Life Insurance 5

Jenny directed $2,500 of her premium deposit to an aggressive technology stock sub-account. At the time of her original deposit, the value of an accumulation unit in that sub-account was $25. Jenny bought 100 units. Two months later, the value of each of those units dropped to $15. What is Jenny's investment in the technology stock account now? $1,500 $1,200 $5,000 $2,500

$1,500

An indexed annuity with a participation rate of 75 percent is currently valued at $10,000. If the S&P 500 increases 10 percent during the contract's term, how much interest will be credited to the annuity? $350 $1,400 $750 $500

$750

Which of the following correctly describes the basic tax treatment of deferred annuity death proceeds paid out before the contract is annuitized? A portion of the death benefit, essentially representing the interest earned by the annuity, is taxable. The full death benefit is tax free. The full death benefit is taxable. A portion of the death benefit, essentially representing the sum of premiums paid into the annuity, is taxable.

A portion of the death benefit, essentially representing the interest earned by the annuity, is taxable.

Which of the following best explains why Section 1035 of the Tax Code does NOT permit a tax-free exchange of an annuity for a life insurance policy? Allowing a tax-free exchange of an annuity for life insurance would result in the life insurance death benefit becoming taxable. Allowing a tax-free exchange of an annuity for life insurance would jeopardize the financial strength of insurance companies. Allowing a tax-free exchange of an annuity for life insurance would enable taxable annuity gain to escape taxation via the life insurance death benefit. The IRS wants to encourage people to own annuities, not life insurance.

Allowing a tax-free exchange of an annuity for life insurance would enable taxable annuity gain to escape taxation via the life insurance death benefit.

Which of the following statements regarding variable annuity annuitization is correct? Annuitization under a variable annuity contract provides income payments that can fluctuate up or down. Annuitization under a variable annuity contract provides income payments that can increase but not decrease. Annuitization under a variable annuity contract provides income payments that are guaranteed to increase at a specified rate. Annuitization under a variable annuity contract provides income payments that remain fixed.

Annuitization under a variable annuity contract provides income payments that can fluctuate up or down.

Which statement about current declared interest rates on deferred fixed annuities is correct? Beyond the initial rate period, renewal rates can be changed at any time They can be changed only when market rates change by two percentage points or more. Once declared, they remain fixed at that level until annuitization. By law, they can be changed no more than once every two years.

Beyond the initial rate period, renewal rates can be changed at any time

While indexed annuities are fairly complex products, the basic concept is best described as which one of the following? The percent of change in the insurer's separate account over the contract's term determines the dollar amount credited to the funds in the indexed annuity. Changes in the selected stock index are the basis for determining the current interest rate credited to the annuity. The percentage increase in the selected stock portfolio over the contract's term translates into a dollar amount that is added to the annuity. The difference between the average rate of a selected stock index and the annuity's guaranteed rate is the current interest rate credited to the annuity.

Changes in the selected stock index are the basis for determining the current interest rate credited to the annuity.

Howard, 33, and Mary, 32, want to fund their 13-year-old daughter's college education. Which of the following is the most appropriate advice about using a deferred annuity for this purpose? Though not the best use for an annuity, it is acceptable because the contract's value accumulates on a tax-deferred basis. It is not recommended. Deferred annuities typically impose surrender charges on funds withdrawn during a contract's early years, and withdrawals from annuities before the owners reach age 59½ may be subject to a tax penalty. Though there may be some merits to the idea, the use of deferred annuity withdrawals to pay for personal expenses like college tuition is forbidden under federal law. It is a good idea. Deferred annuities can be used for almost any purpose that calls for future income.

It is not recommended. Deferred annuities typically impose surrender charges on funds withdrawn during a contract's early years, and withdrawals from annuities before the owners reach age 59½ may be subject to a tax penalty.

A deferred annuity would be a suitable recommendation for all the following needs EXCEPT: Joe, age 23, wants to save money for a European vacation in five years. Betty, age 48, received a distribution from her previous employer's retirement plan and wants to roll that money into a product that will preserve the tax benefits of the qualified money and provide her with lifetime retirement income when she retires. Celeste, age 48, inherits $200,000 and wants to save it somewhere that will grow tax deferred until she retires in 20 years. Chris, age 43, wants to set up a nonqualified retirement savings account where the growth is tax deferred even though the premiums are not tax deductible.

Joe, age 23, wants to save money for a European vacation in five years.

