Life & Health Chapter 7 Exam

A first time homebuyer may take a lump sum distribution from a Roth IRA up to: a. Lump sum distributions are not allowed b. $4,000 c. $25,000 d. $10,000

d. $10,000 With the 1997 Tax Relief Act, both the traditional IRA and the Roth IRA allow a lump sum distribution of $10,000 maximum for first time homebuyers.

The Internal Revenue Code 1035 does not allow the exchange of an Endowment Policy for which of the following? a. Annuity b. Life Policy c. Endowment Policy d. Variable Annuity

b. Life Policy Under IRC 1035, an endowment can be exchanged for another endowment, or an annuity, but not life insurance.

The tax laws allow an employer to set up a S.I.M.P.L.E retirement program. What are the two retirement plans available to use for this retirement program? a. KEOGH or 457 Plan b. IRA or TSA c. ERISA or TSA d. 401(k) or IRA

d. 401(k) or IRA A S.I.M.P.L.E. may be written as a 401(k) or IRA.

What is not an advantage of gifting with life insurance? a. The size of the gift is determined by the size of the death benefit. b. All the choices are advantages. c. The IRS needs very little documentation. d. The entire gift is guaranteed even if only one premium is paid.

b. All the choices are advantages. The question is effectively asking for a disadvantage of gifting with life insurance. The other choices are advantages of gifting with life insurance.

For the State Insurance Examination, the reference to taxation is specifically referring to: a. Inheritance Tax b. Death Tax c. Estate Tax d. Federal Income Tax

d. Federal Income Tax Unless a question specifies otherwise, taxation questions relate to Federal Income Taxation of a policy or plan.

A fringe benefit of life insurance on a retirement plan with the insurance premium noncontributory, the amount of premium reported as income to the employee each year of the plan is: a. 100% b. 50% c. 75% d. The amount over $50,000 of coverage

a. 100% Since the plan is noncontributory, all premiums are taxable as income to the employee for the year in which the premium was paid.

Chad and Sue have successfully owned and operated their bakery for 10 years and have decided to plan for their retirement. They want a qualified plan to maximize the tax advantages. Their best option would be: a. HR-10 Plan b. Simplified Employee Pension c. Profit Sharing Plan d. 401(k) Plan

a. HR-10 Plan Chad and Sue are looking for a plan to benefit them as owners.

The qualified plan designed for self-employed individuals is: a. KEOGH Plan b. IRA c. Tax-Deferred Annuity d. 403 (b) Plan

a. KEOGH Plan The key is self-employed individuals.

The payment of an accelerated death benefit is not taxable income if the accelerated death benefit payment is qualified. The benefit qualifiers are all the following, except: a. The amount of benefit must at least be equal to the present value of the reduced death benefit remaining after payment of the accelerated benefit. b. The ratio of the policy cash value before and after the benefit payment must at least be equal to the ratio of the death benefit before and after the benefit payment. c. The prognosis of a physician must be less than 12 months. d. The benefit amount is determined similarly to that of an annuity, taking into consideration the amount of months remaining for the insured.

c. The prognosis of a physician must be less than 12 months. The prognosis of a physician must be 24 months or less.

Which statement is inaccurate? a. Since 1990, the interest paid on an individual loan is no longer tax deductible. b. Dividends themselves are not taxable. However, the interest on a dividend is taxable. c. When an employer pays the premium on an employee's contract, the premium is tax deductible as a business expense when the employer is not the beneficiary. d. All withdrawals are fully taxed under the Cost Recovery Rule.

d. All withdrawals are fully taxed under the Cost Recovery Rule. The withdrawal is taxed only to the extent it exceeds the premiums paid to the time of the withdrawal (Cost Recovery Rule).

Which of the following is true regarding a Modified Endowment Contract (MEC)? a. The cash value does not accumulate on a tax-deferred basis. b. There is no difference between the taxation of MEC and a life insurance policy. c. The death benefit is taxed differently than under a life insurance policy. d. Distributions of the cash value are taxed differently than distributions from life policies.

d. Distributions of the cash value are taxed differently than distributions from life policies. Funds distributed prior to age 59 1/2 are subject to a 10% penalty.

