Insurance Ch 4
Which of the following terms is used to name the nontaxed return of unused premiums? A Surrender B Dividend C Premium return D Interest
B Dividend The return of unused premiums is called a dividend. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums.
Which of the following is INCORRECT concerning a noncontributory group plan? A They help to reduce adverse selection against the insurer. B They require 100% employee participation. C The employer pays 100% of the premiums. D The employees receive individual policies.
D The employees receive individual policies. The employer receives a master policy, and employees receive a certificate of insurance.
An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits? A The entire living benefit is considered taxable income. B A portion of the benefit up to a limit is tax free; the rest is taxable income. C Principal is tax free, but interest is taxed. D The entire benefit will be received tax free.
B A portion of the benefit up to a limit is tax free; the rest is taxable income. When accelerated benefits are paid to a chronically ill insured, they are tax free up to a certain limit. Any amount received in excess of this dollar limit must be included in the insured's gross income.
In life insurance policies, cash value increases A Are income taxable immediately. B Are taxed annually. C Are only taxed when the owner reaches age 65. D Grow tax deferred.
D Grow tax deferred. Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.
Who may contribute to an HR-10 plan? A Partner with at least 5% ownership B Self-employed plumber C Manager of a store D Corporate executive
B Self-employed plumber Self-employed persons may contribute to an HR 10 Plan.
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
D The policyowner of the life insurance policy The term owner refers to the owner of the policy who may seek to enter into a life settlement contract. The term does not include an insurance provider, a qualified institutional buyer, a financing entity, a special purpose entity, or a related provider trust.
Which of the following is NOT true regarding a nonqualified retirement plan? A Earnings grow tax deferred. B It needs IRS approval. C Contributions are not currently tax deductible. D It can discriminate in benefits and selecting participants.
B It needs IRS approval. Nonqualified retirement plans do not meet the IRS requirements for favorable tax treatment of deductions and contributions; therefore, they do not need to be approved by IRS.
In a life settlement contract, whom does the life settlement broker represent? A The insurer B The beneficiary C The life settlement intermediary D The owner
D The owner Life Settlement Broker is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer? A $8,000, tax on growth only B $10,000, tax on growth only C $10,000, no tax consequence D $8,000, no tax consequence
C $10,000, no tax consequence During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other.
Which of the following is an IRS qualified retirement program for the self-employed? A Keogh B Split Dollar C Buy and Sell Agreement D 401(k)
A Keogh The Keogh or HR-10 plan allow self-employed individuals to establish tax favored retirement plans for themselves and their eligible employees.
If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is A Permanently insured. B Fully insured. C Partially insured. D Correctly insured.
B Fully insured. A worker is fully insured under Social Security if the worker has accumulated the required number of credits based on his/her age.
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
C Survivor protection Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.
Death benefits payable to a beneficiary under a life insurance policy are generally A Subject to income taxation by the Federal Government. B Exempt from income taxation if under $7,000. C Exempt from income taxation if over $7,000. D Not subject to income taxation by the Federal Government.
D Not subject to income taxation by the Federal Government. When premiums are paid with after tax dollars, the death benefit is generally not subject to federal income taxation
Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? A The key employee is the owner and the employer is the beneficiary. B The employer is the owner and beneficiary. C The employer is the owner and the key employee is the beneficiary. D The key employee is the owner and beneficiary.
B The employer is the owner and beneficiary. With the key-person coverage, the business (the employer) is the applicant, owner, premium payer, and beneficiary.
Which of the following is NOT true regarding policy loans? A Policy loans can be repaid at death. B An insurer can charge interest on outstanding policy loans. C A policy loan may be repaid after the policy is surrendered. D Money borrowed from the cash value is taxable.
D Money borrowed from the cash value is taxable. Money borrowed from the cash value is not taxable. Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy loans.
All of the following are personal uses of life insurance EXCEPT A Buy-sell agreement. B Survivor protection. C Estate creation. D Cash accumulation.
