Life and Health - Chapter 7 Quiz - Federal Tax Considerations and Retirement Plans
All employer-paid premiums for amounts above $_________ of group life insurance are reported as taxable income to the employee. $75,000 $25,000 $100,000 $50,000
$50,000 All employer-paid premiums for amounts above $50,000 are reported as taxable income to the employee. Relevant content:7.2 Taxation of Group Life Insurance
Employer-paid premiums for employee group term life do not constitute taxable income to the employee for coverage up to ___________. $25,000 $50,000 $40,000 $30,000
$50,000 Employer-paid group life insurance premiums for coverage up to $50,000 are not taxable as income to the employee. Relevant content:7.2 Taxation of Group Life Insurance
All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee. $25,000 $150,000 $100,000 $50,000
$50,000 Premiums paid for death benefits exceeding $50,000 are taxable as income to the employee for the year in which the premium was paid. Relevant content:7.2 Taxation of Group Life Insurance
When establishing a SIMPLE, what two different types of qualified plans must employers choose between? Defined benefit or defined contribution 401(k) or IRA SEP or TSA Keogh or corporate
401(k) or IRA A SIMPLE may take the form of either a 401(k) or an IRA. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
Sherman is the custodian at an elementary school and participates in its qualified retirement plan. This describes a: Simplified Employee Pension 403(b) Tax-Sheltered Annuity SIMPLE IRA HR-10 Keogh Plan
403(b) Tax-Sheltered Annuity All four responses are qualified plans, but the one specifically designed for employees of nonprofit organizations and public schools is the 403(b) Tax-Sheltered Annuity. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
The IRS allows for 'catch-up' IRA contributions for those age _______ and older. 62 65 50 70
50 The age at which IRA 'catch-up' contributions can be made is 50 or older. Relevant content:7.8 Individual Retirement Accounts (IRAs)
When a life insurance policy does not pass the ______-pay test, it becomes classified as a MEC. 7 9 8 10
7 It is the 7-pay test that must be passed in order not to be classified as a MEC. Relevant content:7.3 Modified Endowment Contracts (MECs)
Required Minimum Distributions must begin from Traditional IRAs by April 1st of the year following the year the account owner turns _____. 65 60 62 70 1/2
70 1/2 RMDs must start no later than April 1 of the year following the year the account owner turns 70 1/2. Relevant content:7.8 Individual Retirement Accounts (IRAs)
Which of these is a qualified plan designed specifically for unincorporated self-employed individuals? 403(b) Plan Tax-Deferred Annuity IRA Keogh Plan
Keogh Plan The key element in the description is a plan specifically designed for self-employed individuals. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
Which of the following statements about Section 1035 transactions is TRUE? A new application is required when moving into a new life insurance policy A 1035 allows an annuity to be exchanged for life insurance All surrender charges are waived on any existing policy Any surrender charges satisfied on the old policy carry over into the new policy
A new application is required when moving into a new life insurance policy If an existing policy has a surrender charge, it is still applied. The new policy requires evidence of insurability, and new surrender charges will apply to the new policy if it has them. Relevant content:7.5 Section 1035 Exchanges
What type of retirement plan is not required to have a vesting schedule, is not approved by the IRS, can discriminate in favor of highly compensated employees, and can benefit the employer? An ERISA plan A non-qualified plan A qualified plan A pension plan
A non-qualified plan A qualified plan is not allowed to have those features or requirements. Only a non-qualified plan can. Relevant content:7.7 Federal Tax Considerations for Retirement Plans
If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period. After-tax Exclusion Pre-tax Non-guaranteed
After-tax Only the after-tax investment is recovered income tax-free from an annuity that is annuitized. It represents a return of the cost basis. Relevant content:7.6 Taxation of Annuities
If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? The amount received in excess of cost basis is taxed as a long-term capital gain The entire amount received is subject to ordinary income tax Any amount that represents an excess over cost basis that has been held for over 1 year is treated as long-term capital gain with the balance considered short-term capital gain Any amount received in excess of its cost basis is taxable as ordinary income