Joe had $500,000 of life insurance at work; he has an additional $40,000 life insurance policy the company purchased on all employees. His wife is the primary beneficiary and their four children are contingent beneficiaries. Upon Joes death, what are the tax consequences to his beneficiaries? a. The contingent beneficiaries must pay income taxes on all proceeds they receive. b. The $40,000 will be taxed since the premium was tax deductible by the employer. c. All premiums paid may be deducted from the face value before taxation. d. The $540,000 lump sum proceeds will be received income tax free.

d. The $540,000 lump sum proceeds will be received income tax free. The death benefit (face amount) of both individual and group policies received lump sum by the beneficiary(s) is income tax free.

Ben purchased life insurance and named his church as beneficiary. All of the following would be advantages except: a. Very little documentation is necessary for the IRS. b. The face amount is guaranteed even if insured dies after the first premium payment. c. The donor may remain anonymous if so desired. d. The death benefit might become part of the decedent's estate.

d. The death benefit might become part of the decedent's estate. If Ben owns the policy upon his death, although he has named his church as beneficiary, Ben still has an incidence of ownership and the proceeds of the policy would be included in his gross estate.

A tax on the right of heirs to receive property from a deceased person is a /an: a. None of the answers listed b. Inheritance Tax c. Estate Tax d. Federal Income Tax

b. Inheritance Tax The question references a tax on heirs to receive property of the deceased.

A Modified Endowment Contract loses many life insurance tax advantages. Which of the following is not a taxable event of a Modified Endowment Contract (MEC)? a. All are non-taxable events. b. Withdrawal of any cash value to pay for daughter's wedding. c. Cash surrender of policy. d. Lump sum death benefit paid to the beneficiary.

d. Lump sum death benefit paid to the beneficiary. Withdrawal of any cash value to pay for daughter's wedding and cash surrender of policy are taxable distributions.

In 1974, the Employee Retirement Income Security Act (ERISA) became law. All of the following are ERISA's benefits, except: a. Age discrimination is allowed. b. The longer the employment, the greater the percentage of funds vested. c. Vesting allows withdrawals if employment is terminated by the employee. d. Supplemental benefits such as death and disability withdrawals are permitted.

a. Age discrimination is allowed. The key element in the passage of ERISA was to determine eligibility and apply nondiscrimination requirements regarding age and sex.

How often may I rollover from a particular traditional IRA to any other traditional IRA? a. Annually b. Once each quarter. c. As often as I want, if it is a flexible IRA. d. As directed by the SEC.

a. Annually A traditional IRA rollover may only be completed once every 12 months from a particular traditional IRA to any other traditional IRA.

Which is false as regards a Roth IRA? a. It is a tax-qualified annuity. b. You may withdraw up to $10,000 for first home purchases. c. You may exceed age 70 1/2 to start withdrawals. d. Contributions are not tax deductible.

a. It is a tax-qualified annuity. Roth IRAs are a nondeductible, tax-free retirement plan. All other responses are true of a Roth IRA.

Which of the following is an advantage of a 403(b) Annuity? a. Distributions are tax exempt. b. All monies invested and the accumulation of interest is tax-deferred until received. c. Employees of states, counties, and municipalities may reduce their pay by a specified amount to invest in one or more 403(b) investments. d. They are profit-sharing plans.

b. All monies invested and the accumulation of interest is tax-deferred until received. A 403(b) is a Tax Sheltered Annuity designed for employees of nonprofit organizations and public schools under which all monies invested and interest accumulations are tax-deferred until received.

An Individual Retirement Account (IRA) may be funded with all of the following, except: a. Common Stocks b. Life Insurance c. Mutual Funds d. Certificates of Deposit (CDs)

b. Life Insurance Life insurance does not meet the IRS qualification of an IRA. Keep in mind the objectives of purchasing life insurance versus an IRA.

