8. Taxes, Retirement, and Other Insurance Concepts

403(b) plan or (TSA) tax-sheltered annuity

a qualified plan available to employees of certain NONPROFIT organizations under Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems. Employer and employees both contribute

If a company has a Simplified Employee Pension plan, what type of plan is it?

a qualified plan for a small business

taxable

subject to taxation, payable to state and federal government

Who may contribute to an HR-10 plan?

A self-employed individual

Who would be considered a third-party owner?

An individual or an entity who is not the insured

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

Attained age

Which of the following terms is used to name the nontaxed return of unused premiums?

Dividend

What is required to qualify an individual to contribute to a traditional IRA?

Earned income

For a retirement plan to be qualified, it must be designed for whose benefit?

Employees

If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?

Interest Only

Which of the following is TRUE of a qualified plan?

It has a tax benefit for both employer and 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?

Life expectancy

SIMPLE plans are available to groups of how many employees?

No more than 100

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then

The benefit is received tax free

In a settlement contract, whom does the life settlement broker represent?

The owner

Policy Endowment

maturity date

What is the name of the insured who enters into a viatical settlement?

Viator

Premiums that an employer pays for life insurance on an employee are

tax deductible to the employer as a business expense

Group Life insurance is written as

annually renewable term insurance

LIFO (last in, first out)

principle applied to asset management in life insurance products, under which it is assumed that the funds paid into the policy last will be paid out first

which of the following is an example of liquidity in a life insurance contract?

the cash value available to the policyowner

If a retirement plan is qualified, what does that mean?

the plan has favorable tax treatment

What is the name for an overfunded life insurance policy?

A Modified Endowment Contract (MEC)

What type of policy issues certificates of insurance to the insureds?

Group policy

If an insured terminates membership in group life insurance, to what type of insurance can the insured convert to coverage?

Whole life

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?

Withdrawals are not taxable

When would life insurance policy proceeds be included in the insured's taxable estate?

When there is an incident of ownership at the time of death

Pretax contribution

contribution made before federal and/or state taxes are deducted from earnings

surrender

early termination of a policy by the policyowner

Viators typically receive a percentage of

the policy's face value from the person who purchases the policy

Vesting

the right of a participant in a retirement plan to retain part or all of the benefits

Who qualifies for tax-sheltered annuities, or 403(b) plans?

Employees of nonprofit organizations under Section 501(c) (3) and employees of public school systems

What is the main advantage of converting from group life insurance to individual coverage?

Evidence of insurability is not required

What are the characteristics of the group that underwriters will consider before issuing a group life policy?

Group's purpose, size, financial strength and turnover

What qualified plan is suitable for the self-employed?

HR-10 or Keogh

In qualified plans, are employer contributions taxed as income to the employees?

No, employer contributions are not taxed as income to the employees

Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump-sum?

No, lump-sum benefits are received tax free

Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

Only the portion in excess of the premium paid

What are the three types of Social Security benefits?

Retirement, disability and survivors

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:

Survivorship protection

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?

Those who have worked in the company for at least 5 years

What is the main purpose of the 7-pay Test?

To determine if a life insurance policy is a Modified Endowment Contract

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?

Viatical settlement; allows an insured with a life-threatening condition to sell the existing policy in order to receive benefits when they are most needed.

Which of the following is NOT an example of a business use of life insurance?

Workers compensation; because it 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

Gross Income

a person's income before taxes or other deductions

Simple Plan

a plan available to small businesses that employe no more than 100 employees who receive at least $5,000 in compensation from the employer during the previous year. Employer matches employee's contribution

tax deductible

a reduction of taxable income, resulting in lower tax liability

Taxes must be paid either upon:

contribution or upon distribution NOT BOTH

A key person insurance policy can pay for which of the following?

costs of training a replacement

tax deferred

taxes on investments or gains (such as interest or dividends) are paid at a future date instead of in the period in which they are incurred tax

Group life insurance policies are written as what type of insurance?

Annually renewable

All of the following are personal uses of life insurance EXCEPT?

Buy-sell agreement

SEP's or simplified employee pension

a type of qualified plan suited for the small employer or the self-employed. employer only contributes

cross-purchase plan

each partner involved purchases insurance on the life of each of the other partners

Roth IRA

is a form of an individual retirement account funded with AFTER-TAX contributions. -Excess contribution penalty is 6% -Grows tax free (if account open for at least 5 years), contributions are NOT tax deductible, qualified distributions cannot occur until account is open for 5 years and owner is 59 1/2, distributions are not taxable. No required minimum age for payouts.

