Chapter 9

What is the earliest a person can retire and begin to receive Social Security retirement benefits? Select one: a. 59 1/2 b. 61 c. 62 d. 65

c. 62

How long is the waiting period for disability benefits under Social Security? Select one: a. 5 months b. 6 months c. 12 months d. 29 months

a. 5 months

Which of the following statements is false regarding taxation of non-living entity owned nonqualified annuities? Select one: a. Interest earned on the principal is tax-deferred. b. Interest earned is taxed in the year it is earned. c. Only human annuitants can receive tax-deferred interest on annuities. d. A corporation that owns a nonqualified annuity will be required to pay tax on interest on a current-basis.

a. Interest earned on the principal is tax-deferred.

Which of the following is false regarding federal taxation of qualified plans? Select one: a. Interest is taxable in the year earned. b. Contributions made by the employer are tax-deductible. c. Interest is tax-deferred d. Employee contributions are made with pretax dollars

a. Interest is taxable in the year earned.

Kenny is self employed. He owns a book bindery. Which statement accurately describes his Social Security tax obligation? Select one: a. Kenny must pay the employer and employee's tax portions. b. Kenny will only pay the employee's tax portion. c. Kenny will only pay the employer's tax portion. d. Kenny will not pay any Social Security tax because he is self-employed.

a. Kenny must pay the employer and employee's tax portions.

Which of the following best describes the seven-pay test? Select one: a. Premiums paid over a seven-year period cannot exceed the total level annual premiums for a paid-up policy in seven years. b. Policy cash value cannot exceed cost basis. c. First seven premium payments cannot exceed cost basis over a ten-year period. d. First seven annuity premium payments cannot exceed cost basis over a ten-year period.

a. Premiums paid over a seven-year period cannot exceed the total level annual premiums for a paid-up policy in seven years.

Which federal law allows a person exchanging one life insurance policy for another to defer tax on the gains? Select one: a. Section 1035 exchange b. Tax-sheltered annuity c. Section 457 deferred compensation d. Roth IRA

a. Section 1035 exchange

Joe becomes totally disabled. How much will Social Security pay Joe's wife, who relies on child support payments from Joe, to care for their 12-year twins? Select one: a. 1/4 Joe's PIA b. 1/2 Joe's PIA c. 3/4 Joe's PIA d. Joe's PIA

b. 1/2 Joe's PIA

Which type of life insurance policy allows an employer to deduct premium payments as an ordinary business expense for tax purposes? Select one: a. Key employee b. Split-dollar plan c. Group life insurance d. Business continuation agreement

c. Group life insurance

Which of the following statements best describes how cash value in a life insurance policy is taxed? Select one: a. Cash value grows tax-free. b. Cash value does not earn interest and is, therefore, not taxable. c. If the policy cash value is surrendered, the interest earned on the cash value is taxable as ordinary income. d. None of the above

c. If the policy cash value is surrendered, the interest earned on the cash value is taxable as ordinary income.

What is the basis for a person's Social Security insured status? Select one: a. Primary insurance amount b. Age c. Quarters of credit d. None of the above

c. Quarters of credit

All of the following statements are true regarding the IRS early withdrawal penalty for nonqualified annuities, EXCEPT: Select one: a. The penalty applies to withdrawals made prior to age 59 1/2. b. If an early withdrawal is made, the penalty applies in addition to ordinary taxes on the taxable portion of the withdrawal. c. The IRS early withdrawal penalty is 20%. d. Early withdrawals are subject to the IRS early withdrawal penalty.

c. The IRS early withdrawal penalty is 20%. The IRS early withdrawal penalty is 10%.

