Individual Life Insurance
The Affordable Care Act included (LO 10.3) I. a 10 percent surtax on Net Investment Income for high-income taxpayers. II. a 1.45 percent surtax on wages for high-income taxpayers.
Neither
For a male aged 30, what is the probability percentage of having a disability which lasts at least 90 days before age 65?
20%
Which of the following factors is a requirement for triggering the transfer for value rule? (LO 6.4) A) Consideration B) Lack of insurable interest C) A "permanent" insurance policy D) A policy loan
A) Consideration
In addition to final expenses and debt liquidation, which one of the following is typically included in the first category of needs (lump sum cash) when doing a needs analysis? (LO 1.6) A) Emergency fund B) Survivor's income C) Retirement income D) Blackout period income
A) Emergency fund
All of the following are uses for life insurance in estate planning EXCEPT: (LO 1.1) A) Finance nonqualified deferred compensation arrangements. B) Provide for children's education. C) Benefit a charity. D) Pay debts.
A) Finance nonqualified deferred compensation arrangements.
The requirement imposed by law and by insurers to prevent "gaming" or "wagering" by one party on the life of another through insurance is called what? (LO 5.7) A) Insurable interest B) Anti-fraud rule C) Transfer for value rule D) Incontestable clause
A) Insurable Interest
The core techniques in estate preservation and liquidity needs planning include all of the following EXCEPT: (LO 1.8) A) Risk sharing and risk shifting B) Lifetime/charitable gifts C) Life insurance D) Marital or family trusts
A) Risk sharing and risk shifting
All of the following items are treated as income-first when distributed from a modified endowment contract EXCEPT (LO 7.5) A) dividends retained by the insurer to pay premiums or other consideration for the contract B) cash dividends C) policy loans to pay premiums and for all other purposes D) withdrawals
A) dividends retained by the insurer to pay premiums or other consideration for the contract
Life insurance can meet which of the following client needs? (LO 1.1) A) Pay debts. B) Provide income for surviving family members. C) Provide income for surviving family members. D) All of the above.
All of the above
What is the underlying purpose for establishing a buy/sell agreement? (LO 9.1) A) Propping-up stock prices B) Business continuation C) Eliminating market fluctuations D) Directly increased stock valuation
B) Business continuation
All of the following are advantages of fully-insured pension plans (i.e., plans holding only life insurance and annuity contracts that meet certain requirements) EXCEPT: (LO 9.5) A) Fully insured plans are exempt from the actuarial certification requirement, which reduces administrative overhead. B) Fully insured plan cash values are not subject to income tax. C) Fully insured plans are exempt from the minimum funding standards. D) Fully insured plans are permitted a higher initial level of deductible plan contributions than are regular trusteed plans.
B) Fully insured plan cash values are not subject to income tax.
Most viatical settlements payments are (LO 7.9) A) excluded from income because they are deemed to be paid by reason of the death of the insured. B) excluded from income only in the second year after the terminally ill individual actually dies. C) deductible as medical expenses under Code Section 217. D) treated as an income tax credit that is completely phased out after $225,000 of income for a joint return.
B) excluded from income because they are deemed to be paid by reason of the death of the insured
For estate tax purposes, life insurance (LO 8.3) A) held by a revocable life insurance trust is includable in the trustee's estate. B) held by a revocable life insurance trust is includable in the grantor's estate. C) held by a third party and payable to a revocable life insurance trust is includable in the insured's estate. D) cannot be used to provide estate liquidity.
B) held by a revocable life insurance trust is includable in the grantor's estate
Accelerated death benefit riders permit (LO 5.9) A) the death benefit to be paid within 30 days rather than 90 days after the date of death. B) payment of all or part of the death benefit before death under certain circumstances. C) premiums to be waived if the insured becomes disabled. D) another insured person to be added to the policy.
B) payment of all or part of the death benefit before death under certain circumstances
The human life value concept basically holds that the measure of the economic value of a life is A) the highest single year earnings of the prior five years. B) the present value of the future earnings potential. C) the surviving spouse's total earnings to retirement. D) the taxable wage base adjusted for inflation.
B) the present value of the future earnings potential.
Gifts of life insurance are favored for which of the following reasons? (LO 6.9) I. It may increase the donor's spendable income. II. The gift tax is relatively low.
Both
All of the following gifts of less than the client's entire interest in property would generate an income tax deduction EXCEPT (LO 7.3) A) A charitable gift annuity B) A remainder interest in a qualified charitable remainder trust C) A charitable gift of the cash surrender value of a policy of which his son is the beneficiary D) An annuity or unitrust interest in a charitable lead trust
C) A charitable gift of the cash surrender value of a policy of which his son is the beneficiary
What is the upper limit called that the interest crediting rate formula will use to determine the amount to credit to cash values?
Cap Rate
All of the following statements regarding universal life insurance are correct, EXCEPT: (LO 3.1) A) The policyowner can easily track the policy's different elements. B) It is generally best suited to long term coverage needs. C) If the policyowner skips a premium payment the policy will not lapse. D) The policy is not susceptible to inadvertently becoming a modified endowment contract.
D) The policy is not susceptible to inadvertently becoming a modified endowment contract.
The "optional modes of settlement" include all of the following EXCEPT: (LO 5.6) A) Leave the proceeds with the insurer at interest. B) Accept the proceeds in fixed-year installments. C) Accept the proceeds in fixed-amount installments. D) Accept the proceeds as a life annuity for the life of the insured.
D) Accept the proceeds as a life annuity for the life of the insured.
The GST Tax may be triggered by which of the following events? (LO 6.11) A) A direct gift to a grandchild B) The death of a grantor's child that leaves a grandchild as the last remaining beneficiary of a trust C) A distribution from a trust to a grandchild of the grantor D) All of the above
D) All of the above
When might a fixed annuity be a good choice? (LO 4.5) A) Safety of principal is paramount. B) A guaranteed interest rate is wanted. C) A conservative complement to other investment vehicles is desired. D) All of the above.
D) All of the above.
All of the following are disadvantages to owning an Indexed Universal Life product EXCEPT: (LO 3.7) A) Insurance companies may change crediting formulas over time. B) Illustrations of these products can be unreliable. C) Lapse of these types of policies can cause adverse tax consequences. D) Distributions are treated similar to distributions from annuities.
