table, he has a life expectance of 20 years.
Now,
Investment in the contract = $ 108,000
Expected return is 20 x 12 x $1000 = $240,000
Hence, Investment in the contract
Exclusion ratio 
Expected return
The exclusion ratio = $108,000/$240,000 = .45
Each year, he receives $5400 (.45*1000*12) tax free and $6,600

(.55*1000*12) which is taxable.
INDIVIDUAL RETIREMENT ACCOUNT
An individual retirement account (IRA) allows workers with taxable
compensation to make annual contributions to a retirement plan up to certain
limits and receive favorable income-tax treatment.
An IRA can be thought of as an individual investment and savings

account with tax benefits. You open an IRA for yourself (that's why it's called
an individual retirement account). If you have a spouse, you'll have to
open separate accounts (if one partner earns low or no wages, you can use the
family income to open a spousal IRA, to benefit that spouse and double the
family's retirement savings options).
Two basic types of IRAs are:

A. Traditional IRA
B. Roth IRA

Difference between Traditional & Roth IRA
There are some big differences between these popular retirement savings plans.
And what you don’t understand about the particular rules that apply can cost you, according
to IRA expert Ed Slott, founder of Ed Slott & Co.
With traditional IRAs, you get a tax deduction upfront. The taxes you pay on that money
are delayed until you withdraw it in retirement.
Roth IRAs, on the other hand, are funded with post-tax money.
“With a traditional IRA, you’re at the mercy or uncertainty of what future higher tax rates
might do to your retirement savings,”
“With a Roth IRA, you don’t have to worry about future rates, because your tax rate in
retirement will be zero.”

reserved
Five key differences between Traditional IRA and Roth IRA
1) Income limits
Contributions to traditional IRAs do not have income limits for savers who contribute
to these kinds of accounts (though high earners may not get the upfront tax break).
Roth IRA contributions, however, do have income limits. For 2018, the
income phase-out range is $120,000 to $135,000 for singles and $189,000 to $199,000
for married couples who file jointly.
2) Age limits
The rules for traditional IRAs prevent you from making contributions once you turn
70½.
But the same doesn’t apply to Roth IRAs. You can continue to contribute to those
accounts at any age, according to Slott, if you have the earned income wages or self-
employment income to do so

reserved
3) Plan participation
Your participation in a company retirement plan generally doesn’t affect either traditional
or Roth IRA accounts.
It is important to note, however, that with a traditional IRA, you may not be eligible for
the deduction depending on your income.
4) Required minimum distributions
The rules around required minimum distributions mark the biggest difference between
traditional and Roth IRAs, according to Slott.
With traditional IRAs, you are forced to take distributions starting at age 70½. Roth IRAs
aren’t subject to required minimum distribution rules.

reserved
5) Money withdrawals
If you withdraw from a traditional IRA before retirement, you will pay tax on that
money. Plus, if you are under 59½, you generally will be subject to an additional
penalty.
You can take money out from Roth IRAs, on the other hand, for any reason,
penalty free. The key is that those withdrawals have to be the money you
contributed, not funds from IRA conversions or earnings on your investments.
In order to withdraw the earnings on your contributions without paying taxes or
other penalties, you have to wait at least five years since you first invested the
money. You must also be age 59½ or older.
“That’s a big deal for lots of younger people who are worried, ‘What if I need to
get to my money?’” Slott said.

reserved
Annual contributions limit: For 2017, the maximum annual contribution is
$5500 or 100 percent of earned compensation, whichever is less.
 Workers over 50 can contribute up to $6500 (plus $1000 catch up
provisions).
Income Tax Deduction of Traditional IRA Contributions: Traditional IRA
contributions may be (1) fully income-tax deductible, (2) partly deductible, or
(3) not deductible at all. A full deduction is allowed in two general situations:
 First, a worker who is not an active participant in an employer’s retirement plan for any
part of the year can make a fully deductible IRA contribution up to the annual maximum
limit.
 As noted earlier, for 2017, the maximum tax-deductible IRA contribution is the lower
of $5500 ($6500 if age 50 or older), or 100 percent of taxable compensation.
 Second, even if the worker is actively participating in the employer’s retirement plan, the
IRA contribution is fully or partly deductible if the worker’s modified adjusted gross
income is below certain threshold limits.
End..
reserved
INDIVIDUAL ANNUITIES
 The person who receives the payments is the annuitant.
 An annuity provides protection against the risk of excessive longevity.
 The fundamental purpose of an annuity is to provide a lifetime income that
cannot be outlived.
 Annuity payments consist of three sources:
(1) premium payments,
(2) interest earnings, and
(3) the unliquidated principal of annuitants who die early.