Who pays tax on personal life insurance given as a gift? Select one: a. The insurer b. The state c. The gift-giver d. The gift recipient

c. The gift-giver

Within how many days must Samantha roll over the funds from her IRA to avoid the 20% withholding tax penalty? Select one: a. 10 days b. 31 days c. 45 days d. 60 days

d. 60 days

Social Security disability benefits are payable to a covered disabled worker until the age of: Select one: a. 50 b. 60 c. 62 d. 65

d. 65

All of the following individuals would not be covered by Social Security, EXCEPT: Select one: a. A nun b. Railroad worker covered by the Railroad Retirement Act c. Police officer covered by a retirement program d. A nurse practitioner who owns their own practice

d. A nurse practitioner who owns their own practice

Which of the following is true regarding the taxation of universal life insurance policies? Select one: a. Premiums are tax-deductible. b. All cash value is taxed upon withdrawal. c. Only withdrawals of premium dollars from the cash value are taxable. d. Cash value grows tax-deferred, but may be subject to taxation upon withdrawal.

d. Cash value grows tax-deferred, but may be subject to taxation upon withdrawal.

How much is the Social Security disability benefit payable to a covered worker? Select one: a. 1/4 their PIA b. 1/2 their PIA c. 3/4 their PIA d. Their PIA

d. Their PIA

After the 5-month waiting period, Social Security disability benefits are payable to the disabled covered worker in the amount of: Select one: a. 1/4 their PIA b. 1/2 their PIA c. 3/4 their PIA d. Their total PIA

d. Their total PIA

When a life insurance policy becomes a MEC, what are the tax consequences? Select one: a. Interest loses tax-deferred advantage. b. Premiums are no longer tax-deductible. c. Premiums do not accrue interest. d. Withdrawals and policy loans are taxed as ordinary income.

d. Withdrawals and policy loans are taxed as ordinary income.

Susan has a $500,000 permanent life insurance policy. She has paid $200,000 in premiums, and the policy has a cash value of $216,000. If Susan dies, her beneficiary will pay taxes on: Select one: a. $0 b. $16,000 c. $284,000 d. $500,000

a. $0 Life insurance death benefits are tax-free. The cash value is included in the death benefit, so it is not taxed.

Erin bought a $100,000 whole life insurance policy. When she is 65 she decides to surrender the policy for its cash value of $60,000. Of the cash value, $50,000 is premiums. How much of Erin's cash surrender is taxable? Select one: a. $10,000 b. $50,000 c. $60,000 d. $100,000

a. $10,000

Under which insured Social Security insured status are most benefits paid? Select one: a. Fully insured b. Currently insured c. Disability insured d. None of the above

a. Fully insured

How are Social Security benefits determined? Select one: a. How long a covered worker has worked throughout their life b. How many dependents a covered worker has c. What type of retirement plan a person has d. How many years a person has been covered by Medicaid

a. How long a covered worker has worked throughout their life

A policy loan on a whole life policy is: Select one: a. Not taxable b. Taxable c. Tax-deferred d. Taxable if not repaid prior to policy maturation

a. Not taxable policy loans are not taxable

How are personal life insurance dividends taxed? Select one: a. Interest earned on dividends is considered taxable income. b. Dividends are considered a return of overcharged premium. c. Dividends are not taxable because premiums are paid with after-tax dollars. d. All of the above

d. All of the above

Which of the following employees would not be covered by Social Security? Select one: a. A person hired by the Federal government in 1980 b. A priest that has taken a vow of poverty c. A self-employed, homeless street musician d. All of the above

d. All of the above

What is the full Social Security retirement age for a person born after 1960? Select one: a. 62 b. 65 c. 67 d. 70

c. 67

Which of the following terms describes the portion of the periodic annuity benefit that is taxed? Select one: a. Estate tax b. Seven-pay test c. Exclusion ratio d. None of the above

c. Exclusion ratio

What is the basis for Social Security retirement benefits? Select one: a. Status of dependency b. Age c. Primary insurance amount (PIA) d. Quarters of credit

c. Primary insurance amount (PIA) The primary insurance amount (PIA) is an individual's average monthly wage earnings and is used to determine the amount of Social Security retirement benefits.

Social Security quarters of coverage earned are based on ________ quarters worked, and ________ be earned consecutively. Select one: a. Consecutive; must b. Consecutive; can c. Cumulative; cannot d. Cumulative; do not need to

d. Cumulative; do not need to

What is the general rule for taxation of personal life insurance? Select one: a. Premiums are paid with after-tax dollars; proceeds received in a lump-sum are received tax-free; proceeds received in installments are taxable only to the extent of interest earned. b. Premiums are paid with pre-tax dollars; proceeds received in a lump-sum are taxed; proceeds received in installments are not taxed. c. Premiums are paid with after-tax dollars; proceeds are taxed. d. Premiums are paid with pre-tax dollars; proceeds are taxable only if received in a lump-sum.

a. Premiums are paid with after-tax dollars; proceeds received in a lump-sum are received tax-free; proceeds received in installments are taxable only to the extent of interest earned.

All of the following are false regarding the tax consequences of Roth IRAs, EXCEPT: Select one: a. Contributions are tax-deductible. b. Contributions are made with taxed dollars; however, interest grows tax-free. c. Once the plan participant reaches age 59 1/2, taxes on distributions may still be imposed. d. Contributions and interest are tax-free.

b. Contributions are made with taxed dollars; however, interest grows tax-free.

Maria is self-employed. She owns her own ballet studio. Which of the following is true regarding her portion of Social Security tax? Select one: a. Maria will only have to pay the employee's portion of the tax. b. Maria will only have to pay the employer's portion of the tax. c. Maria will have to pay the employer and the employee's tax portions. d. Maria will not have to pay the tax because she is self-employed.

c. Maria will have to pay the employer and the employee's tax portions.

Social Security is also referred to as: Select one: a. Medicare b. Medicaid c. OASDI d. Disability income insurance

c. OASDI Old, Age, Survivors, and Disability Insurance

Which of the following factors does not affect how much a retiree will receive for Social Security monthly retirement income benefits? Select one: a. The retiree's age b. The retiree's insured status, fully or currently insured c. The retiree's sex d. The retiree's PIA

c. The retiree's sex

In order to obtain fully insured status, a covered worker must accrue one quarter of coverage each calendar year after the age of 21 for a total of 40 quarters and minimum of six quarters, upon the earliest of: Select one: a. The year prior to reaching age 62 b. The year of disability onset c. The year prior to death d. All of the above

d. All of the above

Which of the following correctly describes Social Security survivors benefits for a covered worker who is fully insured? Select one: a. Monthly payments to the widow equal to the deceased spouse's PIA if the widow is age 65 or above b. Lump-sum death benefit paid to the widow and eligible children of the deceased covered worker c. Monthly payments to a dependent parent age 62 and above d. All of the above

d. All of the above

How long is the reduction in Social Security retirement benefits effective for a person who retires early? Select one: a. 2 years b. 5 years c. Until age 70 d. All throughout retirement

d. All throughout retirement

How much will an unmarried child, Joe, age 19, in his last year of high school, receive from Social Security if his mother becomes totally and permanently disabled? Select one: a. 1/4 his mother's PIA b. 1/2 his mother's PIA c. 3/4 his mother's PIA d. His mother's PIA

d. His mother's PIA

A person who is eligible to receive both spousal and retirement benefits from Social Security will: Select one: a. Only receive the spousal benefit b. Only receive the retirement benefit c. Receive both the spousal and retirement benefit d. Receive the benefit that is larger

d. Receive the benefit that is larger

All of the following are reasons the face amount of a life insurance policy may be subject to tax, EXCEPT: Select one: a. The policy's ownership has been transferred to a third party. b. The designated beneficiary is receiving the face amount in installments. c. The deceased transferred ownership of the policy within three years prior to death. d. The policy proceeds are paid out in a lump-sum.

d. The policy proceeds are paid out in a lump-sum.

