Life Insurance Test 4
The principle advantage of pension maximization is increased planning flexibility. True False
true
The rule against perpetuities is a state law restriction designed to limit the period during which a trust can withhold property or its income from outright ownership. True False
true
A life insurance policy provided to an employee under a Section 162 plan: is fully portable by the employee because the policy is the employee's sole property is only partially tax deductible provides flexibility to the employer, who can use its cash values to ease a temporary cash shortage or for emergency use is usually structured to allow the employer to recover its costs in much the same way as with a split dollar plan
a
All of the following statements about the income taxation of an insured death benefit received by a plan participant's beneficiary are accurate EXCEPT: the entire death benefit received by a plan participant's beneficiary is recovered tax free the "pure insurance" element of an insured death benefit (i.e., the amount in excess of the cash surrender value) is income tax free to the participant's beneficiary the total of all Table 2001 (formerly P.S. 58) costs paid by the participant can be received tax free from the plan death benefit if it is paid from the same insurance contracts that gave rise to these costs. the sum of all nondeductible contributions toward the plan made by the employee in a contributory plan is tax free to the participant's beneficiary.
a
Mr. Jones' pension pays $3,000 a month under the single life annuity option or $2,550 a month under the joint and 50% survivor annuity option. Mr. and Mrs. Jones elect the joint and 50% survivor annuity. What is the effective "cost'' of the 50% survivor annuity? $450 per month $1,500 per month $2,550 per month $3,000 per month
a
The advantages of key employee life insurance include all of the following except: the premiums can be paid with after-tax dollars the value of owners business investment is stabilized there are no restrictions on how the proceeds are used instant capital is available at the death of a key employee
a
Under the insurance feature of the joint & survivor annuity, the pensioner generally has no rights to: all of the above wait to select the type of benefit to be paid choose an alternative or substitute beneficiary accelerate benefit payments if a need occurs
a
Which of the following circumstances, if true, would make a nonqualified deferred compensation plan inadvisable? the business is not likely to survive the death, disability or retirement of its key employees the key employees of the employer are already receiving the maximum permitted benefits or contributions under the employer's qualified plan the employer is a closely held corporation that must to compete with larger, publicly held employers for key personnel the employer wishes to avoid the costs and aggravation of covering most or all employees under a qualified plan
a
The advantages of a split-dollar arrangement include all of the following, EXCEPT in most split-dollar plans, the employer's outlay is fully secured at all times. premiums are not tax deductible at any time by either party split-dollar arrangements are very cost effective to employers there are virtually no ERISA reporting requirements
b
Three of the following are advantages of fully-insured pension plans (i.e., plans holding only life insurance and annuity contracts that meet certain requirements). Which statement is NOT an advantage of fully insured plans? fully insured plans are exempt from the actuarial certification requirement, which reduces administrative overhead fully insured plan cash values are not subject to income tax fully insured plans are exempt from the minimum funding standards fully insured plans are permitted a higher initial level of deductible plan contributions than are regular trusteed plans
b
Which of the following goals can be achieved by the use of key employee life insurance? Provide adequate retirement funds to the key employee through the buildup of policy cash values. Assure shareholders of a public corporation that the price of the stock will not plummet at the death of a president or other senior executive. By use of a policy exchange rider, permit substitution of a new key employee under the original policy without payment of income tax on the gain on the policy. Avoid the corporate alternative minimum tax upon the death of the key employee.
b
Which of the following is true regarding variations on the "classic'' split dollar plan? Under the Employer-Pay-All Plan the employee and the employer each pay a portion of the life insurance premium. Under the Reverse Split Dollar Plan the employee's share of the premium is the amount of the cash value increase in the year with the employer paying the balance. Under the P.S. 58 Offset Plan the employee pays no income tax because his share of the premium is paid with a bonus from the employer that offsets the value of the economic benefit in the year, and the employer takes a deduction for its share of the premium. Under the Level Premium Plan the employee must pay more in the early years than under the classic plan.
b
Which of the following statements accurately describes one of the characteristics of a Section 162 plan? the premiums for life insurance covering an employee under the plan are exempt from both Social Security tax and Federal Unemployment tax at no time does the employer have any incident of ownership in the policy it is best used when the corporation is in the lowest tax bracket the employer owns the policy
b
Which of the following statements regarding the tax implications of key employee life insurance is correct? The receipt of insurance proceeds by the corporation requires the corporation to pay the alternative minimum tax. The sale of key employee insurance to the insured employee is exempt from the transfer for value rule. The receipt of insurance proceeds in excess of $250,000 requires the corporation to pay the accumulated earnings tax. Policy proceeds are subject to federal income tax.
b
All of these recent changes in qualified plan pension law have made nonqualifying deferred compensation plans more attractive, EXCEPT all qualified retirement plans are limited with respect to maximum compensation. participants must become fully vested much more quickly easier nondiscrimination rules place fewer restraints on employer's discretion the amount that can be paid under qualifying plans is severely restricted.
c
For income tax purposes: as a general rule, transfers of assets to a revocable life insurance trust have significant and adverse income tax implications a new holding period for purposes of determining capital gain and loss starts when assets are transferred to a revocable life insurance trust the grantor of a revocable life insurance trust generally reports trust income, losses, deductions, and credits if he is trustee a fiduciary income tax return must be filed for a revocable life insurance trust
c
Which of the following accurately describes one of the disadvantages of a Section 162 plan? the employer may not deduct amounts paid as premiums unless coverage is provided on a nondiscriminatory basis to all employees the deduction available for premiums will be reduced if the plan benefits the employer in any way, even if the benefit is indirect or intangible the employer has no control over either the employee or the policy through the plan filing requirements under ERISA make the coverage provided by the plan a matter of public record
c
Which of the following features is a characteristic of key employee life insurance? The key employee is taxed on the policy's benefits. The policy proceeds are payable to a beneficiary designated by the key employee. The corporation pays the premiums on the policy. The policy is owned by the key employee.
c
Which of the following is one of the advantages of a pension maximization strategy? insurability of the participant is not an issue with a pension maximization strategy the difference between a single life payout and a joint and survivor payout is nearly always sufficient to fund the needed purchase of life insurance the life insurance policy provides more planning flexibility as compared with a joint and survivor payout the pension maximization strategy is most cost effective if implementation of it is postponed until retirement
c
Which of the following types of qualified plans provides the most advantageous treatment of life insurance? 401(k) plan profit sharing plan defined benefit plan money purchase plan
c
A Section 162 plan is based on an Internal Revenue Code section that: permits a key employee to exclude from income up to a certain limited amount paid by his employer as a premium for insurance on his life describes what are wages for purposes of the withholding tax permits an employer to deduct amounts paid for premiums on life insurance covering employees provided that the amounts of insurance and participation are offered on a nondiscriminatory basis permits an employer to deduct amounts paid for premiums on life insurance covering selected employees provided that the amount is charged to the covered employee as a bonus (compensation)
d
A split dollar life insurance arrangement would be appropriate under all of the following circumstances, EXCEPT: when there is a significant income tax bracket differential between the employer and the employee when a corporation wants to facilitate a cross purchase of its stock when an employer wants to provide an employee benefit that is highly flexible at a relatively low cost when the employer wants to be able to provide for the future security of its employees with tax deductible dollars
d
Corporate Owned Life Insurance (COLI) is an attractive means of financing an employer's obligations under a nonqualified deferred compensation plan for all but one of the following reasons. Which one is inapplicable? life insurance almost always provides the ability to recover costs--including the after-tax cost of the use of corporate dollars life insurance enables the employer to promise an immediate death benefit with no risk to corporate cash flow the build-up of value inside the policy is income-tax deferred a plan funded with life insurance is exempt from all state and federal regulatory requirements
d
For estate tax purposes, life insurance held by a third party and payable to a revocable life insurance trust is includable in the grantor's estate held by a revocable life insurance trust is not includable in the grantor's estate cannot be used to provide estate liquidity held by a revocable life insurance trust is includable in the grantor's estate
d
Which of the following is one of the key advantages of using life insurance in a qualified plan? more favorable rates of return as compared with comparable investments tax free recovery of all death proceeds, including cash values lower expense and commission costs as compared with comparable investments the ability of an employer to provide employees with retirement benefits on more favorable terms than would be available through individually purchased products
d
Which of the following statements is true regarding the "classic'' split dollar plan? IRS approval is required before starting such a plan. The major cost to an employer is the amount of its outlay for the premiums. The employer is allowed an income tax deduction each year equal to the amount of economic benefit included in income by the employee. It is rarely seen in practice today.
d
A "salary continuation" plan involves the employee voluntarily choosing to defer a portion of his future salary or bonus, as a means of deferring taxes. True False
false
A "salary reduction" plan is a nonelective plan that is used to provide a specified deferred amount in addition to any other compensation or benefits provided to the employee. True False
false
An employer wishing to provide additional benefits to a select group of employees could do so with a qualified defined contribution plan. True False
false
In order to take a deduction for amounts paid under a Section 162 plan, the corporation must pay the bonus directly to the insurer providing the coverage. True False
false
Key employee life insurance is an insurance policy owned by a business and payable to the insureds' beneficiary. True False
false
Once a grantor transfers assets to a revocable living trust, any income losses, deductions, or credits become taxable to the trust, even if the grantor is the trustee. True False
false
One of the benefits of placing assets in a revocable trust is that they are protected from the claims of the grantor's creditors during his lifetime. True False
false
Premiums paid by the corporation for key employee life insurance are deductible for federal income tax purposes. True False
false
Section 162 plans are usually some form of term insurance. True False
false
Split dollar life insurance is a specialized type of life insurance designed to meet specific business needs. True False
false
The employer is taxed on the value of the economic benefit received from the employee's participation in the split-dollar arrangement. True False
false
The endorsement method of owning life insurance in a split dollar arrangement provides more protection to the employee than does the collateral assignment method of ownership. True False
false
The larger the business is, the greater the need is for key employee life insurance. True False
false
The principal requirement in implementing a pension maximization strategy is compliance with ERISA. True False
false
The sale of a key employee policy to the employee following his retirement or termination will trigger the transfer for value rule. True False
false
When life insurance is provided through a qualified plan, the costs resulting from any substandard ratings are taxable income to the insured employee. True False
false
Compared to alternative plan investment, life insurance typically provides lower expenses and higher rates of return. True False
fasle
A Section 162 plan can be terminated by the employer at any time for any reason. True False
true
A Section 162 plan is frequently referred to as an "Executive Bonus" plan. True False
true
No deduction is permitted to an employer sponsoring a nonqualified deferred compensation plan until income is taxable to the employee. True False
true
One of the key elements of a pension maximization plan is that the couple be sufficiently disciplined and secure financially to keep the life insurance in force. True False
true
Ordinarily, the cost of life insurance purchased at retirement in an amount sufficient for a pension maximization plan will be greater than the differential between the single and joint life annuity payouts. True False
true
Premiums on life insurance in a qualified plan are deductible by the employer as part of its annual contribution for covered employees. True False
true
The life insurance products used to fund a qualified plan may provide employees with retirement benefits at more favorable terms than individual contracts. True False
true