A Buy-sell agreement. Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.
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.
B They are tax free to terminally ill insured. When accelerated benefits are paid under a life insurance policy, they are received tax free by terminally ill insured, and tax free up to a limit for chronically ill insured.
Social Security was created to protect against all of the following EXCEPT A Sickness in old age. B Premature death. C Disability. D Bad investment choices.
D Bad investment choices. Social Security is a Federal program enacted in 1935, that is designed to provide protection, for eligible workers and their dependents, against financial loss due to death, disability, superannuation (retirement income), and sickness in old age.
All of the following are characteristics of group life insurance EXCEPT A Individuals covered under the policy receive a certificate of insurance. B Certificate holders may convert coverage to an individual policy without evidence of insurability. C Premiums are determined by the age, sex and occupation of each individual certificate holder. D Amount of coverage is determined according to nondiscriminatory rules.
C Premiums are determined by the age, sex and occupation of each individual certificate holder. Premiums are determined by the age, sex and occupation of the entire group.
An employee quits her job where she has a balance of $10,000 in her qualified plan. The balance was paid out directly to the employee in order for her to move the funds to a new account. If she decides to rollover her plan to a Traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover? A $10,000, 60 days B $10,000, 30 days C $8,000, 60 days D $8,000, 30 days
C $8,000, 60 days Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor.
Who can make a fully deductible contribution to a traditional IRA? A Someone making contributions to an educational IRA B A person whose contributions are funded by a return on investment C An individual not covered by an employer-sponsored plan who has earned income D Anybody: all IRA contributions are fully deductible regardless of income level
C An individual not covered by an employer-sponsored plan who has earned income Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.
Social security benefits are available for a surviving spouse until the youngest child reaches age 16. Benefits are again available for the spouse after reaching age 60. What is the time period called during which the surviving spouse does not receive benefits? A Annuitization period B Cancellation C Blackout period D Waiver of premium
C Blackout period The period of time after the youngest child reaches age 16 and prior to the surviving spouse reaching age 60 is called a black-out period. No Social Security benefits would be paid to the surviving spouse during this time.
Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? A Premiums are taxable to the employee. B Premiums are not tax deductible as a business expense. C Premiums are tax deductible by the key employee. D Premiums are tax deductible as a business expense.
B Premiums are not tax deductible as a business expense. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free
All of the following would be eligible to establish a Keogh retirement plan EXCEPT A The president and employee of a family corporation. B A sole proprietor of a service station who employs four employees. C A sole proprietor of film development store with no employees. D A hair dresser who operates her business at her house.
B A sole proprietor of a service station who employs four employees. Keogh plans are for self-employed individuals and their employees.
A tax-sheltered annuity is a special tax-favored retirement plan available to A Anyone. B Certain age groups only. C Certain groups depending on factors such as race, gender, and age. D Certain groups of employees only.
D Certain groups of employees only. A tax-sheltered annuity is a special tax-favored retirement plan available only to certain groups of employees (nonprofit charitable, educational, religious, and other 501c(3) organizations, including all employees in public education).
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is A A Multiplicative Policy. B A Modified Endowment Contract. C An Accelerated policy. D An endowment.
B A Modified Endowment Contract Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract.
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a A Rollover. B Settlement option. C Nontaxable exchange. D Nonforfeiture option.
B Settlement option. A settlement option is exercised when an immediate annuity is purchased with the face amount at death or with the cash value at surrender.
Which of the following is NOT true of life settlements? A They could be sold for an amount greater than the current cash value. B They involve insurance policies with large face amounts. C The seller must be terminally ill. D They could be used for a key person coverage.
C The seller must be terminally ill. With Life Settlements, unlike with viatical settlements, the seller does not need to be terminally ill. They usually involve life insurance policies with a face amount of $250,000 or more, "key-person" coverage, corporate owned policies, or policies representing excess coverage that is no longer needed, and could be sold for an amount greater than the current cash value.