D) Distributions are treated similar to distributions from annuities.
In addition to meeting the IRC section 7702 definition, a life insurance contract must exhibit which of the following in order to qualify as life insurance for income and other tax purposes? (LO 1.2) A) Exhibit risk shifting and risk sharing. B) Settlement options C) Adverse selection D) A single premium payment option
Exhibit risk shifting and risk sharing.
A life insurance contract is primarily governed by?
State law
Under the income replacement approach, insurance value is always _______ the human life value
less than
Under the paid-up additions option, the premiums payable by the policyowner _______ while the total death benefit and the schedule of total cash values ___________ over time.
remain level; increase
All of the following are reasons that corporate owned life insurance (COLI) is an attractive means of financing an employer's obligations under a nonqualified deferred compensation plan EXCEPT: (LO 9.8) A) The build-up of value inside the policy is income-tax deferred B) Life insurance enables the employer to promise an immediate death benefit with no risk to corporate cash flow C) A plan funded with life insurance is exempt from all state and federal regulatory requirements D) Life insurance almost always provides the ability to recover costs--including the after-tax cost of the use of corporate dollars
C) A plan funded with life insurance is exempt from all state and federal regulatory requirements
All of the following would be a valid exchange under Section 1035 EXCEPT (LO 7.8) A) A life insurance contract for an annuity contract B) An endowment contract for an annuity contract C) After 2009, an annuity contract for a life insurance contract D) After 2009, a life insurance contract for a qualified long-term care contract
C) After 2009, an annuity contract for a life insurance contract
The advantages of using a revocable life insurance trust include all EXCEPT: (LO 8.2) A) All the client's assets can be poured over to the trust. B) A simple amendment to trust can achieve a redistribution of multiple insurance policies. C) Assets will be distributed by operation of contract. D) Insurance proceeds payable to trustee are immediately available for trustee's distributions.
C) Assets will be distributed by operation of contract.
Why do owners of a no-lapse universal life (NLUL) policy have little incentive to pay more than the stipulated premium amount? (LO 3.9) A) Because of the constantly evolving product design of No-Lapse Universal Life (NLUL) products B) Because of excessive term costs built into the policy C) Because of high loads charged on excess premiums D) Because the tax consequences of owning these products is similar to the consequences of owning a "traditional" universal product
C) Because of high loads charged on excess premiums
Which of the following is true regarding life insurance valuation? (LO 6.6) A) Because there has always been an organized market for policies, valuation is very easy to determine. B) The sale price of a policy to a related party will always be determinative of the actual value. C) For a newly issued policy, the fair market value is the cost of the policy. D) The terminal reserve value of a whole life policy will not be known until the value is needed.
C) For a newly issued policy, the fair market value is the cost of the policy.
To be considered life insurance for estate tax purposes, the death benefit must include all of the following elements EXCEPT (LO 6.7) A) It must be payable unconditionally. B) It must have no effect on other legal liabilities or rights in connection with the insured's death. C) It must not be part of an aleatory contract. D) It must include risk shifting.
C) It must not be part of an aleatory contract.
To meet benefit nondiscrimination rules, a plan must provide all participants with benefits at least as great as those provided to which classification of employees? (LO 7.2) A) Directors and officers B) Unionized employees C) Key employees D) Employees designated as highly compensated employees
C) Key employees
The key elements of life insurance premium pricing include all of the following EXCEPT: (LO 1.3) A) Mortality B) Expenses C) Persistency D) Interest
C) Persistency
All of the following are advantages of making a gift of life insurance to an irrevocable life insurance trust EXCEPT: (LO 8.4) A) Sprinkle and spray powers can be used by an independent trustee. B) Beneficiaries can be given limited powers of appointment. C) Policy cash values can be borrowed from the trust if needed. D) The trust assets are generally protected from the claims of creditors.
C) Policy cash values can be borrowed from the trust if needed.
Which of the following is an advantage of adjustable life? A) Lifetime withdrawals of cash values are fully excluded from income tax. B) Interest paid on policy loans is deductible from capital gain on other investments. C) Policyowners have flexibility of selecting the schedule of premiums they will pay until they request a change in coverage. D) Adjustable life policies are not subject to surrender charges.
C) Policyowners have flexibility of selecting the schedule of premiums they will pay until they request a change in coverage.
The advantages of a split-dollar arrangement include all of the following EXCEPT (LO 9.15) A) Split-dollar arrangements are very cost effective to employers. B) There are virtually no ERISA reporting requirements. C) Premiums are not tax deductible at any time by either party. D) In most split dollar plans, the employer's outlay is fully secured at all times.
C) Premiums are not tax deductible at any time by either party.
Advantages of using life insurance funding in a buy/sell agreement include all of the following EXCEPT: (LO 9.2) A) The event that creates the need for cash also results in the cash becoming available. B) The cost is relatively low. C) Premiums to keep the coverage in effect are deductible as a business expense. D) Survivors of the deceased shareholder can be freed from financial dependence on a business that has just lost a key employee.
C) Premiums to keep the coverage in effect are deductible as a business expense.
Which of the following statements is true regarding the legal aspects of a life insurance contract? (LO 5.5) A) Because the insurance contract is the result of "give and take" negotiations, courts require strict compliance by both the policyowner and the insurance company. B) A statement by the applicant or the insured is considered a warranty. C) States require certain provisions in the contract to safeguard the interests of the policyowner and beneficiary. D) If the policyowner does not pay the premiums, the insurer can compel payment by filing suit against the policy owner.
C) States require certain provisions in the contract to safeguard the interests of the policyowner and beneficiary.
The advantages of key-employee life insurance include all of the following EXCEPT: (LO 9.3) A) The value of owners business investment is stabilized. B) Instant capital is available at the death of a key employee. C) The premiums can be paid with after-tax dollars. D) There are no restrictions on how the proceeds are used.
C) The premiums can be paid with after-tax dollars.
What amount is potentially taxable as a gift of a life insurance policy to another individual? (LO 6.10) A) The sum of premiums paid B) The interpolated terminal reserve C) The replacement cost of the policy D) The face value of the policy
C) The replacement cost of the policy
The transfer for value rule may not apply to a transfer in which of the following situations? (LO 6.3) A) The sale of a policy by the insured to his daughter B) The sale of a policy by the insured to a life settlement company C) The sale of a policy by the insured to his spouse D) All of the above.