Traditional IRA contributions are tax deductible based on which of the following?

Owner's income

When planning for survivor protection in life insurance, what needs to be considered?

The insured's current assets, liabilities, and survivor's needs

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 direct transfer?

$10,000 will be transferred, NO tax consequence

The premiums paid by the employer in a business life insurance policy are

Tax deductible by the employer

IRA (Individual Retirement Account) / Traditional IRA

allows individuals with earned income to make tax deductible contributions regardless of age. -Excess contribution penalty is 6%. -Grows Tax deferred, 10% penalty for early nonqualified distributions prior to age 59 1/2. Payouts begin by age 72

All of the following are business uses of life insurance EXCEPT

funding against company's general financial loss

Differences between qualified and nonqualified retirement

QUALIFIED: - Contributions currently Tax deductible - Plan has to be APPROVED by the IRS - Plan CANNOT Discriminate - Earnings grow Tax Deferred - All Withdrawals are TAXED NONQUALIFIED: - Contributions NOT currently Tax deductible - Plan DOES NOT NEED IRS APPROVAL - Earnings grow Tax Deferred - EXCESS over cost basis is TAXED

Which of the following is NOT true of life settlements?

The seller must be terminally ill

Which of the following is the best reason to purchase life insurance rather than annuities?

To create an estate

What does liquidity mean in a life insurance policy?

availability of cash value

Life insurance may be used to pay state inheritance taxes and federal estate taxes eliminating the need to sell assets from the estate. What is this called?

Estate conservation

Modified Endowment Contract (MEC)

- Any life insurance policy that fails a 7-pay test is classified as this, and loses the standard tax benefits of a life insurance contract. Any MEC distribution is taxable, including withdrawals and policy loans

401(k) plan

- allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. Employer matches employee's contribution

Death benefits payable to a beneficiary under a life insurance policy are generally

Not subject to income taxation by the Federal Government

Rollover

withdrawal of the money from one qualified plan and placing it into another plan. Must be completed within 60 days from the time money is taken out of the first plan

Plans for Employers

-HR-10 or Keough Plans - SEP's or simplified employee pensions - Simple Plans -401k qualified retirement plan -403b plan or (TSA) tax-sheltered annuity

What are some examples of qualified plans?

IRA, 401(k), HR10 (Keogh), SEP, SIMPLE

In what form of payment must the contributions to a traditional IRA be made?

in cash (or cash equivalents)

FIFO (first in, first out)

principle under which it is assumed that the funds paid into the policy first will be paid out first

Key Person Insurance

protects against the loss of a key employee or key executive by making the business the beneficiary if a key person dies. The business is the owner, premium payor, and beneficiary.

Buy-Sell Agreements

used to contractually establish the intent of someone else to purchase the business upon the insureds death and sets a value (purchase price) on a business. life insurance is used to fund the buy sell agreement. a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled

What are the consequences of withdrawing funds from a traditional IRA prior to the age 59 1/2?

10% penalty

What is the penalty for excessive contributions to a traditional IRA

6% penalty

According to the taxation rules of life insurance policies, how are cash value increases taxed?

Cash value growth is tax deferred

What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?

death benefits are generally not subject to income taxes

Why are dividends in life insurance policies not taxable?

dividends are not considered income for tax purposes; they are a return of unused premium

HR-10 or (Keough) Plan

these plans allow self-employed persons to be covered under an IRS qualified retirement plan. The person must be self-employed or a partner working part time or full time who owns at least 10% of the business. Employer matches employee's contributions

Which of he following would be considered a nonqualified retirement plan?

Split-dollar plan

Who owns a group life insurance contract?

The employer (also known as the sponsor of the group)

What are the personal uses of life insurance?

Survivor protection, estate creation and conservation, cash accumulation and liquidity

In a direct rollover, how is the money transferred from one plan to the new one?

From trustee to trustee

What type of policy is typically issued without proof of insurability from the insured?

Group Policy

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy?

Premiums are not tax deductible as a business expense

What is the primary purpose of a 401(k) plan?

Provide retirement income