Chapter 7

When withdrawing cash from a cash value life insurance policy, the amount of the withdrawal up to the policy's cost basis is tax-free. This tax accounting rule is referred to as: a) Last In, First Out (LIFO) b) Dollar Cost Averaging c) First In, First Out (FIFO) d) First In, Still There (FIST)

c) First In, First Out (FIFO)

ERISA sets ________ standards for pension plans in private industry. a) Maximum b) Minimum c) Voluntary d) Flexible

b) Minimum

H is employed by a company that provides group life insurance. How much of the employer-paid premiums for H's $150,000 coverage, if any, is going to be reported as taxable income to H? a) Zero b) The premium paid for $100,000 c) The premium paid for $50,000 d) The premium paid for $75,000

b) The premium paid for $100,000

Distributions from a Modified Endowment Contract (MEC) made on or after age ______ are not subject to any tax penalties. a) 70 1/2 b) 62 c) 59 1/2 d) 65

c) 59 1/2

An insured has paid $1,000 in annual premiums for her permanent life insurance policy for 12 years. Now upon surrendering the policy she is due to receive $15,000 of cash value. How much of this cash value is taxable? a) $3,000 b) Zero c) $12,000 d) $15,000

a) $3,000

All of the following are the benefits of having an employer sponsored retirement plan be ERISA qualified, except: a) Plans withdrawals are tax free b) Employer contributions are not taxable to the employee until withdrawn c) Employer contributions are immediately tax deductible d) Earning son contributions grow tax deferred

a) Plans withdrawals are tax free

Participating policy dividends become taxable as income when: a) The total amount of dividends received by a policyowner exceeds the total amount of premium he/she has paid b) They are distributed by the insurer c) They are declared by the board of directors d) The policyowner receives them in cash

a) The total amount of dividends received by a policyowner exceeds the total amount of premium he/she has paid

If a policyowner of a life insurance policy accidentally pays in premiums in excess of the MEC guidelines, the insurer can refund the excess within ______ days of the end of the contract year. a) 45 b) 60 c) 10 d) 30

b) 60

A qualified plan pre-mature withdrawal tax penalty can be waived in all of the following circumstances, except: a) Disability b) Buying a first vacation home c) Death d) Qualified educational expenses

b) Buying a first vacation home

If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the _______. a) End of the tax year b) End of the contract year c) End of the calendar year d) Latest premium payment was received

b) End of the contract year

Which of the following scenarios will trigger an income tax due? a) Taking out a policy loan in an amount greater than the total premiums paid in b) Interest earned on dividends left on deposit with the insurer c) Cancelling the policy during the free look period d) Receiving a participating policy's cash dividend

b) Interest earned on dividends left on deposit with the insurer

Under the Modified Endowment Contract rules the 7-Pay Test is defined as: a) Any life insurance policy that endows in 7 years b) The least amount of premium required to be paid in the first 7 years to maintain the policy to age 70 c) The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit d) The cash value at the end of year 7 exceeds the total premiums paid

c) The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit

Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate? a) The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up b) An employer owns a policy on the life of a key employee who dies c) The insured is also the policyowner d) A business partner owns a life insurance policy on the other partner that died

c) The insured is also the policyowner

If no ________ is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate. a) Relative b) Insured c) Spouse d) Beneficiary

d) Beneficiary

Which of the following best defines the 'Cost Recovery Rule'? a) When a policy is surrendered, the earnings within the policy are accounted for first b) The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax free upon surrender c) The amount of the policy's internal expense plus the life producer's commission make up the total cost of the policy d) Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender

d) Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender