Chapter 4: Taxes, Retirement, and Other Concepts

A tax sheltered annuity is a special tax-favored retirement plan available to

Certain groups of employees only, like public educators, non profit charitable, religious organizations

In group life policies, a certificate of insurance is given to

Each insured person

When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called a(n)?

Executive bonus

Life insurance death proceeds are

Generally not taxed as income

An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy?

She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan.

All of the following would be different between qualified and nonqualified retirements plans EXCEPT: A. IRS approval requirements B. Taxation on accumulation C. Taxation of withdrawals D. Taxation of contributors

Taxation on accumulation is deferred in both types of plans. The rest of the characteristics would differ

Which of the following is the best reason to purchase life insurance rather than annuities? A. To liquidate a sum of money over a period of years B. To create regular income payments C. To liquidate a sum of money over a lifetime D. To create an estate

To create an estate With insurance, the death benefit creates an immediate estate should the insured die

Which of the following types of insurance policies would perform the function of cash accumulation? A. Term life B. Credit life C. Increasing term D. Whole life

whole life Cash values are available in whole life policies

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 and the cash value would be taxable. (Premium paid) $18,000-$15,000 (cash value)= 3,000

What percentage of a company's employees must take part in a noncontributory group life plan?

100% If the employer pays all of the premium, all employees must be covered to avoid adverse selection

In order to qualify for conversion from a group life policy that has been terminated to an individual policy of the same coverage, a person must have been insured under the group plan for how many years?

5 years If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage

Which of the following is the required number of participants in a contributory group plan? A. 50% B. 75% C. 100% D. 25%

75% Under a contributory group plan, an insurer will require that 75% of eligible employees be included in the plan

An individual has been diagnosed with Alzheimer's disease. He is insured under 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 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

All of the following are examples of third party ownership of a life insurance policy EXCEPT A. An insured couple purchases a life insurance policy insuring the life of their grandson B. A company purchases a life insurance policy on their manager, who is an important part of the operation C. When an insured purchased a new home, the insured made an absolute assignment of a life insurance policy to the mortgage company D. An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan.

An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan. A collateral assignment is the transfer of some or all of the death benefits of the policy to a creditor as security for a loan, but DOES NOT give creditor the rights of ownership

Which of the following is not true of life settlements? A. The seller must be terminally ill B. They could be used for a key person coverage C. They could be sold for an amount greater than the current cash value D. They involve insurance policies with large face amounts

The seller must be terminally ill With life settlements, unlike viatical settlements,the seller does not need to be terminally