Chapter 7

C paid $20,000 in premiums into a $100,000 universal life insurance policy. The accumulated cash value was $35,000 when C received a cash withdrawal of $30,000. How much of the cash withdrawal was taxable?

$10,000

All employer-paid premiums for amounts above $_________ of group life insurance are reported as taxable income to the employee.

$50,000

How are employer paid premiums on a group life insurance plan treated for tax purposes?

As an ordinary and necessary business expense

All of the following are TRUE regarding non-qualified retirement plans, except:

Contributions are immediately tax deductible

___________ are not taxable because they are considered a return of excess premium.

Dividends

All of the following are characteristics of a qualified retirement plan, EXCEPT:

Employers in private industry are required to establish pension plans

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 ________.

End of the contract year

ERISA is a ________ law.

Federal

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:

First-In, First-Out (FIFO)

Which of the following scenarios will trigger an income tax due?

Interest earned on dividends left on deposit with the insurer

Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)?

Lump sum death benefit paid to the beneficiary

single premium life is ALWAYS

MEC

ERISA requires that those who establish qualified plans must meet certain ___________standards.

Minimum

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit?

Monthly

All of the following regarding policy loans are true, except:

Policy loans are taxable if the policy remains in effect and the amount borrowed exceeds the premiums paid

Death benefits are paid to the estate of the policyowner/insured in which of the following situations?

The beneficiary is the estate

The life insurance policy cost basis consists of:

The premiums paid in

Participating policy dividends become taxable as income when:

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

Dividends

considered a return of unearned premium which is why they are paid out income tax free

An insured has contributed $12,000 in premiums toward a universal life policy. She decides to cancel the policy and take the cash value of $15,000. What are the tax consequences of this distribution?

$12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as ordinary income

All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee

$50,000

All of the following are times in which life insurance policy cash values can become taxable

-At policy surrender -If the policy fails to meet the IRS definition of life insurance -When the policy is sold

regarding employer group life insurance these are true?

-Employer-paid premiums do not constitute taxable income to the employee unless the death benefit exceeds $50,000 -Death benefit proceeds paid to an employee's named beneficiary are received income tax-free -Premiums paid by an employer are tax-deductible to the business as an ordinary and necessary business expense

Taxable

-Interest earned on policy dividends -Interest received from a life insurance death benefit settlement option -Withdrawals, cash surrenders, and policy loans distributed from a MEC up to an amount equal to the earnings -Life insurance cash withdrawals or surrenders that exceed the cost basis -Death benefits included in an insured's estate

Life insurance policy premiums establish a _________ in the policy for tax purposes.

Cost basis

The only time a policy loan is taxable is in which of the following situations?

Having the policy lapse with a loan outstanding in excess of cost basis

F has a $100,000 face amount term life policy for which F paid $10,000 in premium to date. F dies and the benefit is paid out to G, the beneficiary. What amount of the death benefit received is taxable as income to G?

Nothing -Lump sum death proceeds are not taxable as income to a named beneficiary.

Which of the following would always be considered a Modified Endowment Contract?

Single Premium Whole Life

Which is true regarding the taxation of the cash value in a Universal Life Policy prior to withdrawal?

Tax deferred

A permanent policy is surrendered for its cash value, and that sum is greater than the amount of premiums paid in. How is the excess taxed?

Taxed as ordinary income

Modified Endowment Contract

-Distributions received from a MEC are subject to a LIFO tax treatment -A policy that fails the 7-pay test will be deemed a MEC -Distributions on gains withdrawn from a MEC prior to age 59 1/2 are subject to a 10% penalty in addition to taxation

qualified retirement plan

-Employee contributions are either pre-tax or tax deductible -Employer contributions are immediately tax deductible to the employer -The penalty for premature distributions may be waived for death, disability, qualified education costs, medical expenses and first -time homebuyers

Under ERISA qualified plans must meet all of the following requirements

-Must have a vesting requirement -Must benefit employees and beneficiaries -Must be approved by the IRS

Qualified Plans

-Must meet ERISA minimum standards -Contributions made by employee are tax-deductible or pre-tax -Entire amount of withdrawal is taxable to the employee upon distribution

Income-tax Free

-Qualified accelerated death benefit -Policy loan from an in-force policy -Policy dividend that is less than the premium paid -Group life insurance death benefit proceeds (lump sum) -Lump sum death benefit paid to a beneficiary

Which of the following statements is correct regarding an employer's ability to deduct the premiums it pays for an employee's life insurance benefit?

Premiums are deductible as long as the business does not derive a direct benefit from the policy

Which of the following best defines the 'Cost Recovery Rule'?

Which of the following best defines the 'Cost Recovery Rule'?

If, as the result of an injury or illness, the insured is deemed to be terminal (i.e., expected to die within 1 or 2 years), what rider added to a life insurance policy would advance a portion of the face value?

Accelerated Benefit (Living Need)

All of the following statements regarding a Modified Endowment Contract are correct, EXCEPT:

If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status

taxable events for a Modified Endowment Contract

-Taking out a policy loan -Cash surrender of the policy -Withdrawal of cash value to pay for a daughter's wedding

Distributions from a Modified Endowment Contract (MEC) made on or after age _____ are not subject to any tax penalties.

59 1/2

Which of the following distributions in a life insurance policy is taxable?

Interest paid on a death benefit settlement option

non-qualified retirement plans

-Upon withdrawal only the earnings are subject to taxation -Earnings can be tax deferred until withdrawn -Contributions are not tax deductible

Nonqualified Plans

-Upon withdrawal, only the earnings are taxable -Usually not funded by the employer until the employee actually retires -Employee contributions paid with after-tax dollars (not tax-deductible)