 An annuity is the opposite of life insurance. Life insurance
creates an immediate estate and provides protection against
dying too soon before sufficient financial assets can be
accumulated. In contrast, an annuity provides protection against
living too long and exhausting one’s savings while the
individual is still alive
 The major types of annuities sold today include:
 Fixed annuity
 Variable annuity
 Equity-indexed annuity

A. FIXED ANNUITY
 A fixed annuity pays periodic income payments that are
guaranteed and fixed in amount.
 During the accumulation period prior to retirement, premiums
are credited with interest.
 The guaranteed rate is the minimum interest rate that will be
credited to the fixed annuity of insured.
 The current rate is based on current market conditions, and
is guaranteed only for a limited period.
 The liquidation period is the period in which funds are paid
out, or annuitized.

A. TRADITIONAL IRA
A traditional IRA allows workers to take a tax deduction for part or all of their
IRA contributions.
 The investment income accumulates income-tax free on a tax-deferred basis.
 Distributions are taxed as ordinary income.
Eligibility requirements: There are two eligibility requirements for establishing a
traditional tax deductible IRA:
I. First, the participant must have taxable compensation (earned income)
during the year.
II. Second, the participant must be under age 70 ½ .
 No traditional IRA contributions are allowed for the tax year in which the participant
attains age 70½ or any later year.

 The full IRA tax deduction is gradually phased out as a person’s
modified gross income increases.
 Taxpayers with incomes that exceed the phase-out limits can contribute
to a nondeductible IRA .
 A spousal IRA allows a spouse who is not in the paid labor force, or a
low-earning spouse to make a fully deductible contribution to a
traditional IRA.
Withdrawal of funds and taxation on distributions:
 Distributions from traditional IRAs are treated as ordinary income.
 Distributions from a traditional IRA before age 59½ are considered an
early withdrawal (premature distributions), and subject to a 10% tax
penalty unless certain conditions apply, e.g., death or disability.

Establishing a traditional IRA: Traditional IRAs can be established at a
bank, mutual fund, stock brokerage firm, or insurer.
The IRA can be set up as either:
 An individual retirement account
 An individual retirement annuity
IRA investments: IRA contributions can be invested in a variety of
investments.
 Investment includes certificates of deposit, mutual funds, and individual stocks and
bonds in a self-directed brokerage account. Contributions can also be invested in U.S.
gold and silver coins and certain precious metals.
 However, the contributions cannot be invested in insurance contracts or collectibles,
such as stamps or antiques.
IRA rollover account: An IRA rollover is a tax-free distribution of cash or
other property from one retirement plan, which is deposited into another
retirement plan.
Benefits of a traditional IRA
 The contribution is tax deductible and earnings grow tax-deferred
 May deduct the full $5,500 contribution in 2017 on your income tax
return if you are not in an employer sponsored plan (ESP) or you are
in ESP but AGI (Adjusted gross income) is less than IRS determined
maximums.
 Spouses not in an Employer Sponsored Plan may make deductible

contributions up to $5,500 if joint AGI is $186,000 or less in 2017

B. ROTH IRA
A Roth IRA is another type of IRA that provides substantial
tax advantages.
 The annual contribution limits discussed earlier for a
traditional IRA also apply to a Roth IRA.
 The annual contributions to a Roth IRA are not tax
deductible
 Contributions can be made after age 70½
 Roth IRAs have generous income limits
 A traditional IRA can be converted to a Roth IRA

 Qualified distributions are not taxable under certain conditions. A
qualified distributions is any distribution from Roth IRA that
(1) is made after a five-year holding period beginning with the first
tax year for which a Roth contribution is made, and
(2) is made for any of the following reasons:
■ The individual is age 59½ or older.
■ The individual is disabled.
■ The distribution is paid to a beneficiary or to the estate after the
individual’s death.
■ The distribution is used to pay qualified first-time home-buyer expenses
(maximum of $10,000).