An employee is insured under her employer's group life plan. If she terminates her group coverage, which of the following statements is INCORRECT? A The insured may choose to convert to term or permanent individual coverage. B The insured would not need to prove insurability for a conversion policy. C The insured may convert coverage to an individual policy within 31 days. D The premium for individual coverage will be based upon the insured's attained age.
A The insured may choose to convert to term or permanent individual coverage. When group coverage is converted to an individual policy, the insurer will determine the type of coverage, usually permanent insurance.
In which of the following instances would the premium be tax deductible? A Premiums paid by an employer on the life of a key person B Premiums paid by an employer on a $30,000 group term life insurance plan for employees C Premiums paid by an individual on his/her own life insurance D Premiums paid by a mother on her son's policy
B Premiums paid by an employer on a $30,000 group term life insurance plan for employees As a general rule, premiums paid for life insurance are not tax deductible. The exception to this rule is when an employer buys group term life insurance for his employees since it is considered a business expense.
What percentage of a company's employees must take part in a noncontributory group life plan? A 0% B 25% C 75% D 100%
D 100% If the employer pays all of the premium, all employees must be covered to avoid adverse selection.
Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer then makes a matching contribution up to an amount equal to what percent of the employee's annual wages? A 7 B 10 C 3 D 5
D 5 Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer can then contribute up to an amount equal to 3% of the employees' annual compensation. Contributions and earnings are both tax-deferred until funds are withdrawn.
Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? A Premiums are tax deductible by the key employee. B Premiums are tax deductible as a business expense. C Premiums are taxable to the employee. D Premiums are not tax deductible as a business expense.
D Premiums are not tax deductible as a business expense. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.
All of the following employees may use a 403(b) plan for their retirement EXCEPT A A school bus driver. B A part-time classroom aide. C The vice president of a charitable organization. D The CEO of a private corporation.
D The CEO of a private corporation. Not all public employees are eligible for 403(b) plans, or tax-sheltered annuities, only employees of public education (local, state, or federal), as well as employees of charitable organizations.
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 Subject to government standards. B Illegal. C A nonqualified annuity plan. D An executive annuity plan.
C A nonqualified annuity plan. Nonqualified plans are a perfectly legal way for selected employees to receive certain types of benefits. Before-tax corporate dollars can be used for these plans, and they are not subject to government standards. Because of this, however, nonqualified plans contributions are not tax-deductible, unlike with qualified plans.
Which of the following is NOT an example of a business use of Life Insurance? A Executive Bonuses B Key Person C Workers Compensation D Buy-sell Funding
C Workers Compensation Workers Compensation is a benefit payable when a worker is injured by a work-related injury, regardless of fault or negligence. It is not considered a business use of insurance.
Life insurance death proceeds are A Generally not taxed as income. B Taxable to the extent that they exceed 7.5% of the beneficiaries adjusted gross income. C Taxed as a capital gain. D Taxed as ordinary income.
A Generally not taxed as income. Life insurance death benefits are generally not taxed as income.
The premiums paid by the employer in a business life insurance policy are A Always taxable to the employee. B Never taxable to the employee. C Tax deductible by the employer. D Tax deductible by the employee.
C Tax deductible by the employer. The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are tax deductible to the employer as a business expense.
What is the main purpose of the Seven-pay Test? A It requires level premium payments for 7 years. B It ensures that the policy benefits are paid out in 7 years. C It guarantees interest minimum. D It determines if the insurance policy is an MEC.
D It determines if the insurance policy is an MEC. The Seven-pay Test determines whether an insurance policy is "over-funded" or if it's a Modified Endowment Contract. In other words, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.
Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings? A 75% of employee's contributions are taxed. B They are tax deferred until withdrawn. C Taxes must be paid in full. D Employer's matching contribution can be 50% of employee's salary.
B They are tax deferred until withdrawn. Taxation is deferred on both contributions and earnings until funds are withdrawn.
