Retirement and Life Insurance Taxation
5% of the exam
Section IV of the Florida 2-15 content outline, "Retirement, and Other Life Insurance Concepts," is 5% of the exam — about 7 or 8 of the 150 scored questions. Covers third-party ownership and insurable interest, Florida's viatical settlement rules, group life and the 31-day conversion privilege, qualified versus nonqualified plans, key person and buy-sell funding, Social Security basics, and how premiums, death benefits, cash value, dividends and MECs are taxed.
Third-party ownership and insurable interest
Three parties, three roles. The owner pays premiums and holds every contractual right. The insured is the life covered. The beneficiary collects. Third-party ownership means the owner is someone other than the insured — a spouse, a trust, a business. Florida requires insurable interest at the time the contract is made, and it need not exist after the inception date of coverage (s. 627.404, F.S.). The insured, having legal capacity to contract, must apply for or consent in writing to the contract and its terms; the proposed insured's signature on the application is that written consent. Florida recognizes insurable interest for a trust whose grantor is the insured or is closely related to the insured; a business entity in the lives of its owners, officers, partners, managers and key employees, with written consent obtained before the purchase; and each party to a buy-sell contract, in the lives of the other parties to that contract.
Viaticals and life settlements under Florida law
Florida regulates the entire secondary market under one label: viatical settlements, Part X of Chapter 626, F.S. (ss. 626.991-626.99295). The policyowner who sells is the viator. Florida's definition does not require the insured to be sick, so a healthy senior selling a policy is still doing a viatical settlement under Florida law (s. 626.9911, F.S.). Licensing: after October 1, 2006, a person other than a licensed life agent may not perform the functions of a viatical settlement broker; the life agent must appoint himself or herself with the Department and pay the applicable fee (s. 626.9916, F.S.). Your 2-15 license is the gateway; there is no separate broker license. Four protections, all in Part X: 1. Disclosures to the viator by the date of application, including that the proceeds may be taxable, may be reached by creditors, and may cost the viator eligibility for Medicaid or other public assistance (s. 626.9923, F.S.). 2. An unconditional right to rescind within 15 days after the viator receives the settlement proceeds, conditioned on returning them (s. 626.9924, F.S.). 3. The provider must notify the insurer that the policy has or will become viaticated within 20 days after the viator executes the documents necessary to transfer the policy, or within 20 days of any other agreement to viaticate it (s. 626.9924, F.S.). 4. The provider must transfer the proceeds to the viator within 3 business days after receiving the insurer's acknowledgment of the transfer (s. 626.9924, F.S.).
Group life: contributory, noncontributory, and conversion
Noncontributory: the employer pays the entire cost, so Florida requires that all eligible employees be insured, except any as to whom evidence of individual insurability is not satisfactory to the insurer and those who reject coverage in writing (s. 627.552, F.S.). Amounts must be based on a plan precluding individual selection by the employees or by the employer or trustees. Contributory: employees pay part of the cost, participation is voluntary, and adverse selection is controlled by participation requirements and class-based amount schedules. Conversion is the number the exam wants. On loss of eligibility — termination of employment or of membership in the eligible class — the employee has 31 days to apply and pay the first premium for an individual policy with no evidence of insurability; the group policy may exclude term as an option (s. 627.566, F.S.). Death pending conversion: if the person dies inside that window before the individual policy takes effect, the amount he or she would have been entitled to convert is payable as a claim under the group policy — whether or not application was made or the first premium paid (s. 627.568, F.S.). The group policy's own grace period is likewise 31 days, for any premium except the first (s. 627.559, F.S.).
Qualified vs nonqualified plans, needs analysis, Social Security
Qualified plan: IRS-approved, employer contributions deductible, employee elective deferrals pretax, growth tax deferred, and each distribution fully taxed as ordinary income because the participant has no cost basis (absent after-tax or designated Roth contributions). Nonqualified: no deduction, after-tax dollars, tax-deferred growth, and only the gain is taxed — basis is recovered tax free. Ordering rule to memorize: withdrawals from a nonqualified deferred annuity issued after August 13, 1982 come out LIFO — interest first, basis last. Needs analysis prices the gap: add final expenses, debts, income replacement, education and estate costs, then subtract existing insurance, savings and Social Security survivor benefits. The human life value approach instead capitalizes the breadwinner's future earnings. Social Security: 40 credits makes a worker fully insured; 6 credits in the last 13 quarters makes him currently insured. The blackout period is a gap in the surviving spouse's own benefit — it opens when the youngest child reaches 16 and closes when the spouse turns 60. Children's benefits are not part of the blackout; they run to 18, or 19 if still in secondary school.
Business uses: key person and buy-sell
Key person insurance: the business is applicant, owner, premium payer and beneficiary; the key employee is the insured. Florida requires the key person's written consent before the purchase (s. 627.404, F.S.), and federal law requires notice and consent before the contract is issued on employer-owned policies (IRC s. 101(j)). Premiums are not deductible; the death benefit is generally received income tax free. Buy-sell funding splits two ways. Cross-purchase: each owner insures every other owner, so n owners need n(n-1) policies, and a surviving buyer takes a cost basis equal to what he paid. Entity purchase, also called stock redemption: the business owns one policy per owner, so n owners need n policies, and the survivors get no personal basis increase.