C) The sale of a policy by the insured to his spouse
All of the following are characteristics of a level-premium non-participating whole life insurance policy EXCEPT: (LO 2.3) A) In the early years of the policy, the amount of protection is lower relative to premium spent than term insurance. B) Federal income tax is deferred on cash value accumulations. C) There is a periodic adjustment of premium and death benefit. D) There is a schedule of guaranteed cash values.
C) There is a periodic adjustment of premium and death benefit.
The "multiples-of-salary" method of estimating the amount of a family's insurance needs is A) a rule of thumb method that determines insurance need by looking the surviving spouse's earnings potential. B) a method that was repealed by overturning the DOMA legislation C) a method combining a simple rule of thumb method with elements of income replacement and needs analysis. D) a method that can be used only by individuals who are properly licensed with FINRA.
C) a method combining a simple rule of thumb method with elements of income replacement and needs analysis.
All of the following are uses for survivorship life EXCEPT (LO 4.1) A) to provide estate liquidity at the second death of a married couple. B) to protect two-career families. C) to fund a buy-sell agreement. D) to help fund charitable bequests.
C) to fund a buy-sell agreement.
The disadvantages of using a revocable life insurance trust include all EXCEPT: (LO 8.2) A) It takes time and trouble to assign assets to the trust. B) The trustee's commissions can cost the trust 1.5 to 2 percent each year. C) The legal and accounting fees can be significant. D) Insurance proceeds payable to the trustee would be distributed at the trustees discretion and personal preference.
D) Insurance proceeds payable to the trustee would be distributed at the trustees discretion and personal preference.
All of the items listed below are advantages of adjustable life insurance EXCEPT: (LO 2.8) A) The policyowner may change the face amount of coverage. B) Cash value earnings accumulate on a tax deferred basis. C) The policy cash values are not subject to market fluctuations. D) Lifetime withdrawals of cash values are exempt from federal estate tax.
D) Lifetime withdrawals of cash values are exempt from federal estate tax.
All of the following features represents an advantage of an annuity over a mutual fund investment EXCEPT: (LO 4.6) A) If annuitized, distributions are taxed under IRC Section 72. B) A variety of contractual guarantees may be available. C) Tax deferred growth D) Lower acquisition fees
D) Lower acquisition fees
Disadvantages of term insurance include all of the following EXCEPT: (LO 2.1) A) There are no tax-free automatic savings. B) Premiums increase with age. C) There are no loan values. D) Proceeds are not part of a probated estate unless the estate is a named beneficiary.
D) Proceeds are not part of a probated estate unless the estate is a named beneficiary.
All of the following are principal life insurance planning areas EXCEPT: (LO 1.5) A) Income replacement and family needs analysis B) Estate preservation and liquidity needs analysis C) Business insurance needs analysis D) Replacement cost analysis
D) Replacement cost analysis
Which of the following types of life insurance requires the greatest amount of annual premium for the same amount of death benefit? (LO 2.5) A) First-to-die whole life insurance B) Level-premium participating whole life insurance C) Limited-pay whole life insurance D) Single-premium whole life insurance
D) Single-premium whole life insurance
Which of the following is a disadvantage to placing a life insurance policy inside an ILIT? (LO 8.5) A) The donor can change a beneficiary's interest, but only with approval by the trustee. B) Once established, only the trustee can revoke an ILIT. C) Premium payments must be made only by the trust beneficiary. D) The donor must relinquish any incidents of ownership.
D) The donor must relinquish any incidents of ownership
All of the following are disadvantages of first-to-die life insurance EXCEPT: (LO 4.3) A) Base policy coverage ceases upon the first death. B) The cost of a JL policy is greater than the cost of a single life policy with the same face amount. C) Failure to adhere to certain guidelines can have adverse tax consequences. D) The need for redundant coverage may be eliminated in the business market.
D) The need for redundant coverage may be eliminated in the business market.
Some rules of thumb when considering the duration of need include which of the following? (LO 5.1) I. Buy term insurance if the need will probably last for ten years or less. II. Buy term insurance if the policy will be continued up to or beyond age 55.
I. Buy term insurance if the need will probably last for ten years or less.
Which of the following is (are) a reason why an employer might use life insurance in a qualified plan? (LO 9.5) I. To fund an executive nonqualified deferred compensation arrangement II. To provide for family protection or estate liquidity
II. To provide for family protection or estate liquidity
In addition to having increased income, what is one reason why a couple might consider a pension maximization plan? (LO 9.9) A) Lower costs B) Increased flexibility C) Increased, guaranteed security for the spouse D) No life insurance premiums
Increased flexibility
The two policy comparison methods that compute the rates of return, or the prices of protection, for all years or any subset of years the policies may be in force were developed by whom?
Joseph Belth
Clients establish revocable trusts to accomplish which of the following objectives? (LO 8.1) I. Reduce income and estate taxes. II. Comply with state intestacy laws.
Neither
A single-premium life insurance policy issued before June 21, 1988, is "grandfathered"; that is, it is not subject to the MEC (Modified Endowment Contract) tax rules. However, it can lose this tax status if there is
exchange of the policy for another policy
Insurance companies base their mortality assumptions on
the experience of large groups of people
Cash value increases in a life insurance policy are not usually taxable income as long as
the policy remains in force
What is a key feature of variable life insurance?
there is no guaranteed minimum cash value
An individual owns a life insurance policy with an investment in the contract of $75,000 and a cash value of $125,000. Over time, the individual withdraws $85,000 from the contract. How much of the withdrawal will the individual be required to recognize for income tax purposes?
$10,000
Which of the following should be included when using a revocable life insurance trust?
A will
Which one of the following is true of a corporate owned joint life policy? (LO 4.4) A) Corporate AMT may be a consideration. B) Death proceeds are considered income in respect of a decedent. C) Taxable gifts are treated as dividends. D) Gross death proceeds will not be a corporate AMT preference item.
A) Corporate AMT may be a consideration.
All of the following should be included in a DBO agreement EXCEPT (LO 9.12) A) Determination on how much survivors will be paid, based on the ERISA rules B) Amount of the benefit C) Class of beneficiaries entitled to the benefit D) Collection procedures
A) Determination on how much survivors will be paid, based on the ERISA rules
How are distributions from a modified endowment contract taxed? (LO 7.5) A) Distributions are treated as coming first from taxable policy income. B) Distributions are treated as coming first from the investment in the contract. C) Distributions are treated as pro-rata distributions of income and basis. D) Distributions are entirely taxable whether coming from income or investment in the contract.
A) Distributions are treated as coming first from taxable policy income.
All of the following statements regarding a grantor trust are correct EXCEPT: (LO 8.6) A) Income paid to trust beneficiaries is taxed to them rather than the trust. B) Income earned by the trust will be taxed to the grantor. C) Any deductions gains, losses or credits realized by the trust can be used by the grantor. D) If trust income is distributed to the client, the trust is considered a grantor trust.
A) Income paid to trust beneficiaries is taxed to them rather than the trust.
Which one of the following can be used for businesses that are considering providing post-retirement medical benefits for their employees? (LO 10.3) A) A Section 419 plan B) A Section 457 plan C) A Section 162 plan D) A Section 79 plan
A) Section 419 Plan
All of the following are interest-crediting methods used with universal life policies EXCEPT (LO 3.3) A) T-Bill matching B) Portfolio C) Blending D) linked rates
A) T-Bill matching
A) The corporation is large, with ongoing profitability not dependent on any one person.
A) The corporation is large, with ongoing profitability not dependent on any one person.
NY Regulation 187 requires life companies to put procedures in place to ensure that a transaction(LO 10.2) A) appropriately addresses the insurance needs and financial objectives of the consumer. B) pays the lowest commission possible to the agent. C) is in the best interest of the agent. D) is audited only when a complaint is filed.
A) appropriately addresses the insurance needs and financial objectives of the consumer.
Which of the following is the length of time required to avoid inclusion of the proceeds from a life insurance policy placed in an irrevocable life insurance trust? (LO 8.6) A) Two years B) Three years C) Five years D) Ten years
B) 3 years
In which way is variable universal life most like universal life? (LO 3.4) A) Fixed, guaranteed death benefit option B) Flexible premium payments and death benefits C) Investment of cash account D) Transfers between sub-accounts
B) Flexible premium payments and death benefits
Which of the following is the key factor to remember when considering whether to replace an existing policy? (LO 5.4) A) Does the existing policy pay renewal commission? B) Match the product to the problem. C) All whole life policies sold prior to 2005 should be replaced. D) If the surrender cost index is less than 5.0, the policy should be replaced.
B) Match the product to the problem.
Which of the following is a disadvantage to DBO plans? (LO 9.11) A) The entire payment is subject to long-term capital gains treatment. B) Premiums on the life insurance must be paid with after-tax dollars. C) Employees must be given full rights to name beneficiaries in order to avoid federal estate tax inclusion of payments. D) The employer can take a deduction immediately, but employee must wait until benefits are paid.
B) Premiums on the life insurance must be paid with after-tax dollars.
When a gift of life insurance is made, what amount is generally taxable as a gift? (LO 6.10) A) The face value of the policy B) The replacement value of the policy C) The sum of premiums paid on the policy D) Nothing is taxable as a gift.
B) The replacement value of the policy
All of the following are factors to consider when determining an appropriate type of coverage for a client EXCEPT (LO 5.1) A) the client's preferences, prejudices, and priorities. B) first year versus renewal year compensation. C) the client's ability to pay a premium. D) the amount of insurance needed.
B) first year versus renewal year compensation.
A gift of a life insurance policy subject to a loan may cause significant tax problems including which of the following? (LO 7.4) I. Generating taxable income to the donor under the bargain sale rules II. Generating taxable income to the charity under rules relating to charitable unrelated business taxable income
Both
At which time are amounts deferred under a nonqualified plan subject to Social Security tax? (LO 9.8) I. When the services are performed II. When the employee no longer has a substantial risk of forfeiture
Both
Preferably, the trustee of an irrevocable life insurance trust should (LO 8.4) I. initiate the purchase of life insurance. II. own from inception all the incidents of ownership in the policy.
Both
The first step in understanding a policy illustration is to identify the columns that state (LO 5.2) I. yearly premium payments. II. the death benefit from the basic policy.
Both
Which of the following ERISA and Internal Revenue Code (IRC) requirements must be met for group life insurance? (LO 7.2) I. The plan must be in writing and must name a plan administrator. II. The plan must provide a death benefit that meets the definition of a "life insurance contract."
Both
Which of the following are common options for beneficiary installment payments? (LO 6.2) I. Life income option II. Interest only option
Both
Which of the following are common options for beneficiary installment payments? (LO 6.2) I. Life income option II. Interest only option
Both
Which of the following are considered alternatives to indexed universal life policies? (LO 3.7) I. Variable or variable universal life II. Flexible premium deferred index annuity with term insurance
Both
Which of the following are considered parties to the contract? (LO 5.5) I. Insurer II. Owner
Both
Which of the following are potential advantages of a split-dollar arrangement? (LO 9.15) I. The employer's outlay is usually fully secured. II. The employer can decide who will be covered and under what terms.
Both
Which of the following are true regarding the valuing of life insurance policies? (LO 6.5) I. There can be a great deal of uncertainty in valuing life insurance. II. The IRS has not yet given guidance over whether secondary market prices can be considered in life insurance valuation.
Both
Which of the following individuals may also be insured by a participant's qualified plan? (LO 9.6) I. A spouse II. A business partner
Both
Which of the following is (are) a tax implication of group life insurance? (LO 7.2) I. Employees do not have to report any income for the first $50,000 of life insurance coverage. II. Discrimination in favor of key employees may make the cost of coverage taxable to key employees.
Both
Which of the following may be a reason to establish a revocable life insurance trust? (LO 8.2) I. To retain ownership control over assets II. To provide ownership flexibility
Both
Which of the following riders or options may be used to provide income to the insured? (LO 5.9) I. Disability income II. Accelerated-death-benefit
Both
A policy that originally is not a modified endowment contract will be subject to re-testing if there is a "material change" in the contract. Which of the following would likely be a material change? (LO 7.6) A) A cost-of-living increase in the death benefit based on the consumer price index B) Increases in death benefits because of premiums paid for the policy to support the first seven contract years of benefits C) An exchange of one policy for another policy in a 1035 exchange D) A death benefit increase inherent in the policy design due to crediting of interest or other earnings
C) An exchange of one policy for another policy in a 1035 exchange
Which of the following is true regarding creditor access to revocable life insurance trust assets? (LO 8.2) A) If the trust avoids probate, it can be hidden from creditors. B) Creditors have three years in which to press their claims C) Creditors have access to the assets. D) Creditors do not have access to the assets.
C) Creditors have access to the assets.
All of the following are reasons to use variable life products EXCEPT (LO 3.4) A) Tax-free transfers between funds B) Control over investment of premiums and cash values C) Guaranteed cash values D) Potential for multiple switches or transfers between funds each year
C) Guaranteed cash values
NY Regulation 187 will require that the agent do all of the following EXCEPT: (LO 10.2) A) Understand the client's goals and situation before making a product recommendation. B) Address client/product specific suitability. C) Highlight only certain sections of the illustration. D) Give an accurate description of the producer's role.
C) Highlight only certain sections of the illustration.
What are the three primary factors in premium calculations? A) Agent commissions, mortality, and expense ratios B) Agent commissions, interest rates, and lapse rates C) Interest rates, expenses, and mortality D) Interest rates, morbidity, and company dividends
C) Interest rates, expenses, and mortality
Advantages of single premium life include all of the following EXCEPT: (LO 2.6) A) Entire premium goes into cash value. B) Cash value interest or earnings accumulate tax free or tax deferred. C) The amount of protection is low relative to the premium paid. D) Policy cash values can be borrowed at low or zero net interest.
C) The amount of protection is low relative to the premium paid.
Nontax implications of an absolute assignment include all of the following EXCEPT: (LO 5.8) A) The new owner can immediately change the beneficiary and often makes that change almost simultaneously with the assignment. B) If the policyowner made an irrevocable beneficiary designation before making an absolute assignment of the policy, in most states the assignment will not defeat that designation. C) The assignment is contestable for three years by the issuing company. D) Absolute assignments may put the policy and its proceeds beyond the claims of the policyowner's creditors.
C) The assignment is contestable for three years by the issuing company.
All of the following are requirements to have death proceeds from employer-owned life policies issued after August 2006 received income tax free EXCEPT: (LO 6.1) A) A notice to the insured must state the policy owner will be the beneficiary. B) The insured must have been an employee of the beneficiary. C) The insured must pay the premiums. D) The insured must be given notice for what maximum amount the employer will insure the insured's life.
C) The insured must pay the premiums.
Which of the following rights is generally considered an incident of ownership of life insurance? (LO 6.8) A) The right to terminate a spouse's interest in a policy by obtaining a divorce B) To remove or change a trustee of a trust that owns a policy on the insured's life C) To amend a trust that owns a policy on the insured's life D) To amend a trust that is beneficiary of a policy on the insured's life
C) To amend a trust that owns a policy on the insured's life
The gift tax payable on the transfer of a life insurance policy into an irrevocable trust depends on all of the following EXCEPT (LO 8.5) A) the fair market value of the policy. B) the availability of the annual exclusion. C) any unused marital or charitable deductions. D) the availability of the lifetime exemption.
C) any unused marital or charitable deductions.
Financial services professionals should examine policy illustrations with emphasis on (LO 5.2) A) traditional net cost. B) ledger statements. C) policy loans and dividends. D) value comparison.
C) policy loans and dividends.
The process of selecting the best fixed annuity includes (LO 4.6) A) comparing costs and features. B) comparing total outlay with total annuity payments. C) comparing relative financial strengths of companies. D) All of the above.
D) All of the above.
Living benefits taken from a CAWL are usually taxed according to which treatment? (LO 2.10) A) Ordinary income B) Last-in-first-out (LIFO) C) Last-in-last-out (LILO) D) First-in-first-out (FIFO)
D) FIFO
Which one of the following correctly identifies how a corporate trusteed plan operates? (LO 4.3) A) Trust is established by the shareholders for the benefit of the corporation. B) Each business owner has an unlimited interest in the trust. C) Proceeds are not paid until the final shareholder's death. D) Premiums paid by the corporation will be taxable to the shareholders.
D) Premiums paid by the corporation will be taxable to the shareholders.
Which one of the following must be included in a viable buy/sell agreement? (LO 9.1) A) Maximum premiums to be paid on life insurance policies B) Prohibition for any additional purchase of insurance C) Elimination of any possibility of changing company structure D) Statement identifying restrictions on stock transfers or sales
D) Statement identifying restrictions on stock transfers or sales
Which of the following is true regarding the way no-lapse universal life products have developed over time? (LO 3.9) A) These products were created in response to continued high crediting rates. B) Premiums required for the secondary guarantee are higher than that needed for the primary guarantee. C) Shadow-account design simplified the No-Lapse product design. D) Stipulated premium design is the oldest design and the one with the least flexibility.
D) Stipulated premium design is the oldest design and the one with the least flexibility.
Which one of the following can be a significant disadvantage to using a nonqualified deferred compensation plan? (LO 9.7) A) IRC Section 415 limits will apply to the plan. B) Equal benefits must be provided to all vested employees. C) Even with a properly structured plan, all ERISA qualified plan requirements will be applicable. D) The employer's income tax deduction is ordinarily deferred until year in which the income is taxable to the covered employee.
D) The employer's income tax deduction is ordinarily deferred until year in which the income is taxable to the covered employee.
Which one of the following is not a reason why a policy owner might make an absolute policy assignment? (LO 5.8) A) The owner might give a policy to a charity. B) The owner might sell a policy on his life to a viatical company. C) The owner might give a policy to his family trust. D) The owner might use the policy as collateral for a loan.
D) The owner might use the policy as collateral for a loan.
All of the following are nonforfeiture options EXCEPT (LO 5.6) A) cash surrender. B) extended term. C) reduced paid up insurance. D) interest only option.
D) interest only option.
The Act that broadly prohibited the federal government from recognizing the legality of same-sex marriage was the
Defense of Marriage Act.
Withdrawals of cash values, when permitted, are usually taxed on what basis?
First in, first out (FIFO)
Which of the following is (are) a primary use for single premium life insurance? (LO 2.6) I. As a possible substitute for tax-free municipal bonds II. As a vehicle for regular, systematic savings
I. As a possible substitute for tax-free municipal bonds
Which of the following are interest-crediting methods typically used by insurance companies? (LO 2.9) I. Blending method II. Modified ledger statement method
I. Blending Method
Which of the following is (are) true about classic and reverse split-dollar plans? (LO 9.16) I. Classic: employer essentially pays an amount equal to the cash surrender value II. Reverse: employee pays an amount equal to the cost of the pure term insurance portion of the policy
I. Classic: employer essentially pays an amount equal to the cash surrender value
Which of the following situations can trigger the GST tax? (LO 6.11) I. Direct skips II. Indirect skips
I. Direct skips
Which of the following is (are) true regarding the sale of a life insurance policy? (LO 6.6) I. For a sale to an unrelated party, the value should be the sale price. II. There are clear-cut rules regarding the sale of a policy from one irrevocable life insurance trust (ILIT) to another ILIT.
I. For a sale to an unrelated party, the value should be the sale price.
Which of the following may cause a trust to be treated as a "grantor trust"? (LO 8.6) I. Payment of trust income to the grantor or grantor's spouse II. Retention of estate tax exclusion or policy proceeds
I. Payment of trust income to the grantor or grantor's spouse
Which of the following is (are) a common use for limited-pay whole life? (LO 2.5) I. To build cash values more quickly than level premium whole life II. When the lowest premium per $1,000 of insurance is desired
I. To build cash values more quickly than level premium whole life
Which of the following is (are) a principal characteristics of limited-pay whole life? (LO 2.5) I. Flexible premium payments II. Premiums paid for a specified number of years
II. Premiums paid for a specified number of years
Important planning issues that arose as a result of the overturn of DOMA include which of the following? (LO 10.6) I. Absolute assignment II. Qualified plan benefits
II. Qualified plan benefits
Which of the following is (are) a true statement when comparing adjustable life (AL) and universal life (UL)? (LO 2.8) I. AL has more death benefit options than UL. II. UL is more flexible than AL.
II. UL is more flexible than AL
Which of the following factors will affect the amount of a viatical or life settlement received?
Insured's life expectancy
Which type of trust ownership structure may be used to avoid potential gift or estate tax problems? (LO 4.2)
Irrevocable life insurance trust with a Crummey provision
Which of the following is the major benefit of using term life insurance rather than whole life or universal life?
Lowest initial premium cost
Generally, a survivorship life policy provides a death benefit for (LO 4.1)
the second death.
What is includible in the deceased owner's estate when there is an insurance policy on the life of another person? (LO 6.8) A) The face value of the life insurance policy B) Replacement cost of the life insurance policy C) The sum of premiums paid D) Nothing is includible.
B) Replacement cost of the life insurance policy
When comparing term policies, which of the following factors should be considered? (LO 2.1) I. To which age may coverage be converted to ordinary whole life? II. What is the schedule of future renewal premiums?
Both
Which of the following are features of a Section 162 (Executive Bonus) plan? (LO 9.13) I. The employee is charged with a bonus in an amount equal to the premium. II. The employer will take an income tax deduction on the premium amount paid.
Both
Which of the following are key factors to be weighed in choosing the best variable life or variable universal life policy? (LO 3.6) I. Policy loadings and expenses II. Suitability and variety of investment options
Both
Which of the following problems could be caused by the flexibility offered by a universal life insurance policy? (LO 3.2) A) Increases in the death benefit within the first five policy years can cause the death benefit to become taxable income to the beneficiary. B) Increasing the premium will cause cash value growth to become taxable. C) A death benefit reduction may cause the policy to be classified as a modified endowment contract. D) The roll out of a split-dollar policy by a corporation will cause a transfer for value problem.
C) A death benefit reduction may cause the policy to be classified as a modified endowment contract.
All of the following are true statements about whether a corporation generally has an insurable interest in a key employee EXCEPT: (LO 9.3) A) The corporation is large, with ongoing profitability not dependent on any one person. B) The continued success of the corporation depends upon the skills and talents of the key employee. C) Corporate success will suffer as the result of the key employee's death. D) The individual is the company president or other key senior executive
A) The corporation is large, with ongoing profitability not dependent on any one person.
The Generation-Skipping Transfer (GST) tax may be levied in addition to any applicable (LO 6.11) A) federal income tax. B) federal estate or gift tax. C) tax on income in respect of a decedent (IRD). D) federal capital gains tax.
A) federal estate or gift tax.
A Tax Deferred Annuity (TDA) (LO 7.8) A) may not be exchanged. B) may be exchanged with a spouse. C) may be exchanged after age 59 1/2. D) may be exchanged, but it will lose some its tax deferral advantages.
A) may not be exchanged
A significant advantage of a split-dollar plan using survivorship life instead of a single-life policy is that (LO 4.1) A) very low joint and survivor rates are used to measure the pure insurance cost of survivorship life while both insureds are alive, instead of the higher single-life rates. B) a survivorship life policy offers a split option that permits policy ownership to be split more easily between the business and the employee. C) recent tax regulations provide several safe harbor methods for determining mortality charges on split dollar policies. D) the Internal Rate of Return is higher for a survivorship life policy than for a single-life policy.
A) very low joint and survivor rates are used to measure the pure insurance cost of survivorship life while both insureds are alive, instead of the higher single-life rates.
What are the consequences of paying off a policy loan on a contract surrendered in an attempted Section 1035 exchange? (LO 7.8) A) The amount of the policy loan is "boot" and a portion of any gain is taxable. B) The amount of the policy loan is "boot" and the entirety of any gain is taxable. C) The basis on the new contract is reduced by the amount of the policy loan. D) there are no consequences to paying off the policy loan.
A)The amount of the policy loan is "boot" and a portion of any gain is taxable.
Which one of the following diseases significantly increased the desire for accelerated benefits and helped to establish viatical settlements as an option?
AIDS
All of the following statements about the tax aspects of ownership of variable life insurance are correct EXCEPT: (LO 3.5) A) Transfers of investment assets from one fund to another are tax free. B) Gains received are taxable at capital gains rates. C) Investment earnings within the policy are tax deferred. D) Death benefits are usually paid free of federal income tax.
B) Gains received are taxable at capital gains rates.
The NAIC's new regulatory approach to measuring the risks associated with secondary guarantee policies is called (LO 3.10) A) actuarial realism. B) principle-based reserving. C) state-based risk quantification. D) enhanced fiduciary responsibilities.