To attain currently insured status under Social Security, a worker must have earned at least how many credits during the last 13 quarters? A 4 credits B 6 credits C 10 credits D 40 credits
B 6 credits To be considered currently (or partially) insured, an individual must have earned 6 credits during the last 13-quarter period.
What is the number of credits required for fully insured status for Social Security disability benefits? A 4 B 10 C 30 D 40
D 40 The term "fully insured" refers to someone who has earned 40 quarters of coverage (10 years of work times 4 maximum annual credits).
All of the following are business uses of life insurance EXCEPT A Funding business continuation agreements. B Funding against general company financial loss. C Compensating executives. D Funding against financial loss caused by the death of a key employee.
B Funding against general company financial loss. Both life and health insurance can be used for a variety of purposes in a business setting, including the funding of business continuation agreements, compensating executives, and protecting the firm against financial loss resulting from the death or disability of key employees
What is the official name for the Social Security program? A Defined Benefit Retirement Insurance B Qualified Pension Plan C Old Age Survivors Disability Insurance D Social Insurance Program
C Old Age Survivors Disability Insurance Social Security is formally called Old Age Survivors Disability Insurance - OASDI.
The minimum number of credits required for partially insured status for Social Security disability benefits is A 4 credits. B 6 credits. C 10 credits. D 40 credits.
B 6 credits. To be considered partially insured, an individual must have earned 6 credits during the last 13-quarter period.
All of the following are general requirements of a qualified plan EXCEPT A The plan must be permanent, written and legally binding. B The plan must provide an offset for social security benefits. C The plan must be communicated to all employees. D The plan must be for the exclusive benefits of the employees and their beneficiaries.
B The plan must provide an offset for social security benefits. Plans must meet the general requirements established by IRS.
A key person insurance policy can pay for which of the following? A Hospital bills of the key employee B Costs of training a replacement C Loss of personal income D Workers compensation
B Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee.
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 Risk exposure B Morbidity C Life expectancy D Mortality rate
C Life expectancy Life Expectancy is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean)
Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE? A Policy loans are taxable distributions. B Accumulations are tax deferred. C Withdrawals are not taxable. D Distributions before age 59 1/2 incur a 10% penalty on policy gains.
C Withdrawals are not taxable. Any distributions from MECs are taxable, including withdrawals and policy loans. All of the other statements are true.
Which of the following is the required number of participants in a contributory group plan? A 75% B 100% C 25% D 50%
A 75% Under a contributory group plan, an insurer will require that 75% of eligible employees be included in the plan.
If a retirement plan or annuity is "qualified," this means A It is approved by the IRS. B It has a penalty for early withdrawal. C It accepts after-tax contributions. D It is noncancellable.
A It is approved by the IRS. A qualified retirement plan is approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth.
Which of the following insurance arrangements will be appropriate for a parent buying a life insurance policy on a child where the parent is the policyowner? A Third-party ownership B An irrevocable beneficiary C A buy-sell agreement D Family term rider
A Third-party ownership Contracts that are owned by someone other than the insured are known as third-party ownership. Most policies involving third-party ownership are written in business situations or for minors in which the parent owns the policy.
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 nothing because the employee has terminated his group insurance and hasn't started the individual one. B The insurer will pay the full death benefit from the group policy to the beneficiary. C The insurer will pay a reduced death benefit to the beneficiary. D The insurer will pay the death benefit minus one month's premium.
B The insurer will pay the full death benefit from the group policy to the beneficiary. The employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy.
An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable? A $50,000 B $18,000 C $15,000 D $3,000
D $3,000 The difference between the premiums paid and the cash value would be taxable. In this example, the difference between the premiums paid ($15,000) and the cash value ($18,000) is $3,000.
How are contributions to a tax-sheltered annuity treated with regards to taxation? A They are never taxed. B They are taxed as income for the employee. C They are taxed as income for the employee, but are tax free upon withdrawal. D They are not included as income for the employee, but are taxable upon distribution.
