CH 6: Federal Tax Considerations for Life Insurance

For a retirement plan to be qualified, it must be designed for the benefit of A IRS. B Employees. C Key employee. D Employer.

B employees

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? A Interest only B Both principal and interest C Neither principal nor interest D Principal only

A Interest Only

If a retirement plan or annuity is "qualified," this means A It is approved by the IRS. B It has a penalty for early withdrawal. C It accepts after-tax contributions. D It is noncancellable.

A it is approved by the IRS

Which of the following is TRUE of a qualified plan? A It may allow unlimited contributions. B It has a tax benefit for both employer and employee. C It does not need to have a vesting schedule. D It may discriminate in favor of highly paid employees.

B It has a tax benefit for both employers and employees

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

B a portion of the benefit up to a limit is tax free; the rest is taxable income

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT A Funds accumulate on a tax-deferred basis. B Employee and employer contributions are not counted as income to the employee for income tax purposes. C At distribution, all amounts received by the employee are tax free. D Employer contributions are tax deductible as ordinary business expense.

C At distribution, all amounts received by the employee are tax free.

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 a direct transfer? A$8,000, no tax consequence B$8,000, tax on growth only C$10,000, tax on growth only D$10,000, no tax consequence

D $10,000, no tax consequence

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n) A Keogh Plan. B Roth IRA. C SEP. D 403(b) Plan (TSA).

D 403(b) Plan (TSA).

When must an IRA be completely distributed when a beneficiary is not named? A Due date of beneficiary's tax return including extensions. B December 31 of the year following the year of the owner's death. C Due date of the deceased owner's final tax return including extensions. D December 31 of the year that contains the fifth anniversary of the owner's death.

D December 31 of the year that contains the fifth anniversary of the owner's death.

Under the 401(k) bonus or thrift plan, the employer will contribute A An undetermined percentage for each dollar contributed by the employee. B All of the money to the plan. C 30% of what the employee contributes. D 75% of what the employee contributes.

A an undetermined percentage for each dollar contributed by the employee

Which of the following statements is TRUE concerning whole life insurance? A Lump-sum death benefits are not taxable. B Dividend interest is not taxable. C Premiums are tax deductible. D Policy loans are tax deductible.

A lump-sum death benefits are not taxable

Which type of retirement account does not require the owner to start taking distributions at age 72? A Standard IRA B Traditional IRA C Roth IRA D Nonqualified IRA

C Roth IRA

Which of the following is true regarding taxation of dividends in participating policies? A Dividends are not taxable. B Dividends are taxable only after a certain amount is accumulated annually. C Dividends are taxable in some life insurance policies and nontaxable in others. D Dividends are considered income for tax purposes.

A Dividends are not taxable

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

A Generally not taxed as income.

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

C From trustee to trustee

Death benefits payable to a beneficiary under a life insurance policy are generally A Exempt from income taxation if under $10,000. B Exempt from income taxation if over $10,000. C Not subject to income taxation by the Federal Government. D Subject to income taxation by the Federal Government.

C not subject to income taxation by the Federal Government

What is the main 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.

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

Which of the following is true regarding taxation of accelerated benefits under a life insurance policy? A They are tax free to terminally ill insured. B They are always taxable to chronically ill insured. C They are always taxed. D There is a 10% penalty for early distribution of the death benefit.

A they are tax-free to terminally ill insured

Employer contributions made to a qualified plan A May discriminate in favor of highly paid employees. B Are after-tax contributions. C Are taxed annually as salary. D Are subject to vesting requirements.

D are subject to vesting requirements

Which of the following terms is used to name the nontaxed return of unused premiums? A Surrender B Dividend C Premium return D Interest

B Dividend

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

D free of federal income taxation

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called? A HR 10 plan B Profit sharing plan C 401(k) plan D Tax-sheltered account plan

B Profit sharing plan

Which of the following is NOT true regarding a nonqualified retirement plan? A Earnings grow tax deferred. B It needs IRS approval. C Contributions are not currently tax deductible. D It can discriminate in benefits and selecting participants.

B It needs IRS approval

The advantage of qualified plans to employers is A Taxable contributions. B Tax-deductible contributions. C Tax-free earnings. D No lump-sum payments.

B tax-deductible contributions

A tax-sheltered annuity is a special tax-favored retirement plan available to A Certain age groups only. B Certain groups depending on factors such as race, gender, and age. C Certain groups of employees only. D Anyone.

C certain groups of employees only

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

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

A Grow tax deferred

All of the following statements are true regarding tax-qualified annuities EXCEPT A Withdrawals are taxed. B Employer contributions are not tax deductible. C Annuity earnings are tax deferred. D They must be approved by the IRS.

B employer contributions are not tax deductible