Uses of Life Insurance

When an employee retires, what is the general income tax treatment of the benefit payments he or she receives under a deferred compensation plan? a. They are fully taxable. b. They are entirely tax free. c. They are partially tax free. d. They are taxable but the employee can also take a deduction on them, making them essentially tax free.

a. They are fully taxable. The employee must pay taxes on the benefits he or she receives from a deferred compensation plan. The employer, not the employee, can then take a deduction of them as (deferred) compensation paid to the employee.

Which statement correctly describes a deferred compensation plan? a. They are qualified retirement plans that let employees avoid taxes on future income. b. They are nonqualified retirement plans that allow executives to delay receiving current compensation until a future time. c. They are nonqualified retirement plans that let executives permanently avoid paying taxes on compensation paid by the employer. d. They are qualified retirement plans that are only available to executives.

b. They are nonqualified retirement plans that allow executives to delay receiving current compensation until a future time. Income taxes are payable when deferred compensation benefits are paid to the employee.

All the following statements about corporate-owned life insurance (COLI) plans are correct EXCEPT: a. The corporation owns the policies covering individual employees. b. The corporation is the beneficiary under each policy. c. The employer must surrender a COLI when the insured employee retires or quits. d. The corporation receives the death benefit at the death of an insured employee.

c. The employer must surrender a COLI when the insured employee retires or quits. Under a COLI plan, the corporation owns the policies and names itself as beneficiary. At the death of an employee, the corporation receives the benefit.

Which statement about deferred compensation plans is correct? a. Although life insurance is not allowed to fund deferred compensation plans, annuities and mutual funds are allowed. b. They are considered qualified plans. c. They allow executives to delay receiving current compensation until a future time. d. All employees over the age of 21 with at least one year of service must be eligible to participate in the plan.

c. They allow executives to delay receiving current compensation until a future time. Life insurance is a popular funding vehicle for nonqualified deferred compensation plans. Amounts deferred are used to pay premiums on cash value life insurance.

Jackie Jones is the CFO of Delta Industries and has been instrumental in the company's growth and success over the years. Because of the significant financial loss that it would suffer if she died, Delta purchased a key person insurance policy covering Jackie. All the following statements regarding this scenario are correct EXCEPT: a. If Jackie ends her employment, she can demand that Delta surrender the policy and give her the cash value. b. If Jackie dies, the death benefits can be used to pay Delta's outstanding loans. c. If Jackie dies, the insurer will pay the death benefit to Delta. d. If Jackie ends her employment, Delta can keep the policy and collect the death benefit when she dies.

a. If Jackie ends her employment, she can demand that Delta surrender the policy and give her the cash value. If Jackie ends her employment, Delta can continue to own the policy even though it no longer has an insurable interest in her.

When calculating the ongoing income that a surviving family will need after an insured dies, the insured must consider all of the following expenses EXCEPT: a. final funeral expenses b. family medical expenses c. utilities d. housing expenses

a. final funeral expenses After an insured dies, the surviving family will have ongoing daily and monthly expenses, such as utilities, taxes, and savings.

All the following statements regarding an insured executive bonus plan are correct EXCEPT: a. The executive can choose the beneficiary under the policy. b. The employer is required to pay all of the premiums for the policy. c. The executive owns the life insurance policy. d. The employer can take an income tax deduction for premium payments it makes under the policy.

b. The employer is required to pay all of the premiums for the policy. The employer's premium payments are deductible as compensation paid to an employee.

All the following statements about key employee life insurance coverage are correct EXCEPT: a. The business applies for and owns the policy. b. The key employee's family receives the death benefits. c. The key employee has no ownership rights in the policy. d. The amount of coverage typically reflects the financial loss that the business would suffer if the key employee died.

b. The key employee's family receives the death benefits. The key employee has no ownership rights in the life insurance policy. Instead, the benefit compensates the business for losses that it incurs when its key employee dies.

What do most insurance producers use today to determine a prospective customer's life insurance needs? a. cost-benefit analysis b. financial loss analysis c. the human life value approach d. the needs approach

d. the needs approach The human life value approach is not the preferred method of determining the correct amount of life insurance needed because it does not consider a person's unique needs.

After a viatical settlement agreement is signed, which party owns the life insurance policy? a. the viatical settlement broker b. the insured c. the viator d. the viatical settlement provider

d. the viatical settlement provider The viator is the insured in a viatical settlement. Once the agreement is signed, he or she no longer owns the policy.