Taxation of premiums, death benefits, cash value, dividends and MECs
Premiums on personal life insurance are not deductible. A lump-sum death benefit is income tax free under IRC s. 101(a), though the proceeds may still be included in the taxable estate. If the beneficiary leaves the proceeds with the insurer at interest, the interest portion is taxable. Cash value grows tax deferred. In a non-MEC, withdrawals are FIFO — basis first, tax free up to total premiums paid — and policy loans are not taxable while the contract remains in force. Dividends are treated as a return of premium and are not taxable; interest credited on dividends left on deposit is taxable. A MEC is a contract that fails the 7-pay test (IRC s. 7702A). Distributions and loans flip to LIFO, gain first, plus a 10% additional tax before age 59 1/2 (IRC s. 72(v)). MEC status is permanent: it cannot be cured, and it carries over to a contract received in a 1035 exchange.
Where people lose points
✗ Viatical settlement (terminally ill) vs life settlement (healthy senior) — taxation
✓ Florida licenses both under the same viatical statute, but the tax result differs. If a physician certifies the insured as terminally ill — an illness reasonably expected to cause death within 24 months of the certification — the proceeds of a sale to a licensed viatical settlement provider are excluded from income under IRC s. 101(g), as if paid at death. A healthy 78-year-old selling for investor value gets no exclusion: the gain above cost basis is taxable. Same Florida license, different 1040.
✗ Conversion on loss of eligibility vs conversion when the whole group policy terminates
✓ Loss of eligibility (s. 627.566, F.S.): 31 days, no evidence of insurability, an individual policy up to the amount of coverage that ceases. Whole policy terminates or a class is dropped (s. 627.567, F.S.): the person must have been insured at least 5 years before that termination date, and the individual policy is capped at the smaller of $10,000 or the amount ceasing less any group coverage he becomes eligible for within 31 days. Both use 31 days; only the second carries the 5-year and $10,000 limits.
✗ Entity purchase normally escapes transfer-for-value; a cross-purchase swap between co-shareholders does not
✓ IRC s. 101(a)(2) taxes a death benefit when a policy is transferred for valuable consideration, except a transfer to the insured, to a partner of the insured, to a partnership in which the insured is a partner, to a corporation in which the insured is a shareholder or officer, or a transfer whose basis carries over from the transferor. A co-shareholder is NOT on that list. So swapping existing policies between shareholders to set up a cross-purchase can make the death benefit taxable above the consideration paid plus later premiums, while a transfer to the corporation itself normally lands inside the shareholder-or-officer exception.
✗ Non-MEC FIFO and tax-free loans vs MEC LIFO and the 10% additional tax
✓ Non-MEC: withdrawals are FIFO, so the owner pulls basis out tax free up to total premiums paid, and loans are not taxable while the policy is in force. MEC: withdrawals AND loans are LIFO, gain first as ordinary income, plus a 10% additional tax on the taxable amount before age 59 1/2. What never changes: the death benefit of a MEC is still income tax free, and MEC status can never be cured.
✗ Fully insured vs currently insured under Social Security
✓ Fully insured = 40 credits, permanent, and it unlocks the full menu including retirement benefits and the widest survivor benefits. Currently insured = 6 credits earned in the last 13 quarters, a short-term status that supports only limited survivor benefits, such as the lump-sum death payment and benefits for a surviving child or the parent caring for that child. A worker can be currently insured without ever being fully insured.
✗ Group term life: the first $50,000 is free, the excess is imputed income — not actual premium
✓ Under IRC s. 79 the employer deducts the entire premium as a business expense. The employee excludes the cost of the first $50,000 of employer-paid group term coverage. Above $50,000, the employee reports imputed income calculated from the IRS uniform premium table (Table I) by 5-year age bracket — not the employer's actual premium rate. The death benefit itself remains income tax free to the beneficiary regardless of the amount.