 What are the advantages of a Roth IRA?
 You are actually investing more with a Roth, since your investments
are after-tax
 Contributions can be withdrawn tax/penalty free
 Earnings grow tax-free if the Roth IRA is in place for at least 5 years,
and you are 59½ years old
 No requirement for distributions by age 70½
 Disadvantages
 You can have both a traditional and a Roth, but you cannot exceed the
yearly $5,500 limit in 2017.
 There are income limits for investing in a Roth.
 Earnings must be in place 5 years before they can be withdrawn
without penalty.
Features Traditional IRA Roth IRA
Tax-deductible Yes No
Contribution
Tax on investment Investment incomes Investment incomes
income accumulates tax free. accumulates tax free.
Tax on distributions Taxed as ordinary income; no Distributions are tax-free if you
tax on nondeductible meet certain conditions.
contributions.
Maximum total annual For 2017, $5,500 ($6,000 age For 2017, $5,500 ($6,000 age 50
contribution to all IRA50 and older) or 100 percent of and older) or 100 percent of
programs earned compensation, earned compensation, whichever
whichever is less. is less.
Eligibility Must be under age 70 1/2 and Any age with earned income not
have earned income exceeding AGI limits
Minimum distributions Required after age 70 1/2 None
requirements

Features Traditional IRA Roth IRA
Tax-free No Yes
Withdrawals
Penalty for Withdrawals are subject to 10% penalty Contributions can be withdrawn
early tax before age 59 1/2 unless for first- tax-free. There is 10% penalty tax
withdrawals. time home purchase, deductible medical before age 59 1/2 unless for first-
expenses, or for death or disability. time home purchase, deductible
medical expenses, or for death or
disability.
Spousal IRA's Deductibility is subject to AGI limits. Nondeductible subject to AGI

Contributions from non-earning spouses limits. Contributions from non-
are based on earnings of employed earning spouses are based on
spouse, up to $5,500. earnings of employed spouse, up to
$5,500.

Unit Vii

Uploaded by

Copyright:

Available Formats

You might also like

Unit Vii

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Unit Vii

Uploaded by

Copyright:

Available Formats

UNIT VII

GROUP INSURANCE AND ANNUITIES

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 1

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 2

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 3

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 4

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 5

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 8

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 9

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 10

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 11

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 12

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 14

 Pays additional benefits if the employee dies in an accident or

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 15

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 16

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 18

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 20

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 21

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 22

 Plans are usually established with stop-loss insurance.

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 24

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 25

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 26

How do annuities work?

04/18/2024 Copyright @ by Sangharsh Regmi All rights 27

What Are Tax Implications Of Annuities?

04/18/2024 Copyright @ by Sangharsh Regmi All rights 28

Non-Qualified Annuity Taxation

04/18/2024 Copyright @ by Sangharsh Regmi All rights 33

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 36

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 40

An equity-indexed annuity is a fixed, deferred annuity that:

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 41

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 42

Each year, he receives $5400 (.45*1000*12) tax free and $6,600

An IRA can be thought of as an individual investment and savings

Two basic types of IRAs are:

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 45

04/18/2024 Copyright @ by Sangharsh Regmi All rights 46

04/18/2024 Copyright @ by Sangharsh Regmi All rights 47

4) Required minimum distributions

04/18/2024 Copyright @ by Sangharsh Regmi All rights 48

04/18/2024 Copyright @ by Sangharsh Regmi All rights 49

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 52

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 53

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 54

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 55

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 56

 Spouses not in an Employer Sponsored Plan may make deductible

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 58

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 59

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 60

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 62

Spousal IRA's Deductibility is subject to AGI limits. Nondeductible subject to AGI

04/18/2024 Copyright @ by Sangharsh Regmi All rights reserved 63

You might also like

Each year, he receives $5400 (.45100012) tax free and $6,600