Chapter 4- Questions Wrong

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?

$3,000

An insured 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?

$3,000- the difference between the premiums paid ($15K)and the cash value ($18K)

Which of the following statements concerning buy-sell agreements is true?

Buy sell agreements are normally funded with a life insurance policy

For a retirmement plan to be qualified, it must be designed to benefit of

Employees

An insured has a MEC. He wants to withdraw some money in order to pay medical bills, which of the following is true?

He will have to pay a penalty if he is younger than 59.5

Which of the following is NOT true regarding policy loans?

Money borrowed from the cash value is taxable- this is actually NOT taxable. Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy.

What is the official name of the Social Security program?

Old Age Survivor Disability Insurance OASDI

Which of the following statments concerning a simplified employee pension plan is INCORRECT?

SEPs are suitable for large companies- a SEP is a benefit plan that is designed to be provided by a small employer for the benefit of the employees.

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

Split-dollar plan- examples of nonqualified plans are individual annuities and deferred compensation plans for highly paid executives, split-dollare insurance arrangements, and section 162 exec-bonus plans.

A 60-year old participant in a 401K plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true?

The amount of the distribution is reduced by the amount of a 20% withholding tax- distributions from 401K plans are taxable as ordinary income in the year of distribution. However, if the distribution is rolled over to a Traditional IRA, taxes are deferred until the required minimum IRA distributions begin. Since this client actually took a distribution (instead of making a trustee-to-trustee roll over), this distribution is subject to 20% withholding tax.

Which of the following describes the tax advantage of a qualified retirement plan?

The earnings in the plan accumulate tax deferred

An employee is insured under her employer's group life plan. If she terminates her group coverage, which of the following statements is INCORRECT?

The insured may choose to cover to term or permanent individual coverage- when group coverage is converted to an individual policy, the insurer will determine the type of coverage, usually permanent insurance.

All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT

The policy is owned by the company (it is actually owned bu the empolyee)

How are contributions to a tax-sheltered annuity treated with regards to taxation?

They are not included as income for the employee, but are taxable upon distribution.

All of the following benefits are under Social Security EXCEPT

Welfare benefits- Social Security is an entitlement program, not a welfare program.

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

Withdrawls are not taxable-any distributions from MECs are taxable, including withdrawls and policy loans.

All of the following statements are true regarding tax-qualified annuities EXCEPT

employer contributions are not tax deductible- tax qualified annuities must be approved by the IRA and allow for tax deductible employer contributions. All withdrawls are taxed and earnings grow tax deferred.

The minimum number of credits required for partial insured status for Social Security disability benefits is

6 credits- during the last 13 quarter period

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 portion of the benefit is up to a limit is tax-free; the rest is taxable income- When accelerated benefits are paid to a chronically ill insured, they are tax free up to a certain limit. Any more received in excess of this limit must be included in the insured's gross income.

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

A qualified plan for a small business- a SEP is a type of qualified plan suited for the small employer or self-employed. A SEP is an employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or a specific maximum contribution amount.

Employer contributions made to a qualified plan

Are subject to vesting requirements

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT

At distribution, all amounts received by the employee are tax free- funds in a qualified plan accumulate on a tax-deferred basis; however, at distribution any amount received by the employee will be treated as ordinary income for tax purposes.

What is the purpose of the Seven-pay Test?

It determines if the insurance policy is a MEC or a Modified Endowment Contract- Meaning, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums

Which of the following is TRUE of a qualified plan?

It has a tax benefit for both employer and employee- A qualified plan is approved by the IRS, which then gives both the employer and employee benefits in deductibility of contributions and tax deferral of growth.

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- The Business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax-free.

In which of the following instances would the premium be tax deductible?

Premiums paid by an employer on a $30,000 group term life insurance plan for employees- As a general rule, premiums paid for life insurance are NOT tax deductible. The exception to this rule is when an employer buys group term life insurance for his employees since it is considered a business expense.

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement option- a settlement option is exercised when an immediate annuity it purchased with the face amount at death or with the cash value at surrender

All of the following are requirements of eligibility for Social Security Disability Income benefits EXCEPT

being age 65- the term fully insured refers to someone who has earned 40 quarters over coverage (equivalent of 10 years of work), and is therefore entitle to receive Social Security retirement, Medicare, and survivor benefits. The waiting, or elimination period for Social Security Disability benefits is 5 months.

All of the following would be different between qualified and nonqualified retirement plans EXCEPT

taxation of accumulation- this is deferred on both types of plans.

All of the following are true of key person insurance EXCEPT

the plan is funded by permanent insurance only- it can be funded by ANY TYPE OF INSURANCE

All of the following would be eligible to establish a Keogh retirement plan EXCEPT

the president and employee of a family corporation- Keogh plans are for self-employed individuals and their employees.