Numbers to memorize
| Viator's right to rescind a viatical settlement (FL) | 15 days after the viator receives the proceeds, conditioned on returning them — s. 626.9924, F.S. |
| Provider's notice to the insurer that a policy is viaticated (FL) | Within 20 days after the viator executes the documents necessary to transfer the policy, or within 20 days of any other agreement to viaticate — s. 626.9924, F.S. |
| Release of viatical proceeds to the viator (FL) | Within 3 business days after receiving the insurer's acknowledgment of the transfer — s. 626.9924, F.S. |
| Viatical contract signed too soon after policy issue (FL) | Void and unenforceable if entered within 2 years of policy issuance, with limited exceptions (e.g., terminal or chronic illness arising after issue, divorce, disability, loss of employment) — s. 626.99287, F.S. |
| Viatical settlement broker qualification (FL) | Must be a licensed life agent who appoints himself or herself with the Department and pays the fee; no separate broker license — s. 626.9916, F.S. |
| Viatical disclosures to the viator (FL) | Provided no later than the date of application; must include that proceeds may be taxable, may be reached by creditors, and may affect Medicaid or other public-assistance eligibility — s. 626.9923, F.S. |
| Group life conversion on loss of eligibility (FL) | 31 days to apply and pay the first premium, no evidence of insurability, up to the amount that ceases; term may be excluded — s. 627.566, F.S. |
| Group life conversion when the group policy terminates (FL) | Must have been insured at least 5 years; individual policy capped at the smaller of $10,000 or the amount ceasing less new group coverage available within 31 days — s. 627.567, F.S. |
| Death during the conversion period (FL) | Convertible amount is payable as a group claim whether or not application was made or premium paid — s. 627.568, F.S. |
| Group life policy grace period (FL) | 31 days for any premium after the first — s. 627.559, F.S. |
| Noncontributory group life participation (FL) | All eligible employees must be insured, except any whose evidence of individual insurability is unsatisfactory to the insurer and those rejecting in writing — s. 627.552, F.S. |
| Insurable interest timing (FL) | Must exist when the contract is made; need not exist after the inception date of coverage. Insured must apply or consent in writing — s. 627.404, F.S. |
| Creditor protection for cash value and annuities (FL) | Cash surrender values of life policies and proceeds of annuity contracts of Florida citizens or residents are not liable to attachment, garnishment or legal process by creditors, with no dollar cap, unless the policy or contract was effected for that creditor's benefit — s. 222.14, F.S. |
| Terminally ill definition for tax-free acceleration or viatication | Physician-certified illness reasonably expected to result in death within 24 months of the certification — IRC s. 101(g)(4)(A) |
| Chronically ill per-diem exclusion (2026) | $430 per day; amounts above that are taxable only to the extent they also exceed actual qualified long-term care costs — Rev. Proc. 2025-32; IRC s. 7702B(d) |
| Employer-paid group term life exclusion | First $50,000 of coverage; excess produces imputed income per the IRS uniform premium table (Table I), computed on 5-year age brackets — IRC s. 79 |
| Employer-owned life insurance notice and consent | Written notice and the employee's written consent must be obtained before the contract is issued, or the death benefit loses its income tax exclusion — IRC s. 101(j) |
| MEC test and penalty | Fails the 7-pay test = MEC; distributions and loans taxed LIFO plus a 10% additional tax before age 59 1/2 — IRC ss. 7702A, 72(v) |
| Nonqualified deferred annuity withdrawal ordering | LIFO — interest first, basis last — for contracts issued after August 13, 1982 — IRC s. 72(e) |
| Social Security insured status | Fully insured = 40 credits; currently insured = 6 credits in the last 13 quarters |
| Social Security credit value (2026) | $1,890 in covered earnings per credit, maximum 4 credits per year ($7,560 for all four) |
| Social Security retirement ages and blackout | Full retirement age 67 for those born 1960 or later; earliest reduced retirement at 62; blackout runs from the youngest child turning 16 until the surviving spouse reaches 60 |
| Federal retirement plan limits (2026) | 401(k)/403(b)/457 elective deferral $24,500; age 50+ catch-up $8,000; ages 60-63 catch-up $11,250; IRA $7,500 plus $1,100 catch-up; total annual additions $72,000 — IRS Notice 2025-67 |
| Buy-sell policy counts | Cross-purchase = n(n-1) policies; entity purchase = n policies |
Test yourself
No answers here on purpose — retrieving them is the practice. Drill this domain if any of these stall you.
- Under s. 627.404, F.S., at what moment must insurable interest exist, and name three categories of individuals in whom a business entity has an insurable interest.
- How many days does a Florida viator have to rescind, from what triggering event, and on what condition? What must the provider do within 20 days, and within 3 business days?
- Contrast the group life conversion right on loss of eligibility with the conversion right when the entire group policy terminates: days to act, eligibility requirement, dollar cap, and the statute for each.
- A terminated employee dies on day 12 of her conversion window without applying or paying. Is anything payable, under what statute, and why?
- What is the 7-pay test, and name three tax consequences that follow from failing it. Which commonly assumed consequence does NOT follow?
- Five shareholders fund a buy-sell agreement. Give the policy count and the basis result for cross-purchase versus entity purchase, and explain exactly when transfer-for-value becomes a risk.
- Distinguish fully insured from currently insured status, and define the Social Security blackout period by its two endpoints. Whose benefit does the blackout interrupt?
- Why is a viatical settlement for a terminally ill insured excluded from income while a life settlement on a healthy 78-year-old is not? What certification is required, and over what life expectancy?
- Classify each as deductible, taxable, or neither: personal life premiums, key person premiums, a lump-sum death benefit, interest on proceeds left at interest, policy dividends, interest on dividends left on deposit, and a policy loan from a non-MEC.
- In what order do withdrawals come out of a nonqualified deferred annuity issued after August 13, 1982, and why does a qualified plan distribution not follow that same ordering?