B) Principle-based reserving
ATRA implemented all of the following changes EXCEPT: (LO 10.4) A) The unified estate and gift tax exclusion is now indexed for inflation. B) The Social Security taxable wage base was increased for high-income taxpayers. C) The top individual tax rate increased. D) Introduced phase-outs of the personal exemption for high-income taxpayers.
B) The Social Security taxable wage base was increased for high-income taxpayers.
Which of the following items are taxable under a life insurance contract? (LO 6.1) A) Interest paid on policy loans B) The economic benefit reportable income from term insurance in a qualified plan C) Premiums for accidental death benefits D) Premiums for disability income
B) The economic benefit reportable income from term insurance in a qualified plan
For income tax purposes, which of the following apply? (LO 8.3) A) A fiduciary income tax return must be filed for a revocable life insurance trust. B) The grantor of a revocable life insurance trust generally reports trust income, losses, deductions, and credits if he is trustee. C) As a general rule, transfers of assets to a revocable life insurance trust have significant and adverse gift and estate tax implications. D) Assets transferred to a revocable trust receive a stepped up basis when they are transferred.
B) The grantor of a revocable life insurance trust generally reports trust income, losses, deductions, and credits if he is trustee.
Which one of the following is typically true of a revocable life insurance trust? (LO 8.1) A) It removes policy proceeds from the insured's estate. B) The owner reserves all policy ownership rights. C) The trust cannot be the owner of the life insurance policy. D) Once established, the trust can only be changed for three years.
B) The owner reserves all policy ownership rights.
All of the following are true regarding no-lapse universal life policies EXCEPT: (LO 3.9) A) While these policies are built upon regular universal life (UL) policy design, they are very different products from "regular" UL products. B) These policies will lapse if the cash value falls to zero. C) These policies serve as extended period term policies. D) These policies were first created in the mid-1990s.
B) These policies will lapse if the cash value falls to zero.
A revocable trust can help with all of the following EXCEPT (LO 8.1) A) asset conservation. B) estate tax reduction. C) asset management. D) asset distribution.
B) estate tax reduction
A Section 162 plan is based on an Internal Revenue Code section that (LO 9.14) A) permits an employer to deduct amounts paid for premiums on life insurance covering employees provided that the amounts of insurance and participation are offered on a nondiscriminatory basis. B) permits an employer to deduct amounts paid for premiums on life insurance covering selected employees provided that the amount is charged to the covered employee as a bonus (compensation). C) permits a key employee to exclude from income up to a certain limited amount paid by their employer as a premium for insurance on their life D) describes what are wages for purposes of the withholding tax.
B) permits an employer to deduct amounts paid for premiums on life insurance covering selected employees provided that the amount is charged to the covered employee as a bonus (compensation).
For families with young children or couples with a living standard that is relatively high for their income, the amount of insurance needed will be high. As a result, (LO 5.1) A) the priority should be to provide the most possible permanent insurance. B) the priority should be to provide adequate death protection. C) the couple should be encouraged to save for several years until they can afford to purchase permanent insurance. D) a combination of term and permanent insurance should always be recommended regardless of how little the client can afford.
B) the priority should be to provide adequate death protection.
All of the following are current assumption whole life (CAWL) features that are similar to universal life (UL) EXCEPT (LO 2.9) A) unbundled structure. B) two-death benefit options. C) low or no front-end loads. D) some CAWL death benefits similar to UL option II.
B) two-death benefit options.
Which of the following is (are) a use for level premium whole life policies? (LO 2.3) I. Fund charitable bequests. II. Fund split-dollar arrangements.
Both
Which of the following rights is (are) considered an incident of ownership of life insurance? (LO 6.8) I. To cancel the policy II. To change policy beneficiaries
Both
Which of the following should be analyzed to determine a pension maximization strategy's feasibility? (LO 9.9) I. Comparison of monthly payments for both joint and single options II. Analysis of benefits, including cost-of-living adjustments
Both
Which disability policy covers normal, necessary, and customary expenses incurred to run the business?
Business overhead insurance
All of the following items should be considered in relation to a joint life insurance policy EXCEPT (LO 4.3) A) guaranteed-purchase riders. B) guaranteed-purchase riders. C) an "own occupation" definition of disability. D) joint premium waiver.
C) an "own occupation" definition of disability.
The value of the survivor benefit from a qualified plan J&S annuity will be included in the taxable estate of the participant EXCEPT (LO 9.10) A) if a trust is named as the beneficiary. B) if a child is named as the beneficiary. C) if the spouse is named as the beneficiary. D) if a trustee is named as the beneficiary.
C) if the spouse is named as the beneficiary.
A survivorship life plan that involves a greater proportion of term insurance than permanent insurance (LO 4.1) A) tends to be the most expensive. B) is based on unrealistic mortality assumptions. C) is sensitive to changes in yields, or interest rates. D) does not guarantee bonus credits or terminal dividends.
C) is sensitive to changes in yields, or interest rates
For clients who are no longer facing potential estate tax liability, all of the following are potentially estate planning goals that can be addressed with life insurance EXCEPT (LO 10.4) A) providing for the orderly transition of a business. B) ensuring that non-business heirs are treated fairly. C) providing a guaranteed increasing income to the surviving family. D) carrying out the charitable goals of the client.
C) providing a guaranteed increasing income to the surviving family.
A conceptually sound approach to valuing key employees should A) account for increased productivity of other employees. B) discount for trends in the life cycle of the business. C) recognize that most, if not all, of the value of key employee contributions will be recovered over time through change or adapting. D) assume that a replacement key employee can be hired at a lower pay scale.
C) recognize that most, if not all, of the value of key employee contributions will be recovered over time through change or adapting.
Which of the following statements is true regarding CAWL insurance? (LO 2.9) A) The amount in the "accumulation account" is based on the performance of investments selected by the policy holder. B) Most current assumption policies charge relatively high front-end loads but have no surrender charges. C) The amount of premiums remains fixed for the term of the contract. D) The insurer promises to credit at least a minimum guaranteed rate of interest.
D) The insurer promises to credit at least a minimum guaranteed rate of interest.