Any amount received in excess of its cost basis is taxable as ordinary income The same tax rules apply to both fixed and variable annuities. The funds received in excess of the cost basis are taxable as ordinary income. Relevant content:7.6 Taxation of Annuities
Which of the following statements regarding Roth IRAs is FALSE? If the account owner is at least 59 1/2 and has held the account assets at least 5 years, there is no tax on earnings withdrawn There are no Required Minimum Distribution (RMD) age or amounts Contributions are not tax-deductible As long as the account owner is under age 59 1/2 there is no maximum contribution limit
As long as the account owner is under age 59 1/2 there is no maximum contribution limit Roth IRAs are subject to the same maximum contribution limits as other IRAs. Relevant content:7.8 Individual Retirement Accounts (IRAs)
Life insurance policy premiums establish a _________ in the policy for tax purposes. Dividend Cash value Cost basis Loan
Cost basis Cost basis is primarily established by accounting for the premiums paid into the policy. Relevant content:7.1 Taxation of Personal Life Insurance
Which of the following would always be considered a Modified Endowment Contract? Limited Pay Whole Life Variable Whole Life Straight or Continuous Pay Whole Life Single Premium Whole Life
Single Premium Whole Life Single Premium Whole Life would always be a MEC as it would always fail the 7-Pay Test. Relevant content:7.3 Modified Endowment Contracts (MECs)
All of the following are true regarding ERISA qualified plans, except: Employers must establish a pension plan The plan must benefit employees and beneficiaries A vesting schedule must be established The plan must be IRS approved
Employers must establish a pension plan Establishing a corporate pension plan is optional; however, if one is established it must meet the ERISA requirements in order to qualify for favorable tax treatment. Relevant content:7.7 Federal Tax Considerations for Retirement Plans
When withdrawing cash from a cash value life insurance policy, the amount of the withdrawal up to the policy's cost basis is tax-free. This tax accounting rule is referred to as: Last-In, First-Out (LIFO) First-In, First-Out (FIFO) First-In, Still There (FIST) Dollar Cost Averaging
First-In, First-Out (FIFO) FIFO accounting is first-in, first-out, which is why the recovery of amounts up to the cost basis are income tax-free. Relevant content:7.1 Taxation of Personal Life Insurance
Which of the following is a qualified retirement plan that bases an employee's retirement benefit upon length of service and highest attained salary? Defined Benefit SIMPLE Profit-Sharing Defined Contribution
Defined Benefit A defined benefit plan usually bases the employee's retirement check on length of service and highest attained salary. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
All of the following types of qualified plans provide an employee with a retirement benefit based on the value of the employee's account at retirement, except: Defined Benefit 403(b) SEP-IRA 401(k)
Defined Benefit A defined benefit plan's retirement check is usually based on the length of time the employee was with the firm and his/her highest salary. The employer takes on the investment risk. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
When an employee receives a fixed and known benefit at retirement, it comes from a(n) __________ plan. Defined Contribution Profit-Sharing SEP-IRA Defined Benefit
Defined Benefit Defined benefit plans pay out a fixed and known benefit to retirees based on a formula considering years of employment and highest earnings. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
An annuity held within a traditional IRA ____________. Does not provide any additional tax-deferral benefit Allows for withdrawals prior to age 59 1/2 without any tax penalty Generates tax credits upon withdrawal Makes the tax-deferral aspect of the annuity tax-free
Does not provide any additional tax-deferral benefit An annuity already has a tax-deferred element to it. An annuity inside a traditional IRA does not provide any additional tax-deferral benefit; however, the annuity may provide other benefits that other investments cannot. Relevant content:7.8 Individual Retirement Accounts (IRAs)
Anyone under the age of 70 1/2 who has _________ can open up a Traditional IRA. Annuity Income Benefit Payments Investable Assets Investment Income Earned Income
Earned Income The requirement is earned income. Relevant content:7.8 Individual Retirement Accounts (IRAs)
Cash values within an ordinary straight whole life insurance policy _______ over time. Increase Remain constant Decrease Vary
Increase Cash values increase over time as premium is paid in and interest is reflected in the cash values shown in the policy's nonforfeiture table. Relevant content:7.1 Taxation of Personal Life Insurance
Which of the following best defines the 'Cost Recovery Rule'? The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender When a policy is surrendered, the earnings within the policy are accounted for first Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender
Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender The 'Cost Recovery Rule' stipulates that upon a partial withdrawal of cash or the surrender of a policy, the cash value in excess of premiums paid (cost basis) is subject to income tax. Relevant content:7.1 Taxation of Personal Life Insurance
Which of the following statements about a Modified Endowment Contract (MEC) is FALSE? The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment Taxable distributions include cash value surrenders and policy loans
If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment Any funds distributed are subject to a last-in, first-out (LIFO) tax treatment, meaning gains will be taxed before principal. Relevant content:7.3 Modified Endowment Contracts (MECs)
When would a life insurance policy loan be subject to income taxation? If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis When the outstanding loan is in excess of $10,000 When any part of the policy loan is used to pay for the policy's premium When the policy loan is greater than the premiums paid into the policy
If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis Only the portion of an outstanding policy loan in excess of the policy's cost basis will be subject to income taxation if the policy lapses. Relevant content:7.1 Taxation of Personal Life Insurance
An employer's contribution to a SIMPLE plan is vested _________. Immediately at 100% In equal amounts over 3 years Over 7 years in equal amounts In the fifth year at 100%
Immediately at 100% Employer contributions to a SIMPLE plan are vested immediately at 100%. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
In a SIMPLE plan, employer contributions vest: 20% per year over 5 years Immediately at 100% 1/4 per year over 4 years 100% at the end of year 7
Immediately at 100% SIMPLE employer contributions must be immediately vested at 100%. This means that the employee is entitled to all the employers' contributions immediately. Relevant content:7.9 Qualified Retirement Plan Types, Characteristics and Purchasers
Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________. Income tax-free Income tax-deferred Income tax penalty-free Income tax-deductible
Income tax-free Death benefits paid in a lump sum to a named beneficiary are income tax-free. Relevant content:7.2 Taxation of Group Life Insurance
An Individual Retirement Account (IRA) may be funded with all of the following, except: Life Insurance Annuities Certificates of Deposit (CDs) Mutual Funds
Life Insurance Life insurance does not meet the IRS qualifications for funding an IRA. Relevant content:7.8 Individual Retirement Accounts (IRAs)
Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)? Taking out a policy loan Withdrawal of cash value to pay for a daughter's wedding Cash surrender of the policy Lump sum death benefit paid to the beneficiary
Lump sum death benefit paid to the beneficiary Withdrawal of any cash value to pay for a daughter's wedding, policy loans, and cash surrender of the policy are all taxable distributions. Lump-sum death benefits are considered to be tax-free life insurance proceeds. Relevant content:7.3 Modified Endowment Contracts (MECs)
ERISA sets ________ standards for pension plans in private industry. Maximum Minimum Flexible Voluntary
Minimum ERISA sets minimum standards. Relevant content:7.7 Federal Tax Considerations for Retirement Plans
____________ plans do not meet the requirements of federal law to be eligible for favorable tax treatment. Pension Non-qualified ERISA Qualified
Non-qualified Non-qualified plans do not meet the requirements for favorable tax treatment; qualified plans do. Relevant content:7.7 Federal Tax Considerations for Retirement Plans
Any employee-paid group life insurance premiums are __________. Tax-deferred Tax-exempt Not tax-deductible Tax-deductible
Not tax-deductible Any employee-paid group life insurance premiums are not tax-deductible. Relevant content:7.2 Taxation of Group Life Insurance
How often may a person perform a rollover from one IRA to another? Once a year Every 6 months Once each quarter Once every 2 years
Once a year IRA rollovers may only be done once every 12 months. Relevant content:7.8 Individual Retirement Accounts (IRAs)