D They are not included as income for the employee, but are taxable upon distribution. Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawal.
An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy? A She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. B She will still be covered under the group plan, but will have to pay an individual policy premium. C She can only convert her coverage without proof of insurability if she has the master policy. D She must apply for a new policy, which requires her to provide proof of insurability.
A She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. If a person has life insurance under a group plan and then leaves the group, he/she may convert group coverage to individual coverage within 31 days of leaving the plan without proof of insurability.
Which of the following types of insurance policies would perform the function of cash accumulation? A Increasing term B Whole life C Term life D Credit life
B Whole life Life insurance is unique from other types of insurance in that it could perform the function of cash accumulation. Cash values are available in whole life policies.
Which of the following would be considered a nonqualified retirement plan? A Split-dollar plan B 401(k) C Keogh plan D Roth IRA
A Split-dollar plan Examples of nonqualified plans are individual annuities and deferred compensation plans for highly paid executives, split-dollar insurance arrangements, and Section 162 executive bonus plans.
All of the following are true of key person insurance EXCEPT A The plan is funded by permanent insurance only. B There is no limitation on the number of key employee plans in force at any one time. C The employer is the owner, payor and beneficiary of the policy. D The key employee is the insured.
A The plan is funded by permanent insurance only. Key Person coverage may be funded by any type of life insurance.
For a retirement plan to be qualified, it must be designed for the benefit of A IRS. B Employees. C Key employee. D Employer.
B Employees. Qualified plans are designed for the exclusive benefit of the employees and their beneficiaries.
What is the primary purpose of a 401(k) plan? A Life insurance distribution B Retirement C Education funds D To receive dividends over a certain period
B Retirement Profit-sharing plans are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees. A 401(k) qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also somehow match the employee's contribution, whether it is dollar for dollar or on a percentage basis.
A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then A IRS has no jurisdiction. B The benefit is received as taxable income. C The benefit is received tax free. D The benefit is subject to the exclusionary rule.
C The benefit is received tax free. Should a key person die, the benefit is treated as a reimbursement to the business for loss of services from that key person.
Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated? A Those who have dependents B Those who have no history of claims C Those who have been insured under the plan for at least 5 years D Those who have worked in the company for at least 3 years
C Those who have been insured under the plan for at least 5 years If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.
Which of the following is true regarding taxation of dividends in participating policies? A Dividends are not taxable. B Dividends are taxable only after a certain amount is accumulated annually. C Dividends are taxable in some life insurance policies and nontaxable in others. D Dividends are considered income for tax purposes.
A Dividends are not taxable. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums. The interest earned on the dividends, however, is subject to taxation as ordinary income.
Group life insurance is a single policy written to provide coverage to members of a group. Which of the following statements concerning group life is CORRECT? A Premiums are determined by age, occupation, and individual underwriting. B 100% participation of members is required in noncontributory plans. C Each member covered receives a policy. D Coverage cannot be converted when an individual leaves the group.
B 100% participation of members is required in noncontributory plans. If the employer pays all of the premium, then all employees must be included.
Employer contributions made to a qualified plan A Are taxed annually as salary. B Are subject to vesting requirements. C May discriminate in favor of highly paid employees. D Are after-tax contributions.
B Are subject to vesting requirements. Qualified plans must have a vesting requirement.
A partnership buy-sell agreement in which each partner purchases insurance on the life of each of the other partners is called a A Stock redemption plan. B Cross-purchase plan. C Key person plan. D Split-dollar plan.
B Cross-purchase plan. In a Cross-Purchase Plan each partner involved purchases insurance on the life of each of the other partners. With a cross-purchase plan, each partner is the owner, premium-payor, and beneficiary of the life insurance on the lives of the other partners. The amount of the life insurance is equal to each partner's share of the purchase price of the deceased partner's interest in the business.
When an employee terminates coverage under a group insurance policy, coverage continues in force A Until the employee can obtain coverage under a new group plan. B Until the employee notifies the group insurance provider that coverage conversion policy is issued. C For 31 days. D For 60 days.
