Chp 4 - Taxes, Retirement, and Other Insurance Concepts
Life insurance may be used to pay state inheritance taxes and federal estate taxes eliminating the need to sell assets from the estate. What is this called?
Estate conservation
What is the main advantage of converting from group life insurance to individual coverage?
Evidence of insurability is not required
What type of policy is typically issued without proof of insurability from the insured?
Group policy
What type of policy issues certificates of insurance to the insureds?
Group policy
What are the characteristics of the group that underwriters will consider before issuing a group life policy?
Group's purpose, size, financial strength and turnover
What qualified plan is suitable for the self-employed?
HR-10 or Keogh
What are some examples of qualified plans?
IRA, 401(k), HR10 (Keogh), SEP, SIMPLE
In what form of payment must the contributions to a traditional IRA be made?
In cash (or cash equivalents)
If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?
Interest only
Which of the following terms means a result of calculation based on the average number of months the insured is projected to live due to medical history and mortality factors? A Mortality rate B Risk exposure C Morbidity D Life expectancy
Life expectancy
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an A Modified endowment contract. B Accelerated benefit policy. C Endowment. D Nonqualified annuity.
Modified endowment contract
In qualified plans, are employer contributions taxed as income to the employees?
NO, employer contributions are not taxed as income to the employees
Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?
NO, lump-sum benefits are received tax free
SIMPLE plans are available to groups of how many employees?
No more than 100
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
Only the portion in excess of the premium paid
What is the primary purpose of a 401(k) plan?
Provide retirement income
What are the three types of Social Security benefits?
Retirement, disability and survivors
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as A Survivorship insurance. B Juvenile protection provision. C Survivor protection. D Life planning.
Survivor protection
What are the personal uses of life insurance?
Survivor protection, estate creation and conservation, cash accumulation and liquidity
Which of the following is an example of liquidity in a life insurance contract? A The money in a savings account B The cash value available to the policyowner C The death benefit paid to the beneficiary D The flexible premium
The cash value available to the policyowner
Which of the following is INCORRECT concerning a noncontributory group plan? A The employer pays 100% of the premiums. B The employees receive individual policies. C They help to reduce adverse selection against the insurer. D They require 100% employee participation.
The employees receive individual policies
Who owns a group life insurance contract?
The employer (also known as the sponsor of the group)
What are the consequences of withdrawing funds from a traditional IRA prior to the age of 59 1/2?
10% penalty
What is the penalty for excessive contributions to a traditional IRA?
6%
What is the name for an overfunded life insurance policy?
A Modified Endowment Contract (MEC)
The president of a manufacturing company has offered one of the company's officers a special individual annuity plan that is unavailable to lower-echelon employees. This plan would be funded with before-tax corporate dollars, and it does not meet government approval standards. This annuity plan is A An executive annuity plan. B Subject to government standards. C Illegal. D A nonqualified annuity plan.
A non qualified annuity plan
Who is a third-party owner? A An irrevocable beneficiary B A policyowner who is not the insured C An insurer who issues a policy for two people D An employee in a group policy
A policyowner who is not the insured
Who may contribute to an HR-10 plan?
A self-employed individual
Who would be considered a third-party owner?
An individual or an entity who is not the insured
All of the following are examples of third-party ownership of a life insurance policy EXCEPT A An insured couple purchases a life insurance policy insuring the life of their grandson. B A company purchases a life insurance policy on their manager, who is an important part of the operation. C When an insured purchased a new home, the insured made an absolute assignment of a life insurance policy to the mortgage company. D An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan.
An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan
Group life insurance policies are written as what type of insurance?
Annually renewable term
What does liquidity mean in a life insurance policy?
Availability of cash value
A life insurance policy used to fund an agreement that contractually establishes the intent of someone to purchase a business upon the insured business owner's death is a A Key person policy. B Split-dollar plan. C Stock redemption plan. D Buy-sell agreement.
Buy-sell agreement
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Cash value growth is tax deferred
A key person insurance policy can pay for which of the following? A Workers compensation B Hospital bills of the key employee C Costs of training a replacement D Loss of personal income
Cost of training a replacement
What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?
Death benefits are generally not subject to income taxes
Why are dividends in life insurance policies not taxable?
Dividends are not considered income for tax purposes; they are a return of unused premium
What is required to qualify an individual to contribute to a traditional IRA?
Earned Income
Who qualifies for tax-sheltered annuities, or 403(b) plans?
Employees of nonprofit organizations under Section 501(c)(3) and employees of public school systems
For a retirement plan to be qualified, it must be designed for whose benefit?
Emplyees
Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? A The employer is the owner and the key employee is the beneficiary. B The key employee is the owner and beneficiary. C The key employee is the owner and the employer is the beneficiary. D The employer is the owner and beneficiary.
The employer is the owner and beneficiary
When planning for survivor protection in life insurance, what needs to be considered?
The insured's current assets, liabilities and survivor needs
Question 1 of 15 An employee quits his job on May 15 and doesn't convert his Group Life policy to an individual policy for 2 weeks. He dies in a freak accident on June 1. Which of the following statements best describes what will happen? A The insurer will pay a reduced death benefit to the beneficiary. B The insurer will pay the death benefit minus one month's premium. C The insurer will pay nothing because the employee has terminated his group insurance and hasn't started the individual one. D The insurer will pay the full death benefit from the group policy to the beneficiary.
The insurer will pay the full death benefit from the group policy to the beneficiary
If a retirement plan is 'qualified', what does that mean?
The plan has favorable tax treatment
Which of the following best defines the "owner" as it pertains to life settlement contracts? A A financial entity that sponsors the transaction B A fiduciary for the contract C The insurance provider D The policyowner of the life insurance policy
The policyowner of the life insurance policy
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy? A There is a 10% penalty for early distribution of the death benefit. B They are tax free to terminally ill insured. C They are always taxable to chronically ill insured. D They are always taxed.
They are tax free to terminally ill insured
Which of the following is the best reason to purchase life insurance rather than annuities? A To liquidate a sum of money over a period of years B To create regular income payments C To liquidate a sum of money over a lifetime D To create an estate
To create an estate
What is the main purpose of the 7-pay Test?
To determine if a life insurance policy is a Modified Endowment Contract
When would life insurance policy proceeds be included in the insured's taxable estate?
When there is an incident of ownership at the time of death
If an insured terminates membership in group life insurance, to what type of insurance can the insured convert the coverage?
Whole Life