Which of the following sections of the Tax Code deals with the exchange of life insurance policies and annuities? Section 401(k) Section 501(c)(3) Section 1035 Section 403(b)

Section 1035

Which of the following statements regarding the taxation of death benefits paid from a group life insurance plan is correct? Both the death benefit and interest earned on funds left with the insurer under a settlement option are income tax free. Both the death benefit and interest earned on funds left with the insurer under a settlement option are taxable as ordinary income. The death benefit is taxable in the year distributed, but interest earned on funds left with the insurer under a settlement option is tax free. The death benefit is income tax free, but interest earned on funds left with the insurer under a settlement option is taxable in the year earned.

The death benefit is income tax free, but interest earned on funds left with the insurer under a settlement option is taxable in the year earned.

The exclusion ratio applies until all principal in the annuity contract has been paid out. After that, what happens? The full amount of future annuity payments is treated as taxable income. The annuity will be paid up, and no further taxes will apply. The full amount of future annuity payments is income tax free. The annuity contract is canceled.

The full amount of future annuity payments is treated as taxable income.

Which statement correctly describes the transfer-for-value rule in life insurance taxation? When life insurance policies are sold to another party, the beneficiary may be subject to income tax on the death benefits, but only to the extent of the policy's gain. When life insurance policies are sold to another party, the death benefit will be fully taxable as income to the beneficiary. When life insurance policies are sold to another party, the death benefit will be fully tax free to the beneficiary. When life insurance policies are sold to another party, the death benefit will be fully taxable as income to the insured's estate.

When life insurance policies are sold to another party, the beneficiary may be subject to income tax on the death benefits, but only to the extent of the policy's gain.

In accordance with Section 1035 of the Tax Code, a deferred fixed annuity may be exchanged on a tax-free basis for all the following types of products EXCEPT: a deferred variable annuity an immediate fixed annuity a tax-qualified long-term care insurance policy a whole life insurance policy

a whole life insurance policy

With respect to annuities, the basic purpose for the exclusion ratio is to: determine the taxable portion of each annuity payment determine the tax rate to be used in calculating the annuitant's tax liability of each annuity payment determine the non-taxable portion of each annuity payment determine if annuity payments are taxable

determine the non-taxable portion of each annuity payment

Under which annuity settlement options are payments made for as long as it takes to liquidate the annuity principal, at which point payments terminate whether or not the annuitant is still alive? fixed period option life income with period certain life income with refund guarantee option fixed amount option

fixed amount option

If a market-value adjusted annuity (MVA) is surrendered before the end of the contract term at a time when current market interest rates are lower than they were when the annuity was issued, the insurer will: maintain the same interest rate on the withdrawn funds and charge the normal surrender charge decrease the interest rate on the withdrawn funds and charge the normal surrender charge maintain the same interest rate on the withdrawn funds and reduce the normal surrender charge increase the interest rate on the withdrawn funds and charge the normal surrender charge

increase the interest rate on the withdrawn funds and charge the normal surrender charge

Which of the following annuity settlement options best suits two spouses who want to make sure payments will continue for as long as either is alive, no matter which of them dies first? joint life income option straight life income option joint and survivor option life income with refund guarantee option

joint and survivor option

Using a deferred annuity for short-term accumulation goals may result in all the following consequences EXCEPT: loss of accrued interest earnings upon distribution possible surrender charges upon distribution a possible penalty tax upon distribution income taxation of the interest earnings upon distribution

loss of accrued interest earnings upon distribution

Regardless of the interest earned by the index underlying an indexed annuity, the actual amount credited is limited by the contract's: minimum guaranteed interest rate expense charge annuity purchase rate participation rate and rate cap

participation rate and rate cap

In a fixed deferred annuity that has a current declared interest rate, a change in the current rate results in a new: guaranteed rate general account rate renewal rate initial interest rate

renewal rate

Grace's annuity pays her an income for her lifetime, regardless of how long she lives. When she dies, no further payments are made to anyone. Which type of settlement options does she have? straight, or pure, life income life income with guaranteed minimum (refund guarantee or life annuity certain) joint and survivor life income life income with period certain

straight, or pure, life income

Annuities offer all the following benefits EXCEPT tax-free distributions upon the annuity owner's death or retirement tax-deferred growth during a deferred annuity's accumulation period a death benefit retirement income the annuitant cannot outlive

tax-free distributions upon the annuity owner's death or retirement

The death benefit of a fixed deferred annuity equals: the face amount stipulated in the deferred annuity contract. the contract's accumulated value when death occurs the sum of periodic income payments projected to the annuitant's life expectancy the sum of premiums paid into the annuity

the contract's accumulated value when death occurs

All the following statements about variable annuity sub-accounts are correct EXCEPT: Variable annuities today may offer up to 20 or 30 different sub-accounts. Sub-accounts can range from conservative money-market portfolios to moderate corporate bond portfolios to risky and aggressive international and sector stock portfolios. If sub-accounts perform well, the contract owner is likely to realize a greater investment growth than possible with a fixed annuity. The insurer selects the variable sub-accounts to which the contract owner's premiums are allocated.

The insurer selects the variable sub-accounts to which the contract owner's premiums are allocated.

Which statement about variable annuities (VAs) is correct? Variable annuities can only be purchased as deferred contracts. Variable annuities offer fewer income settlement options than fixed annuities. While VAs may yield higher returns than a fixed annuity, both types guarantee the annuity's principal. With a variable annuity, annuity income payments may increase or decrease based on the investment performance of the sub-accounts supporting them.

With a variable annuity, annuity income payments may increase or decrease based on the investment performance of the sub-accounts supporting them.

In accordance with Section 1035 of the Tax Code, which of the following exchanges is permitted on a tax-free basis? a variable annuity for a variable life insurance policy a deferred market-value adjusted annuity for an immediate variable annuity a market-value adjusted annuity for a whole life insurance policy an equity-indexed annuity for an equity-indexed life insurance policy

a deferred market-value adjusted annuity for an immediate variable annuity

When can the owner of a deferred annuity select a settlement option? any time before or after annuitization any time prior to annuitization The choice of settlement option is built into the contract; the owner chooses a contract with the preferred settlement option. only when the contract is annuitized

any time prior to annuitization

To qualify for accelerated benefits from a life insurance policy on a tax-free basis, an insured must meet all of the following qualifications, EXCEPT: approved by the insurance company as meeting its definition of terminally ill in the case of terminal illness, not be expected to live more than 24 months in the case of chronical illness, have a mental or physical impairment that requires significant medical supervision meet the definition of either terminally ill or chronically ill

approved by the insurance company as meeting its definition of terminally ill

Under a market-value adjusted annuity (MVA), an interest rate adjustment may reduce the annuity's effective rate of interest as low as: the contract's rate cap less than 0 percent 0 percent the contract's minimum guaranteed rate of interest

the contract's minimum guaranteed rate of interest

What does the employer own under a group insurance plan? the value of the group insurance and the insurance contracts the right to charge what it wants for participating employees the employees' right to negotiate on their own behalf the master policy

the master policy

All the following statements regarding an employer's group life insurance plan are correct EXCEPT: The employer owns the master policy. The amount of insurance coverage provided for each employee is typically some percentage of his or her salary. Employee contributions are not permitted. The employees are the insured individuals.

Employee contributions are not permitted.

Which statement correctly describes the income tax treatment of employer-funded group life insurance coverage on a covered employee? The value of the first $50,000 in coverage is taxable to the employee; above that, it is tax free. As long as the plan is nondiscriminatory, 100 percent of employer-paid group life coverage is tax free to the employees. The value of coverage exceeding the employee's adjusted gross income is taxable to the employee; below that, it is tax free. The value of coverage exceeding $50,000 is taxable to the employee; below that, it is tax free.

The value of coverage exceeding $50,000 is taxable to the employee; below that, it is tax free.

When received in a lump sum, how are life insurance death benefits commonly taxed to the beneficiary? They are generally income tax free to the beneficiary. They are generally taxable as income to the beneficiary, but only to the extent of the policy's gain. They are generally tax free to the beneficiary, but only to the extent of the policy's gain. They are generally fully taxable as income to the beneficiary.

They are generally income tax free to the beneficiary.

Which one of the following most accurately describes the income tax treatment of life insurance death benefits received by a terminally ill insured under the accelerated benefits rider? They are taxable in the year the benefit is received. They are taxable as ordinary income while the insured is alive; the rest of the death benefit is income tax free when distributed at death. They are tax deferred until the insured dies, at which point they are taxable. They are generally income tax free.

They are generally income tax free.

What is another name for the annuitization phase of an annuity contract? the accumulation stage the ownership stage the conservation stage the payout stage

the payout stage