C For 31 days. An employee has 31 days under the conversion privilege to convert to an individual policy.
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? A It is taxable only if it exceeds the amounts paid for premiums by 50%. B It is automatically taxable. C It is only taxable if the cash value exceeds the amount paid for premiums. D It is not considered to be taxable.
C It is only taxable if the cash value exceeds the amount paid for premiums. The cash value of a surrendered policy is only considered to be taxable as income if the cash value exceeds the amount of premiums paid for the policy.
Which of the following is an eligibility requirement for all Social Security Disability Income benefits? A Have permanent kidney failure B Be at least age 50 C Have attained fully insured status D Be disabled for at least 1 year
C Have attained fully insured status Although Social Security offers many benefits, such as retirement, survivors and Medicare, only those who have attained fully insured status are eligible for Disability Income benefits. Contributing to Social Security for 40 quarters (10 years) attains fully insured status.
An employee quits his job and converts his group policy to an individual policy; the premium for the individual policy will be based on his A Experience Rating. B Group rate. C Insurer's scheduled rate. D Attained age.
D Attained age. If an employee terminates membership in the insured group, the employee has the right to convert to an individual whole life policy without proving insurability. The insurer will determine what type(s) of policy an employee may convert to, but it must be issued at a standard rate, based on the individual's attained age.
An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n) A 403(b) Plan (TSA). B Keogh Plan. C Roth IRA. D SEP.
A 403(b) Plan (TSA). Under a 403(b) Plan, tax-sheltered annuities may be established for the employees of specified nonprofit charitable, educational, religious and other 501c(3) organizations, including teachers in public schools systems. Such plans generally are not available to other kinds of employees.
A 60-year-old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true? A The amount of the distribution is reduced by the amount of a 20% withholding tax. B No taxes are due since the plan participant is over age 59 1/2. C There is a 10% early withdrawal penalty. D The amount distributed is subject to ordinary income tax.
A The amount of the distribution is reduced by the amount of a 20% withholding tax. Distributions from 401(k) plans are taxable as ordinary income in the year of the distribution. However, if the distribution is rolled over to a Traditional IRA, taxes are deferred until the required minimum IRA distributions begin (which is generally no later than age 70 1/2). Since this client actually took a distribution (instead of making a trustee-to-trustee roll over), the distribution is subject to 20% withholding tax.
An IRA purchased by a small employer to cover employees is known as a A Simplified Employee Pension plan. B 401(k) plan. C Defined contribution plan. D 403(b) plan.
A Simplified Employee Pension plan. A Simplified Employee Pension (SEP) is an employer sponsored IRA. Contributions to the plan are not included in the employee's taxable income for the year, to the extent that they do not exceed the maximums allowed. Distributions from a SEP are taxable as ordinary income when received at retirement
Two attorneys at law and operate their practice as a partnership. They want to start a program through their practice that will provide retirement benefits for themselves and three employees. They would likely choose A HR-10 (Keogh Plan). B Section 457 Deferred Compensation Plan. C 403(b) plan. D 401(k) plan.
A HR-10 (Keogh Plan). HR-10 (Keogh Plans) are plans specifically for self-employed and their employees.
All of the following statements concerning an employer sponsored nonqualified retirement plan are true EXCEPT A The plan is not approved for favorable tax treatment by the IRS. B The employer can receive a current tax deduction for any contributions made to the plan. C The plan is a legal method of accumulating money for retirement needs. D The plan can discriminate as to who may participate.
B The employer can receive a current tax deduction for any contributions made to the plan. Employers do not receive a current tax deduction for any contributions made to a nonqualified plan. The plans are legal; however, they do not qualify for any favorable tax treatment under the IRS rules.
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 Split-dollar plan. B Stock redemption plan. C Buy-sell agreement. D Key person policy.
