Chapter 7

Employers must establish a pension plan

All of the following are true regarding ERISA qualified plans, except:

Federal

ERISA is a ________ law.

ERISA

A qualified pension plan must meet ___________ requirements.

Buying a first vacation home

A qualified plan pre-mature withdrawal tax penalty can be waived in all of the following circumstances, except:

Plan withdrawals are tax free

All of the following are the benefits of having an employer sponsored retirement plan be ERISA qualified, except:

Buying a new car

All of the following are ways in which the 10% additional tax can be waived, except:

The interest that he pays on policy loans is tax-deductible

Clayton is asking his life insurance producer about any potential taxation issues related to his $100,000 personal Whole Life policy. All of the following are TRUE, except:

Not tax-deductible

Contributions to a nonqualified plan are:

Lump sum death benefit paid to the beneficiary

Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)?

Single Premium Whole Life

Which of the following policies would be deemed a MEC?

The insured is also the policyowner

Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate?

Interest earned on dividends left on deposit with the insurer

Which of the following scenarios will trigger an income tax due?

If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE?

They represent a return of a portion of the premium paid

Why are dividends not taxable as income when paid out to a participating policyholder?

Non-qualified

_ plans do not meet the requirements of federal law to be eligible for favorable tax treatment.

Accelerated Benefit (Living Need)

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?

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

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?

Receive the claim amount in a lump sum

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?

Cost basis

Life insurance policy premiums establish a _________ in the policy for tax purposes.

The life of the policy

Once a policy is classified as a MEC, it will maintain that classification for ____________.

The total amount of dividends received by a policyowner exceeds the total amount of premium he/she has paid

Participating policy dividends become taxable as income when:

24

Regarding an accelerated death benefit, a physician must give a prognosis of ___ months or less life expectancy for the named insured. 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

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

Into the insured's estate

If no beneficiary is living at the time of the insured's death, the benefit will automatically be paid __________.

Employee-paid premiums are tax-deductible to the employee

All of the following regarding employer group life insurance are true, except:

Policy loans are taxable if the policy remains in effect and the amount borrowed exceeds the premiums paid

All of the following regarding policy loans are true, except:

$12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as ordinary income

An insured has contributed $12,000 in premiums toward a universal life policy. She decides to cancel the policy and take the cash value of $15,000. What are the tax consequences of this distribution?

$3,000

An insured has paid $1,000 in annual premiums for her permanent life insurance policy for 12 years. Now upon surrendering the policy she is due to receive $15,000 of cash value. How much of this cash value is taxable?

Beneficiary

If no __________ is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate.

Income tax-free

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________.

59 1/2

Distributions from a Modified Endowment Contract (MEC) made on or after age _____ are not subject to any tax penalties.

$50,000

Employer-paid premiums for employee group term life do not constitute taxable income to the employee for coverage up to ___________.

Nothing

F has a $100,000 face amount term life policy for which F paid $10,000 in premium to date. F dies and the benefit is paid out to G, the beneficiary. What amount of the death benefit received is taxable as income to G?

Nondeductible personal expense

For an individually purchased life insurance policy, the premiums are considered a _________

$5,000

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?

Tax free

Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified.

The premium paid for $100,000

H is employed by a company that provides group life insurance. How much of the employer-paid premiums for H's $150,000 coverage, if any, is going to be reported as taxable income to H?

MEC

If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________.

7

If a life insurance policy does not pass the ___ -pay test, it will be deemed a MEC.

Ordinary income

If a taxable event occurs regarding the cash value of a permanent life insurance policy, in virtually every case, the taxable amount is taxed as:

Life insurance policy

If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC).

Monthly

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit?

The dividend is tax-free, but the interest is taxable

If dividends are left on deposit with an insurer to earn interest:

10

If funds are prematurely withdrawn from a Modified Endowment Contract (MEC) they are subject to a _____% penalty on any gains.

Federal Estate

If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes.

The premiums paid in

The life insurance policy cost basis consists of:

The benefit amount cannot exceed the lesser of $50,000 or 7.5% of AGI

To be a qualified accelerated death benefit it must meet all of the following criteria, except:

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

To eliminate the use of life insurance as a short-term, tax-free savings vehicle, what tax law change took place?

May discriminate in favor of highly compensated employees

Under ERISA qualified plans must meet all of the following requirements, except:

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

Under the Modified Endowment Contract rules the 7-Pay Test is defined as:

The entire withdrawal

What portion of an employee's pension plan withdrawal is subject to tax?

Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender

Which of the following best defines the 'Cost Recovery Rule'?

A condition that is terminal

Which of the following could initiate the Accelerated Benefits Provision or Rider of a life policy?