All of the following are TRUE regarding qualified plans, except: Distributions taken prior to age 59 1/2 are subject to tax and a tax penalty Plans can discriminate in favor of highly compensated employees Employer contributions are immediately tax-deductible Employer contributions are not taxable to the employee until withdrawn
Plans can discriminate in favor of highly compensated employees In an ERISA-qualified plan, there can be no discrimination in favor of highly compensated employees. Relevant content:7.7 Federal Tax Considerations for Retirement Plans
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? Choose the interest income only settlement option Elect the life only settlement option Receive the claim amount in a lump sum Select the 10-year period certain settlement option
Receive the claim amount in a lump sum Any settlement option will generate taxable income to the beneficiary. The only way to be exempt from any income taxation is to receive the death benefit in a lump sum. Relevant content:7.1 Taxation of Personal Life Insurance
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? The $540,000 lump sum proceeds will be received income tax-free The $40,000 will be taxed since the premium was tax-deductible by the employer $460,000 is income taxable to the recipient All premiums paid may be deducted from the face value before taxation
The $540,000 lump sum proceeds will be received income tax-free The death benefit (face amount) of both individual and group policies received in a lump sum by a named beneficiary(s) is income tax-free. Relevant content:7.1 Taxation of Personal Life Insurance
Death benefits are paid to the estate of the policyowner/insured in which of the following situations? The beneficiary is the estate The contingent beneficiary has outlived the primary beneficiary The primary beneficiary is the deceased's spouse The primary beneficiary is a minor
The beneficiary is the estate If the beneficiary is listed as the estate, then upon death of the insured that is where the funds will end up. Relevant content:7.1 Taxation of Personal Life Insurance
Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate? The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up The insured is also the policyowner and at death no beneficiaries are alive A business partner owns a life insurance policy on the other partner that died An employer owns a policy on the life of a key employee who dies
The insured is also the policyowner and at death no beneficiaries are alive If the policyowner and the insured are the same person, and the insured dies when there are no living beneficiaries, the death benefit will be included in the insured's estate. Relevant content:7.1 Taxation of Personal Life Insurance
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: Upon surrender of the policy, he will be taxed on any amount by which the cash value exceeds the cost basis (premiums paid) of the contract The interest that he pays on policy loans is tax-deductible Annual increases in the policy's cash value are not taxable at the time they are credited to the policy Since his policy is a personal policy, he cannot deduct the premiums he pays for the policy
The interest that he pays on policy loans is tax-deductible The interest on policy loans is not tax-deductible. Relevant content:7.1 Taxation of Personal Life Insurance
By what means is a transfer for value made? Through an absolute assignment By a partial withdrawal By way of collateral assignment By requesting a change in the beneficiary designations
Through an absolute assignment To effect a transfer for value, an absolute assignment needs to take place. Relevant content:7.4 Life Insurance Transfer for Value Rule
What is the main purpose that IRC section 1035 was enacted? To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one To allow policyowners to obtain features and benefits not available on their existing policies To allow consumers to get better performance from a new policy To allow consumers to obtain less expensive life insurance policies
To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one The main purpose of section 1035 is to allow for the continuation of tax-deferral from an old policy into a new policy. Relevant content:7.5 Section 1035 Exchanges
All of the following are times in which life insurance policy cash values can become taxable, except: When the policy is sold When a policy loan is taken out If the policy fails to meet the IRS definition of life insurance At policy surrender
When a policy loan is taken out Policy loans do not trigger a taxable event. Relevant content:7.1 Taxation of Personal Life Insurance