C Buy-sell agreement. Buy-Sell agreements are used to contractually establish the intent of someone else to purchase the business upon the insured's death, and to set a value (purchase price) on a business. Life insurance is used to fund the buy-sell agreement. Any type of life insurance may be purchased to provide the necessary funds for the agreement. Insurance can be used to either fully or partially fund the buy-sell agreement.
In order to qualify for conversion from a group life policy to an individual policy of the same coverage, a person must have been insured under the group plan for how many years? A 10 B 1 C 3 D 5
D 5 If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.
For an individual who is NOT covered by an employer-sponsored plan, IRA contributions are A Never tax deductible. B Partially tax deductible depending on the income level. C Tax deductible. D Deducted based on the income level.
C Tax deductible. Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level
In a direct rollover, how is the money transferred from one plan to the new one? A From the original plan to the original custodian B From trustee to trustee C From trustee to the participant D From the participant to the new plan
B From trustee to trustee In a direct rollover, the distribution is made directly from the trustee of the first plan to the trustee or administrator/custodian of the new IRA plan.
All of the following benefits are available under Social Security EXCEPT A Death benefits. B Welfare benefits. C Old-age and retirement benefits. D Disability benefits.
B Welfare benefits. Social Security is an entitlement program, not a welfare program.
If a company has a Simplified Employee Pension plan, what type of plan is it? A The same as an IRA, with the same contribution limits B An undefined contribution plan for large businesses C A qualified plan for a small business D The same as a 401(k) plan
C A qualified plan for a small business A Simplified Employee Pension (SEP) is a type of qualified plan suited for the small employer or for self-employed. A SEP is an employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or a specified maximum contribution amount.
An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called? A 401(k) plan B Tax-sheltered account plan C HR 10 plan D Profit sharing plan
D Profit sharing plan A profit sharing plan is one where the employer will contribute monies into an employee's retirement plan when the company shows a profit. The others are all qualified plans, but company profit isn't an issue with them.
An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses. What option could the insured utilize? A Viatical settlement B Estate liquidation C Nonpayment of premium D Change of beneficiary
A Viatical settlement A viatical statement allows an insured with a life-threatening condition to sell the existing policy in order to receive benefits when they are most needed. Viators typically receive a percentage of the policy's face value from the person who purchases the policy
SIMPLE Plans require all of the following EXCEPT A No more than 100 employees. B Employees must receive a minimum of $5,000 in annual compensation. C At least 1,000 employees. D No other qualified plan can be used.
C At least 1,000 employees. A SIMPLE plan is available to small businesses that employ not more than 100 employees receiving at least $5,000 in compensation from the employer during the previous year.
Who is a third-party owner? A An insurer who issues a policy for two people B An employee in a group policy C An irrevocable beneficiary D A policyowner who is not the insured
D A policyowner who is not the insured Third-party owner is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it.
Which of the following is an example of liquidity in a life insurance contract? A The flexible premium B The money in a savings account C The cash value available to the policyowner D The death benefit paid to the beneficiary
C The cash value available to the policyowner Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.
What is the purpose of key person insurance? A To insure retirement benefits are available to all key employees B To maintain an account that insures the owner of a company remains solvent C To lessen the risk of financial loss because of the death of a key employee D To provide health insurance to the families of key employees
C To lessen the risk of financial loss because of the death of a key employee With insurance, the death benefit creates an immediate estate should the insured die.
All of the following statements are true regarding tax-qualified annuities EXCEPT A Tax accumulation is deferred. B They must be approved by the IRS. C Withdrawals are taxed. D Employer contributions are not tax deductible.
D Employer contributions are not tax deductible. Tax qualified annuities are required to be approved by the IRS. Tax qualified annuities provide tax deductible employer contributions and all tax accumulation is deferred.
An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true? A He will have to pay a penalty regardless of his age. B He will not have to pay a penalty, regardless of his age. C He cannot withdraw money from his MEC before age 59½. D He will have to pay a penalty if he is younger than 59½.