A fully insured individual must have which of the following? Select one: a. 40 quarters of credit b. 20 quarters of credit c. 10 quarters of credit d. 4 quarters of credit

a. 40 quarters of credit

Which of the following correctly describes Social Security Survivors benefits payable if a covered worker is currently or fully insured upon death? Select one: a. Lump-sum death benefit paid to the widow and eligible children of the deceased covered worker. b. Monthly payments to the disabled covered worker in the amount of the worker's PIA. c. Monthly payments to the retired covered worker. d. Monthly payments to the spouse regardless of age.

a. Lump-sum death benefit paid to the widow and eligible children of the deceased covered worker.

A covered worker must be ______ insured to receive Social Security retirement benefits. Select one: a. Currently b. Fully c. Disability d. Disability and currently

b. Fully

Which of the following is true regarding taxes on nonqualified annuities? Select one: a. Premiums are paid with pre-tax dollars and interest is tax-deferred. b. Premiums are not tax-deductible and interest is taxable in the year it is earned. c. Premiums are not tax-deductible, but interest is tax-deferred. d. Premiums are paid with pre-tax dollars, but interest is taxable in the year it is earned.

c. Premiums are not tax-deductible, but interest is tax-deferred.

Which of the following is false regarding eligibility for Social Security disability benefits? Select one: a. The covered worker must be unable to do the work they did prior to the disability. b. The covered worker must not be able to do other work. c. The disability must have lasted or will last for at least 6 full months or be expected to end in death. d. All of the above

c. The disability must have lasted or will last for at least 6 full months or be expected to end in death.

Which of the following is true regarding the taxation of traditional IRAs? Select one: a. Contributions are made with after-tax dollars and interest earned is tax-deferred. b. Contributions are made with pre-tax dollars and interest earned is tax-deferred. c. Contributions are made with after-tax dollars, but interest is taxable in the year it is earned. d. Contributions are made with pre-tax dollars, but interest is taxable in the year it is earned.

b. Contributions are made with pre-tax dollars and interest earned is tax-deferred.

Which of the following is generally true regarding premiums for individually-purchased life insurance and annuities? Select one: a. They are tax-deductible. b. They are not tax-deductible. c. Only life insurance premiums are tax-deductible. d. Only annuity premiums are tax-deductible.

b. They are not tax-deductible.

How many quarters of coverage are required for currently insured status under Social Security? Select one: a. 6 b. 10 c. 20 d. 40

a. 6 A covered worker who has accrued at least six quarters of coverage over the past 13 quarters ending with the quarter of disability onset, death or retirement, is currently insured.

Premiums for life insurance are not tax-deductible and death benefits, received in a lump sum, are not taxable. Which of the following is taxable? Select one: a. Interest on life proceeds paid in installments b. Dividends c. Accelerated benefits d. Policy loans

a. Interest on life proceeds paid in installments

Lump sum payments for life insurance are: Select one: a. Taxable b. Not taxable c. Taxable over the premium payment amounts d. Taxable if the employer paid the premiums

b. Not taxable

Which of the following is false regarding taxation of distributions from qualified plans? Select one: a. Benefits are taxable as income upon withdrawal from the account. b. Distributions prior to 62 are subject to an additional 10% IRS penalty. c. Plan loans and rollovers are considered withdrawals, but are not subject to the 10% IRS penalty. d. If the plan participant becomes disabled, he or she may make early withdrawals that are subject to tax, but not the 10% IRS penalty.

b. Distributions prior to 62 are subject to an additional 10% IRS penalty.

Luka is eligible to receive both spousal and retirement benefits. Which of the following is true? Select one: a. Luka will receive the spousal benefit only. b. Luka will receive the retirement benefit only. c. Luka will receive both the spousal and the retirement benefits. d. Luka will receive the larger of the two benefits.

d. Luka will receive the larger of the two benefits.

Social Security retirement benefits include all of the following, EXCEPT: Select one: a. Monthly payments to a covered worker b. Monthly payments to a covered worker's spouse, age 65 or older, in an amount of 1/2 the covered worker's PIA c. Monthly payments to a divorced spouse over age 62 d. Monthly payments to a grandchild of the covered worker in the amount of the covered worker's PIA

d. Monthly payments to a grandchild of the covered worker in the amount of the covered worker's PIA