LIFE ONLY_ Chapter 8- Federal Tax Consideration for Life Insurance and Annuities

An insurer 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

Which of the following are Social Security benefits? A. Term and whole life B. Accelerated benefits C. Retirement, disability and survivors D. Workers compensation

C. Retirement, disability and survivors

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually? A. $3,000 B. $13,000 C. $10,000 D. $7,000

A. $3,000

If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate? A. Accumulated cash value B. Full annuity benefit C. No benefits D. Policy loans

A. Accumulated cash value

In life insurance policies, cash value increases A. Are only taxed when the owner reaches age 65 B. Grow tax deferred C. Are income taxable immediately D. Are taxed annually

B. Grow tax deferred

How is Social Security funded? A. Federal grant money B. Taxes imposed on a worker's earned income C. State payroll taxes D. Sales tax

B. Taxes imposed on a worker's earned income

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

What is the penalty for IRA distributions that are below the required minimum for the year? A. 10% B. 25% C. 50% D. 60%

C. 50%

A claimant, who is totally and permanently disabled, is eligible for Social Security Disability benefits after an elimination period of A. 12 months B. 24 months C. 0 months D. 5 months

D. 5 months

What is the 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 the minimum interest D. It determines if the insurance policy is a MEC

D. It determines if the insurance policy is a MEC

Which concept is associated with "exclusion ratio"? A. How exclusion riders affect an insurance premium B. Policy provisions C. Annuities payments D. Dividend distribution

C. Annuities payments

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur? A. The interest will become immediately taxable B. The premiums will increase C. The premiums will decrease D. The interest will continue to accumulate tax deferred

The interest will continue to accumulate tax deferred

What is the number of credits required for fully insured status for Social Security benefits? A. 4 B. 10 C. 30 D. 40

D. 40

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. Blackout period B. Nonpayment Interval C. Latent Interval D. Accumulation Period

A. Blackout Period

What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences? A. 401(k) plan B. Section 457 Deferred Compensation Plan C. Section 1035 Policy Exchange D. Modified Endowment Exchange

C. Section 1035 Policy Exchange

Life insurance death proceeds are A. Taxable to the extent that they exceed 7.5% of the beneficiary's adjusted gross income B. Taxed as capital gain C. Taxed as ordinary income D. Generally not taxed as income

D. Generally not taxed as income

Which of the following best describes taxation during the accumulation period of the annuity? A. The annuity is subject to state taxes only B. The annuity is subject to both state and federal taxation C. The growth is subject to immediate taxation D. Taxes are deferred

D. Taxes are deferred

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

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

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an A. Endowment B. Nonqualified annuity C. Modified endowment contract D. Accelerated benefit policy

C. Modified endowment contract

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

Who can make a fully deductible contribution to a traditional IRA? A. Someone making contributions to an education 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

If an immediate annuity is purchased with the face amount at death or with the case value at surrender, this would be considered a A. Nonforfeiture option B. Rollover C. Settlement option D. Non taxable exchange

C. Settlement option

During the accumulation period in a non qualified annuity, what are the tax consequences of a withdrawal? A. Neither interest nor principal is taxed, but penalties may be imposed B. Taxable interest will be withdrawn first and the 10% penalty will be imposed under age 59 1/2 C. Non taxable principal may be withdrawn first, but the 10% penalty will be imposed if under age 59 1/2 D. Both interest and principal are taxed; no other penalties are imposed

B. Taxable interest will be withdrawn first and the 10% penalty will be imposed under age 59 1/2

Which of the following is used to determine the annuity amounts that are not taxable? A. Market-adjusted annuities index B. Exclusion ratio C. Pro rate ratio D. Exclusion index

B. Exclusion ratio

Traditional IRA contributions are A. Deducted based on the income level B. Never tax deductible C. Partially tax deductible depending on the income level D. Tax deductible

D. Tax deductible

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true fo the distributions? A. Distributions are taxable B. Distributions are non taxable C. Distributions cannot begin prior to age 70 1/2 D. There are no distributions

A. Distributions are taxable

Which of the following is NOT an allowable 1035 exchange? A. A whole life insurance policy is exchanged for a term insurance policy B. A whole life insurance policy is exchanged for a Universal life insurance policy C. An annuity is exchanged for another annuity D. A life insurance policy is exchanged for an annuity

A. A whole life insurance policy is exchanged for a term insurance policy

Social Security was created to provide all of the following benefits EXCEPT A. Unemployment income B. Survivor's benefits C. Disability income D. Retirement income

A. Unemployment income

If taken as a lump sum, life insurance proceeds to beneficiaries are passed A. Without interest B. Free of federal income taxation C. Tax-deduction D. Part tax-free and part taxable

B. Free of federal income taxation

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

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? A. It is only taxable if the cash value exceeds the amount paid for premiums B. It is not considered to be taxable C. It is taxable only if it exceeds the amounts paid for premiums by 50% D. It is automatically taxable

A. it is only taxable if the cash value exceeds the amount paid for premiums

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. Principal is tax free, but interest is taxed B. The entire benefit will be received tax free C. The entire living benefit is considered taxable income D. A portion of the benefit up to a limit is tax free; the rest is taxable income

D. A portion of the benefit up to a limit is tax free; the rest is taxable income

In a direct rollover, how is the money transferred from one plan to the new one? A. From trustee to the participant B. From the participant to the new plan C. From the original plan to the original custodian D. From trustee to trustee

D. From trustee to trustee

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 $10,000 C. Exempt from income taxation if over $10,000 D. Not subject to income taxation by the Federal Government

D. Not subject to income taxation by the Federal Government

An applicant buys a non qualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable? A. Charitable organization B. Dependents C. Annuitant D. Spouse

D. Spouse

The minimum number of credits 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

Which of the following refers the amount of retirement benefits a workers receives under Social Security based on the worker's earnings and retirement age? A. OASDI B. QC C. PIA D. FICA

C. PIA

When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the Interest Settlement Option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on A. $239,000 B. $11,000 C. None, because the beneficiary has not received the death benefit D. $261,000

$11,000