Which of the following is true regarding the interest credited to universal life policies? (LO 3.3) A) "Portfolio" rates are generally more responsive to changing market interest rates than "New Money" rates. B) The rate used is based on the return on investments selected by the policyholder and held in a segregated asset account. C) Insurance companies are no longer allowed complete freedom in interest crediting due to some companies abusing such discretion in the past. D) The rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy.
D) The rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy.
A gift of life insurance to an irrevocable life insurance trust can make all of the following results possible EXCEPT (LO 8.4) A) state death taxes savings. B) federal estate tax savings. C) estate liquidity. D) ability to change the beneficiary of the life insurance policy.
D) ability to change the beneficiary of the life insurance policy.
All of the following are appropriate uses of single premium whole life insurance EXCEPT (LO 2.6) A) when maximum tax-deferred cash buildup in conjunction with life insurance is desired. B) when the objective is to prefund a specified minimum death benefit for a specific purpose. C) as a vehicle for gifts. D) as a good short-term tax-deferred investment.
D) as a good short-term tax-deferred investment.
Under ATRA, the unified gift and estate tax credit is now (LO 10.3) A) scheduled to be eliminated in 2026. B) fixed at a certain amount. C) depreciated based on the type of property in the estate. D) automatically indexed to inflation.
D) automatically indexed to inflation.
Disability income benefit payments received from personally purchased policies are (LO 4.8) A) fully taxable. B) partially taxable. C) not taxable if the individual was self-employed. D) not taxable.
D) not taxable.
If an annuitant dies before having recovered the full amount guaranteed under a refund or period-certain life annuity, the balance of the guaranteed amount received by the beneficiary is (LO 4.5) A) taxable as ordinary income. B) taxable as a capital gain. C) not taxable. D) partially taxable based on how much of the investment of the contract had been returned to the annuitant prior to death.
D) partially taxable based on how much of the investment of the contract had been returned to the annuitant prior to death.
The lapse of a Crummey power is considered a taxable gift only to the extent that the value of the property exceeds (LO 8.5) A) $5,000. B) the greater of 5 percent of the trust assets or the indexed amount of the gift tax exclusion. C) 5 percent of the trust's assets. D) the greater of $5,000 or 5 percent of the trust's assets.
D) the greater of $5,000 or 5 percent of the trust's assets.
The income replacement approach to determining a family's insurance needs is based primarily on A) the annual adjustment to the Social Security taxable wage base. B) ERISA regulations issued by the Department of Labor. C) the current balance in the deceased wage earners qualified plan account. D) the human life value concept.
D) the human life value concept.
A "viatical settlement" is (LO 7.9) A) a provision under which the insurer makes age and time adjustments to the annuity rates under annuity settlement options. B) an option that permits a policyowner, if other than the insured, to change the beneficiary for up to 60 days following the death of the insured in a common disaster with the surviving owner. C) a provision in a universal life policy that reduces or eliminates the surrender charge for early termination if the current rate being credited to cash value falls below specified levels. D) the sale of a life insurance policy to a third party when the insured has a life threatening disease or illness.
D) the sale of a life insurance policy to a third party when the insured has a life threatening disease or illness.
Traditional participating life insurance policy illustrations show which of the following items? (LO 1.4) I. Guaranteed premiums II. Guaranteed dividend
I. Guaranteed premiums
Which of the following should be included in a key employee valuation? (LO 1.7) I. Measure the financial loss based on the employee's contributions II. Inflate for a decline in the employee's contributions
I. Measure the financial loss based on the employee's contributions
Which of the following are reasons why an individual might want to make a gift of life insurance? (LO 8.4) I. Proceeds can be removed from the estate at a relatively low gift tax cost. II. The cash value of the life insurance is always removed from the grantor's estate.
I. Proceeds can be removed from the estate at a relatively low gift tax cost.
Which of the following are key goals of DBO plans? (LO 9.11) I. Provide a significant death benefit. II. Provide additional funding for a qualified retirement plan.
I. Provide a significant death benefit.
When would a no-lapse universal life (NLUL) policy be best indicated for a client? (LO 3.9) I. When the client needs long-term protection II. When the client wants to use the policy as a cash reserve for future loans or distributions
I. When the client needs long-term protection
NY Regulation 187 will require that the agent (LO 10.2) I. understands the client's goals and situation before making a product recommendation. II. gives an accurate description of the issuing company's responsibilities.
I. understands the client's goals and situation before making a product recommendation.
Which of the following are reasons to use a Section 162 plan? (LO 9.13) I. As an alternative to an irrevocable life insurance trust II. As a supplement or replacement for a qualified retirement plan
II
Which of the following are correct when comparing an FPDA and a SPDA? (LO 4.6) I. A SPDA annuity phase begins immediately. II. A FPDA annuity phase is deferred.
II. A FPDA annuity phase is deferred.
Which of the following is (are) a term used to describe universal life? (LO 3.1) I. Fixed-premium II. Adjustable-death-benefit
II. Adjustable-death-benefit
Which of the following is (are) a potential market for joint life insurance? (LO 4.3) I. Unmarried head of household II. Buy/sell funding
II. Buy/sell funding
Which of the following factors are included in determining an individual's human life value? (LO 1.6) I. Employee replacement costs II. Future income levels
II. Future income levels
Which of the following is (are) true regarding interest-crediting strategies used in Indexed Universal Life? (LO 3.8) I. They are usually easy for policyowners to understand. II. Many policies require an owner to commit to a strategy for a long period of time.
II. Many policies require an owner to commit to a strategy for a long period of time.
Which of the following are ways in which life insurance can be used to provide a gift to a charity? (LO 7.3) I. Purchasing a policy on the charitable organization II. Naming the charity as a beneficiary of a policy
II. Naming the charity as a beneficiary of a policy
Which of the following is (are) a requirement for making a charitable gift of a policy? (LO 7.3) I. A gift may be made up to three years following the tax year for which a deduction is being claimed. II. The client must receive a benefit from the charity that exceeds the gift's value.
Neither
Which of the following is true regarding short-term disability insurance? (LO 4.7) I. These plans generally do not require medical documentation before paying benefits. II. Some states require certain employers to provide short-term disability benefits.
Neither
Which of the following is true regarding the uses of Indexed Universal Life (IUL) policies? (LO 3.7) I. IUL policies are well suited for short-term needs. II. While IUL is a popular product for individuals, it is not popular in the business market.
Neither