Which life insurance event is not taxable? a. Monthly income of principle and interest. b. Lump sum death benefit received by the beneficiary. c. Dividends received exceed the premiums paid by $700. d. Interest income only.

b. Lump sum death benefit received by the beneficiary. Interest income only and monthly income of principle and interest include interest which is taxable, and dividends are taxable should the total accumulation of dividends exceed the accumulated premiums paid.

Which type of exchange is not allowed as a section 1035 exchange? a. An annuity exchanged for another annuity. b. A life insurance policy exchanged for another life insurance policy. c. An annuity exchanged for a life insurance policy. d. A life insurance policy exchanged for an annuity.

c. An annuity exchanged for a life insurance policy. An annuity exchanged for life insurance would not be allowed, as their objectives are fundamentally different. You are attempting to exchange a product sold to liquidate an estate for one sold to create an estate.

Which is false regarding the taxation of an annuity if the annuitant should die during distribution? a. If the annuitant chose the life income option, nothing is included in the gross estate. b. If annuity payments are to continue to another person upon an annuitant's death, the survivor's proceeds are included in the gross estate. c. Interest earned during the accumulation period is not taxable. d. If a lump sum goes to a beneficiary, only the amount in excess of the policyowner's investment is included in the beneficiary's gross income for federal tax purposes.

c. Interest earned during the accumulation period is not taxable. Interest earned during the accumulation period is not taxed until annuitization begins and the annuitant starts receiving benefits. Upon receipt as benefits, an annuitant is taxed on the amount of interest earned, not the principal.

The 1035 Exchange states no gain or loss will be recognized on the exchange of contracts by the same insured. This is true for each situation described below, except: a. An Endowment Policy is exchanged for another Endowment Policy that provides for payments on or before the original endowment date. b. A Whole Life Policy is exchanged for a Universal Life Policy. c. An annuity contract is exchanged for another annuity contract. d. An Endowment Policy is exchanged for a Whole Life Policy.

d. An Endowment Policy is exchanged for a Whole Life Policy. IRC 1035 does not authorize the exchange of an Endowment Policy for any kind of Life Insurance Policy as a like-kind exchange.

A qualified pension plan that guarantees a specified level benefit at retirement is a: a. Qualified Contract b. Annuity contract c. Simplified Employee Pension Plan d. Defined Benefit Plan

d. Defined Benefit Plan The key is a specified level benefit at retirement.

After June 20, 1988, all life insurance contracts that do not pass the 7-Pay Test are identified as Modified Endowment Contracts and they lose many of their tax advantages. Which statement is not true? a. Taxable distributions include cash value surrenders and policy loans. b. The 7-Pay Test compares the premiums paid for the policy during the first seven years with seven annual net level premiums for a 7-Pay Policy. c. Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains. d. If a contract is deemed a MEC, any funds distributed are subject to a first-in/first out tax treatment rather than last-in/first-out.

d. If a contract is deemed a MEC, any funds distributed are subject to a first-in/first out tax treatment rather than last-in/first-out. Any funds distributed are subject to a last in, first-out tax treatment.

Janice is a teacher at the local school. Her employer has agreed for the past 3 years to reduce her pay by a specified amount and invest it for her. She has a: a. Section 457 b. 401(k) c. HR 10 d. TSA

d. TSA The question describes a TSA (Tax-Sheltered Annuity), a plan whereby a teacher participates through a reduction in pay by a specified amount to accommodate his/her future retirement.

There are several qualified retirement plans. Which was designed for public school teachers? a. School Employee Pension (SEP) b. Home Room 10 Plans (HR10) c. Educational Stock Option Pensions (ESOP) d. Tax Sheltered Annuities (TSA)

d. Tax Sheltered Annuities (TSA) The choices SEP, HR10 and ESOP carry erroneous titles.

David withdrew the money from his qualified plan and reinstated it 90 days later into another qualified plan. Which one of the following statements is true regarding this transaction? a. The funds in the new qualified plan will not accumulate on a tax-deferred basis. b. The distribution from the former qualified plan is not taxable. c. This type of transaction is not allowed. d. The distribution from the former qualified plan is fully taxable.

d. The distribution from the former qualified plan is fully taxable. The distribution from the former qualified plan is fully taxable, as the transaction was not completed within the 60-day window.