D He will have to pay a penalty if he is younger than 59½ Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract. All withdrawals are subject to taxation on a LIFO basis, and if withdrawals are made earlier than the age of 59½, a 10% penalty is imposed.
All of the following would be different between qualified and nonqualified retirement plans EXCEPT A Taxation on accumulation B Taxation of withdrawals C Taxation of contributions D IRS approval requirements
A Taxation on accumulation Taxation on accumulation is deferred in both types of plans. The rest of the characteristics would differ.
In terms of Social Security, what is the interval spanning between the day when the youngest child of a family turns 16 and before the surviving spouse turns age 60 called? A Accumulation Period B Blackout Period C Nonpayment Interval D Latent Interval
B Blackout Period The interval spanning between the day when the youngest child of a family turns 16 and before the surviving spouse turns age 60 is called a "Blackout Period". No benefits are paid during this time.
All of the following are business uses of life insurance EXCEPT A Funding against financial loss caused by the death of a key employee. B Funding business continuation agreements. C Funding against general company financial loss. D Compensating executives.
C Funding against general company financial loss. Both life and health insurance can be used for a variety of purposes in a business setting, including the funding of business continuation agreements, compensating executives, and protecting the firm against financial loss resulting from the death or disability of key employees.
What does "liquidity" refer to in a life insurance policy? A The insured is receiving payments each month in retirement. B Cash values can be borrowed at any time. C The death benefit replaces the assets that would have accumulated if the insured had not died. D The policyowner receives dividend checks each year.
B Cash values can be borrowed at any time. Liquidity in life insurance refers to availability of cash to the insured through cash values.
All of the following are examples of third-party ownership of a life insurance policy EXCEPT A When an insured purchased a new home, the insured made an absolute assignment of a life insurance policy to the mortgage company. B An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan. C An insured couple purchases a life insurance policy insuring the life of their grandson. D A company purchases a life insurance policy on their manager, who is an important part of the operation.
B An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan. A collateral assignment is the transfer of some or all of the death benefits of the policy to a creditor as security for a loan, but does not give the creditor the rights of ownership. In the event of the insured's death, the creditor would only be able to recover that portion of the policy's proceeds equal to the creditor's remaining interest in the loan.
Which of the following is TRUE of a qualified plan? A It may allow unlimited contributions. B It has a tax benefit for both employer and employee. C It does not need to have a vesting schedule. D It may discriminate in favor of highly paid employees.
B It has a tax benefit for both employer and employee. A qualified plan is approved by the IRS, which then gives both the employer and employee benefits in deductibility of contributions and tax deferral of growth.
Which of the following is the best reason to purchase life insurance rather than annuities? A To liquidate a sum of money over a lifetime B To create an estate C To liquidate a sum of money over a period of years D To create regular income payments
B To create an estate With insurance, the death benefit creates an immediate estate should the insured die.
All of the following are requirements of eligibility for Social Security disability income benefits EXCEPT A Fully insured status. B Waiting period of 5 months. C Being age 65. D Inability to perform any gainful work.
C Being age 65. The term fully insured refers to someone who has earned 40 quarters of coverage (the equivalent of 10 years of work), and is therefore entitled to receive Social Security retirement, Medicare, and survivor benefits. The waiting, or elimination period for Social Security disability benefits is 5 months.
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? A Neither principal nor interest B Principal only C Interest only D Both principal and interest
C Interest only If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.
What is the name of the insured who enters into a viatical settlement? A Contingent B Viatical broker C Viator D Third party
C Viator Viator means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.
Which of the following statements concerning a Simplified Employee Pension plan (SEP) is INCORRECT? A SEPs allow the employer to make annual tax deductible contributions up to 25% of an employee's earned income. B SEPs have a higher tax deductible contribution limit than an IRA. C Employer contributions are not included in the employee's gross income. D SEPs are suitable for large companies.
D SEPs are suitable for large companies. An SEP is a benefit plan that is designed to be provided by a small employer for the benefit of the employees.