Chapter 7

The Modified Endowment Contract (MEC) rules were put into place because: A Individuals were overfunding life insurance policies and using them as tax-free investment vehicles instead of a way to protect survivors against the financial cost of one's death B Too many consumers were being sold life insurance when they thought they were buying annuities C Life insurance companies needed to become more competitive with other financial institutions D The federal government needed a new source of tax revenue

A Individuals were overfunding life insurance policies and using them as tax-free investment vehicles instead of a way to protect survivors against the financial cost of one's death

If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC). A Life insurance policy B Viatical settlement C Annuity D Endowment contract

A Life insurance policy

Any employee-paid group life insurance premiums are __________. A Not tax-deductible B Tax-exempt C Tax-deductible D Tax-deferred

A Not tax-deductible

Life insurance policy premiums establish a _________ in the policy for tax purposes. A Loan B Dividend C Cost basis D Cash value

C Cost basis

Life insurance policy premiums establish a _________ in the policy for tax purposes. A Dividend B Cost basis C Loan D Cash value

Cost basis

If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period. A After-tax B Non-guaranteed C Pre-tax D Exclusion

A After-tax

If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the ________. A End of the contract year B End of the tax year C Latest premium payment was received D End of the calendar year

A End of the contract year

When an annuitant annuitizes their annuity that has a cost basis in it, the amount of the income benefit payment subject to tax is determined by using the: A Exclusion ratio B Annuity rule C Superannuation ratio D Exception rule

A Exclusion ratio

If the annuitant, now deceased, was receiving income from a pure life or straight life annuity, how much goes into the annuitant's estate for valuation? A Nothing B The cost basis and the remaining tax-deferred earnings C The tax-deferred earnings D The cost basis

A Nothing

If Charlotte wishes to cash out her annuity at age 58 after having it for over 20 years, what should she know about prior to doing it? A She will face income tax consequences and tax penalties B She will pay surrender charges for failing to annuitize C She will have to pay tax penalties D She will have to pay income taxes

A She will face income tax consequences and tax penalties

G, being undecided on what to do with $100,000 just received on F's policy, decides to leave the proceeds on deposit with the insurer at interest. The rate being paid is 5%. In one year, what amount will be taxable to G? A $105,000 B $5,000 C Zero D $500

B $5,000

If no beneficiary is living at the time of the insured's death, the benefit will automatically be paid __________. A The funeral home B Into the insured's estate C The deceased's spouse D To next of kin

B Into the insured's estate

If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________. A Annuity B MEC C Commodity D Savings account

B MEC

Janelle is the beneficiary of a life insurance policy in which the insured has died. What is the only way she can receive the claim amount totally free from income taxes? A Select the 10-year period certain settlement option B Receive the claim amount in a lump sum C Choose the interest income only settlement option D Elect the life only settlement option

B Receive the claim amount in a lump sum

Joe had $500,000 of life insurance at work. He has an additional $40,000 life insurance policy the company purchased on all employees. His wife is the primary beneficiary and their four children are contingent beneficiaries. Upon Joe's death, what are the tax consequences to his beneficiaries? A The $40,000 will be taxed since the premium was tax-deductible by the employer B The $540,000 lump sum proceeds will be received income tax-free C All premiums paid may be deducted from the face value before taxation D $460,000 is income taxable to the recipient

B The $540,000 lump sum proceeds will be received income tax-free

To eliminate the use of life insurance as a short-term, tax-free savings vehicle, what tax law change took place? A Loan interest became tax-deductible B Employer-paid premiums were made non-tax-deductible C Death benefits became income-taxable D The Modified Endowment Contract (MEC) rules were put into place

D The Modified Endowment Contract (MEC) rules were put into place

E has a $10,000 traditional whole life policy with a $4,000 cash value. Premiums paid to date are $3,500. If the policy lapses with a $4,000 loan outstanding, what amount will be taxable as income to E? A $3,500 B $6,000 C $500 D $4,000

C $500

Which of the following would always be considered a Modified Endowment Contract? A Variable Whole Life B Limited Pay Whole Life C Single Premium Whole Life D Straight or Continuous Pay Whole Life

C Single Premium Whole Life

What is the main purpose that IRC section 1035 was enacted? A To allow consumers to obtain less expensive life insurance policies B To allow consumers to get better performance from a new policy C To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one D To allow policyowners to obtain features and benefits not available on their existing policies

C To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one

If money is paid when a change of ownership in a life insurance policy takes place, this is generally known as a ____________. A 1035 Exchange B Life settlement C Transfer for value D Viatical settlement

C Transfer for value

If, as the result of an injury or illness, the insured is deemed to be terminal (i.e., expected to die within 1 or 2 years), what rider added to a life insurance policy would advance a portion of the face value? A Disability Rider B Return of Cash Value Rider C Viatical Rider D Accelerated Benefit (Living Need)

D Accelerated Benefit (Living Need)

The exception to the rule concerning the non-deductibility of life insurance premiums is: A Third-Party Ownership Policies B Key Employee Insurance C Life insurance to fund a Buy-Sell Agreement D All employer paid group life insurance premiums

D All employer paid group life insurance premiums

The exclusion ratio states that once the entire cost basis has been recovered from a non-qualified annuity income benefit payout then any further payments are __________. A Still tax favored for annuitants over the age of 70 B Taxed as capital gain but only 50% of the gain is applied C Taxed at the favorable annuity continuation income rates D Fully taxable since the excess payments must represent only earnings

D Fully taxable since the excess payments must represent only earnings

ERISA sets minimum standards for pension plans primarily in the ______ industry. A Public and Private B Public C Quasi-government D Private

D Private

Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified. A Taxable B Taxable to the extent it exceeds 7.5% of AGI C Tax free up to $50,000 D Tax free

D Tax free

In the event that an insured receives a periodic benefit as the result of exercising the Accelerated Death Benefit Rider, what information must the insurer provide to the insured? A The life expectancy of the insured on a semi-annual basis B The amount of taxable income that they will be reporting to the IRS C Verification and update of the policy ownership and beneficiary designations D The amount of the accelerated payment, the remaining death benefit and cash values

D The amount of the accelerated payment, the remaining death benefit and cash values

The life insurance policy cost basis consists of: A The net amount at risk B The dividends received C The cash value of the policy D The premiums paid in

D The premiums paid in

Which of the following is the reason why premiums paid on personal life insurance are not deductible? A They are considered to produce a guaranteed source of income B They rarely exceed 10% of a taxpayer's AGI C It makes the deductibility of employer-paid premiums more attractive D They are considered a personal expense

D They are considered a personal expense

Under the Modified Endowment Contract rules the 7-Pay Test is defined as: A The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit B The cash value at the end of year 7 exceeds the total premiums paid C Any life insurance policy that endows in 7 years D The least amount of premium required to be paid in the first 7 years to maintain the policy to age 70

The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit