Life Insurance Pt 2
Cal bought a $100,000 universal life policy ten years ago. He has paid $8,000 in premiums into the policy. He now decides to surrender the policy for its full $15,000 cash value. What amount is taxable?
$7000
In accordance with Section 1035 of the Tax Code, all the following exchanges are permitted on a tax-free basis EXCEPT:
A deferred annuity exchanged for a whole life insurance policy.
The charge-free withdrawals provision of a deferred annuity contract does which of the following?
It permits annuity contract owners to withdraw a specified percentage of the accumulated value annually without imposing a surrender charge.
After a viatical settlement agreement is signed, which party owns the life insurance policy?
the viatical settlement provider
Sally has $60,000 coverage under her employer's noncontributory group life insurance plan. What portion of that coverage is taxable to Sally?
$10,000
The amount of money a person might typically receive from a viatical settlement is:
50 to 80 percent of the death benefit.
All the following statements about annuity death benefits are correct EXCEPT:
All annuities provide a death benefit if the owner or annuitant dies after the contract has been annuitized.
Which of the following best explains why Section 1035 of the Tax Code does NOT permit a tax-free exchange of an annuity for a life insurance policy?
Allowing a tax-free exchange of an annuity for life insurance would enable taxable annuity gain to escape taxation via the life insurance death benefit.
Which of the following statements regarding the taxation of death benefits paid from a group life insurance plan is correct?
The death benefit is income tax free, but interest earned on funds left with the insurer under a settlement option is taxable in the year earned.
Which of the following statements correctly describes the tax treatment of life insurance death benefit settlement options other than a lump-sum payment?
The death benefit principal of every settlement option payment is income tax free, but the interest earnings are taxable income to the beneficiary in the year earned.
Which statement is correct about interest earnings within an individual's qualified plan account?
The participant pays no income tax on the earnings while accruing in the plan but will have to pay tax on them whenever and however they are withdrawn.
The death of a fully insured worker may result in all the following Social Security benefits being payable EXCEPT:
a monthly income benefit to the deceased worker's brothers or sisters, if any
In accordance with Section 1035 of the Tax Code, a deferred fixed annuity may be exchanged on a tax-free basis for all the following types of products EXCEPT:
a whole life insurance policy
The FICA tax is split between an employee and employer, with the employee paying how much?
one-half (50 percent) of the total tax
Regardless of the interest earned by the index underlying an indexed annuity, the actual amount credited is limited by the contract's:
participation rate and rate cap
Grace's annuity pays her an income for her lifetime, regardless of how long she lives. When she dies, no further payments are made to anyone. Which type of settlement options does she have?
straight, or pure, life income
Alice's deferred annuity imposes a declining surrender charge that begins at 7 percent during the first year of the contract and declines 1 percentage point each year. What would the surrender charge rate be for a full withdrawal in the third year of the same contract?
5 percent
Which of the following is most designed to discourage deferred annuity contract owners from surrendering their annuity and moving the money to a new annuity when rates are rising?
market-value adjusted annuities
Social Security does NOT provide benefits for
medical care
For which of the following people would an annuity probably NOT be suitable?
Charlie, age 79, who is looking for a place to save the proceeds from the recent sale of his vacation home.
Which of the following sections of the Tax Code deals with the exchange of life insurance policies and annuities?
Section 1035
Both indexed annuities and market-value adjusted annuities are generally considered a form of:
fixed annuity
Which of the following statements is true regarding an insured executive bonus plan?
The executive is the policyowner.
Which statement correctly describes the income tax treatment of employer-funded group life insurance coverage on a covered employee?
The value of coverage exceeding $50,000 is taxable to the employee; below that, it is tax free.
Annuities offer all the following benefits EXCEPT
tax-free distributions upon the annuity owner's death or retirement
Pam is a vice president employed by Gulf, Inc., where she has $300,000 in coverage under the company's noncontributory group life insurance plan. What portion of that coverage is taxable to Pam?
$250,000
An indexed annuity with a participation rate of 75 percent is currently valued at $10,000. If the S&P 500 increases 10 percent during the contract's term, how much interest will be credited to the annuity?
$750
Which of the following statements accurately describes the difference between a joint and survivor (J&S) annuity settlement option and a joint life settlement option?
The J&S option continues payments until the second annuitant dies, while the joint life option terminates payments upon the first annuitant's death.
Once annuitized income payments begin, which of the following statements is correct?
The settlement option cannot be changed.
Which of the following is guaranteed under most variable annuity contracts?
a death benefit, if the owner or annuitant dies before the contract is annuitized
Social Security's full retirement age (FRA), currently age 66, will gradually rise to what age for workers born in 1960 or later?
age 67
All of the following distributions from a qualified plan are exempt from the 10 percent penalty tax on premature distributions, EXCEPT:
Distributions made because the participant needs the funds to pay for homeowners insurance premiums.
All the following statements regarding deferred annuity beneficiaries are correct EXCEPT:
With an annuitant-driven contract, the beneficiary must annuitize the contract immediately if the annuitant dies before annuitization.
Jenny is considered fully insured under Social Security, which qualifies her for which of the following benefits?
disability benefits, survivor benefits, and retirement benefits
Sue, an annuity owner, names her 15-year-old son and 10-year-old daughter as joint annuitants of her contract. Upon whose life (or lives) are income payments determined?
the joint life expectancy of Sue's son and daughter
What happens to Social Security retirement benefits when a person postpones them past their full retirement age (FRA)?
They increase.
A currently insured worker is eligible for which of the following Social Security benefits?
survivor death benefits only
What is the name of the period during which premium funds are paid into an annuity contract?
the accumulation period
Ann is beneficiary of an annuity owned by Jim, who is also the annuitant. If Jim annuitizes the contract at retirement and dies shortly afterward, what benefits will Ann receive from the annuity?
Ann's right to any funds will be based on the income payout option Jim selected.
All the following statements about variable annuity sub-accounts are correct EXCEPT:
The insurer selects the variable sub-accounts to which the contract owner's premiums are allocated.
Which of the following statements best describes the purposes that annuities serve?
While their basic purpose is to distribute a sum of money, annuities can also be used to accumulate money.
If Harry, age 58, withdraws funds from his annuity, the taxable portion of the withdrawal may also be assessed which of the following?
10 percent penalty
Which of the following statements correctly describes the tax treatment of withdrawals from a modified endowment contract (MEC)?
Full withdrawals and policy loans from a MEC are treated on a LIFO (last-in/first-out) basis; in addition to income tax, MEC withdrawals taken before the owner's age 59½ are subject to a 10 percent penalty.
When looking at how much income his family would need if he were to die prematurely, Tom discovered that the Social Security survivors' benefit would not give them enough ongoing income. If securing his family's financial future is his top priority, which of the following statements describes Tom's best response?
Tom can buy additional life insurance to cover the amount needed to provide an adequate stream of income upon his death.
Which of the following distribute a sum of money regularly, starting very shortly after they are bought?
immediate annuities
What is the only part of a nonqualified annuity's death benefit that is taxable?
the amount that exceeds the amount the owner paid into the contract
If four business partners enter into a cross-purchase buy-sell agreement, what is the total number of life insurance policies that will be needed to fully insure this agreement?
12
George purchased an annuity that will provide his wife, Anna, with monthly income payments for as long as she lives. In this scenario, what is Anna called?
the annuitant
Failure to begin taking required minimum distributions (RMDs) from a qualified retirement plan when required can result is a penalty tax equal to:
50 percent of the difference between the amount that was taken and the RMD amount that should have been taken
Which one of the following best describes the meaning of "life insurance death benefits avoid probate"?
the death benefit is paid to the beneficiary without regard for what the insured's will may say.
One of the first systems developed for determining life insurance needs, which it did by calculating a person's economic value, was called the:
human life value approach
Howard, 33, and Mary, 32, want to fund their 13-year-old daughter's college education. Which of the following is the most appropriate advice about using a deferred annuity for this purpose?
It is not recommended. Deferred annuities typically impose surrender charges on funds withdrawn during a contract's early years, and withdrawals from annuities before the owners reach age 59½ may be subject to a tax penalty.
Social Security benefits are funded through payroll taxes split between the employee and employer. Which of the following best explains the amount of tax paid by self-employed individuals?
Self-employed individuals pay a tax rate equal to the combined employer and employee rate.
Under which one of the following circumstances are funds related to life insurance policy dividends taxable?
the interest earned on dividends left with the insurer to accumulate interest
What do most insurance producers use today to determine a prospective customer's life insurance needs?
the needs approach
Jenny has purchased a variable annuity. She directs $2,500 of her $5,000 premium deposit into the contract's blue-chip stock sub-account when its net asset value is $10. How many accumulation units has Jenny bought?
250 accumulation units of the sub-account
Which of the following correctly describes the basic tax treatment of deferred annuity death proceeds paid out before the contract is annuitized?
A portion of the death benefit, essentially representing the interest earned by the annuity, is taxable.
All the following statements about key employee life insurance coverage are correct EXCEPT:
The key employee's family receives the death benefits.
With respect to annuities, the basic purpose for the exclusion ratio is to:
determine the non-taxable portion of each annuity payment
The process of determining life insurance needs by discounting a person's future net earnings into a single sum that represents the person's economic value is called the:
human life value approach
Which of the following distributes income payments over time beginning soon after purchase and can be funded only with a single lump-sum premium payment?
single premium immediate annuity
Which of the following best describes income payments under the period certain-only annuity settlement option?
the longer the payout period, the smaller the amount of each monthly payment
Whether a variable annuity's monthly income rises, falls, or stays level depends largely on which of the following?
the assumed interest rate (AIR) selected by the contract owner
Which statement regarding defined contribution qualified plans is correct?
Participants are always fully vested in their contributions, but employer contributions may not fully vest for several years.
Four shareholders of ABC Corporation, who each own a $1,000,000 interest in the company, enter into a stock redemption agreement funded with life insurance. If one shareholder dies six months later, all the following statements are correct EXCEPT:
The three remaining shareholders will buy the deceased owner's interest from his estate.
The Acme Company sets up a plan that provides annuities to its employees when they retire. The individuals those annuities cover hold "certificates of participation." Which type of plan is that?
group annuity
What does the length of an annuity's surrender charge period depend on?
the contract design
Life insurance is commonly used for all the following needs, EXCEPT:
to save for a new car in several years.
