Life/Health A.D. Banker - Chapter 7
A SIMPLE plan may be established either as a(n): A. IRA or 401(k) plan B. TSA or Keogh plan C. 401(k) or Keogh plan D. IRA or TSA plan
A. A SIMPLE plan may be established either as an IRA or a 401(k) plan.
All of the following tax-free exchanges of life insurance and annuities are permitted, EXCEPT: A Life insurance to long term care insurance B Annuity to life insurance C Annuity to long term care insurance D Life insurance to an annuity
B Annuities may not be exchanged for life insurance.
A SEP uses employer funded _______ accounts. A 401(k) B Profit Sharing C IRA D Defined Benefit
C Section 501(c)(3) is the section of tax code that defines what a non-profit organization is. Section 403(b) is the section of tax code that specifies who may participate in a 403(b) retirement plan.
A Tax Sheltered Annuity may be established and funded by which of the following? A A not-for-profit community hospital association B Johnson Accountants, Inc. C A professional law firm D XYZ's Catering, a small unincorporated business
A 403(b) plans are established for nonprofit organizations.
When may an employer deduct the premiums it pays for an employee's life insurance benefit? A If the business does not receive more than 50% of the death benefit B As long as the business does not derive a direct benefit from the policy C An employer cannot ever deduct premiums it pays for an employee's life insurance benefit D Employers can always deduct the premiums it pays for an employee's life insurance benefit
B As long as the insurance death benefit is not payable to the employer when an employee dies, the premiums paid for the life insurance are deductible to the business.
Which of the following persons may contribute to an HR-10 Keogh Plan? A An unemployed person B A corporate executive C A self-employed musician D An employee of the YMCA
C An HR-10 Keogh plan is designed to provide unincorporated self-employed individuals the opportunity to fund retirement in a tax-advantaged method.
Anyone under the age of 70 1/2 who has _________ can open up a Traditional IRA. A Annuity Income Benefit Payments B Investment Income C Investable Assets D Earned Income
D The requirement is earned income.
How are employer paid premiums on a group life insurance plan treated for tax purposes? A. A barter transaction B. As compensation in lieu of cash C. As an ordinary and necessary business expense D. As a personal expense paid on behalf of the employee
C. Employer paid premiums on a group life insurance plan are treated as an ordinary and necessary business expense which is why it qualifies for tax deductibility.
To be considered terminally ill, federal law defines a terminal illness as one which is expected to result in the person's death within how many months? A. 36 B. 6 C. 24 D. 12
C. Federal law establishes 24 months as a person's maximum life expectancy to be defined as terminally ill. For the activation of an accelerated death benefit rider, and for the purpose of limiting such claims, insurance companies often define terminal illness as one which would result in death within 12 months.
Generally, the ________ is the amount of premiums paid into the policy less any dividends or withdrawals previously taken. A Cost basis B Cash value C Net premium D Loan amount
A Generally, the cost basis is the amount of premiums paid into the policy, less any dividends or withdrawals previously taken.
A non-school employer can set up a TSA plan for their employees under which of the following IRC section? A. 501(c)(3) B. 401(k) C. 408(a) D. 403(b)
A. A non-school employer that is a non-profit organization can set up a TSA for its employees under IRC 501(c)(3).
Which of the following statements about Section 1035 transactions is TRUE? A Any surrender charges satisfied on the old policy carry over into the new policy B A new application is required when moving into a new life insurance policy C All surrender charges are waived on any existing policy D A 1035 allows an annuity to be exchanged for life insurance
B 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.
What is "defined" in a defined contribution plan? A The percentage of the employee's income provided as life insurance to the employee B The percentage or amount of an employee's deposits to the plan C The employer's percentage or amount of distribution to an employee from the plan D The percentage or amount of an employee's distributions from the plan
B In a defined contribution plan, the employee chooses how much of his/her pay to contribute to the plan each payroll period. The employer deducts that amount from the employee's pay before income tax is calculated and remits that amount to the plan's custodian for the benefit of the employee.
Nancy has an IRA and wants to move her funds directly from one financial institution to another while still maintaining the assets within an IRA account. How many times can she do this? A Once every 6 months B As often as she likes C Once a year D Once a quarter
B This describes an IRA transfer which can be done as often as she wants.
ERISA sets ________ standards for pension plans in private industry. A Flexible B Voluntary C Minimum D Maximum
C ERISA sets minimum standards.
A life insurance 1035 exchange can only be completed after: A. All surrender charges have disappeared B. Policy conversion has taken place C. Proof of insurability has been provided and accepted D. The policy has been declared a MEC
C. A life insurance 1035 exchange requires that the insured prove insurability in order to obtain new life insurance as part of the transaction.
Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified. A. Taxable B. Tax free up to $50,000 C. Taxable to the extent it exceeds 7.5% of AGI D. Tax free
D. Generally, the payment of an accelerated death benefit is tax free to a recipient if the benefit payment is qualified.
Which of these is a qualified plan designed specifically for unincorporated self-employed individuals? A Keogh Plan B 403(b) Plan C IRA D Tax-Deferred Annuity
A The key element in the description is a plan specifically designed for self-employed individuals.
All of the following are TRUE regarding non-qualified retirement plans, except: A Upon withdrawal only the earnings are subject to taxation B Contributions are not tax deductible C Contributions are immediately tax deductible D Earnings can be tax deferred until withdrawn
C Because the plan is non-qualified many of the tax benefits are not available, such as tax deductibility of contributions.
Qualified plan employer contributions are tax deductible when _________. A The employee dies B The employee makes a contribution C They are made D The employee retires
C Employer contributions are immediately tax deductible.
An Individual Retirement Account (IRA) may be funded with all of the following, except: A Annuities B Mutual Funds C Life Insurance D Certificates of Deposit (CDs)
C Life insurance does not meet the IRS qualifications for funding an IRA.
Which of the following policies would be deemed a MEC? A 10-pay Whole Life B Variable Universal Life C Single Premium Whole Life D Universal Life
C Since a single premium life insurance policy clearly does not pass the 7-pay test, it will automatically be deemed a MEC.
If a life insurance policy becomes a MEC, what was the cause? A The policy failed the 7-pay test B The policy was rolled over into an IRA C The policy was exchanged for an annuity D The policyowner stopped paying premiums after 7 years
A A policy that does not pass the 7-Pay Test will be deemed a Modified Endowment Contract for the life of the contract.
ERISA requires which of the following? A Qualified plans must meet certain minimum standards B Employers must be able to benefit equally with the employees and beneficiaries C That every plan has the same vesting schedule D That employers establish pension plans for their employees
A ERISA requires that qualified plans must meet certain minimum standards.
All of the following will determine whether or not an IRA contribution is deductible, except: A. Whether the IRA owner is over a specified age B. Whether the IRA owner is a participant in an employer sponsored retirement plan C. Whether the IRA owner chooses a Roth or a Traditional IRA D. Whether the IRA owner has gross income that exceeds a certain amount
A. An individual's age does not determine whether or not a contribution is deductible. Age may determine whether a contribution can be made, but not if it is deductible. All other choices determine if the contribution is deductible or nondeductible.
An Individual Retirement Account (IRA) may be funded with all of the following, except: A. Mutual Funds B. Life Insurance C. Annuities D. Certificates of Deposit (CDs)
B. Life insurance does not meet the IRS qualifications for funding an IRA.
To be considered terminally ill, federal law defines a terminal illness as one which is expected to result in the person's death within how many months? A 12 B 6 C 36 D 24
D Federal law establishes 24 months as a person's maximum life expectancy to be defined as terminally ill. For the activation of an accelerated death benefit rider, and for the purpose of limiting such claims, insurance companies often define terminal illness as one which would result in death within 12 months.
A Roth IRA is unique for which of the following reasons? A. Contributions are nondeductible and distributions are nontaxable B. Contributions are nondeductible and distributions are taxable C. Contributions are tax deductible and distributions are nontaxable D. Contributions are tax-deductible and distributions are taxable
A. Roth retirement plans are funded with after-tax (nondeductible) money. Under current tax law, distributions are received tax-free, including all gains.
The federal law that governs the rights of plan participants and beneficiaries of most employer-sponsored benefit plans is ____________. A. ERISA B. HIPAA C. FCRA D. COBRA
A. The Employee Retirement Income Security Act defines the manner in which most employee benefit plans must be administered. Plans operated by federal, state, and local government agencies are generally exempt from the provisions of ERISA.
When the dividends received exceed the total premium paid in for the life insurance policy, the excess dividend is considered __________. A. Taxable Income B. Tax Free C. Dividend Income D. Capital Gain
A. When the total dividend paid out exceeds the total premium paid in then the dividend becomes taxable as ordinary income.
When an employee receives a fixed and known benefit at retirement, it comes from a(n) __________ plan. A Defined Contribution B Defined Benefit C SEP-IRA D Profit-Sharing
B Defined benefit plans pay out a fixed and known benefit to retirees based on a formula considering years of employment and highest earnings.
The federal law that governs the rights of plan participants and beneficiaries of most employer-sponsored benefit plans is ____________. A FCRA B ERISA C HIPAA D COBRA
B The Employee Retirement Income Security Act defines the manner in which most employee benefit plans must be administered. Plans operated by federal, state, and local government agencies are generally exempt from the provisions of ERISA.
All of the following are TRUE regarding non-qualified retirement plans, except: A. Earnings can be tax deferred until withdrawn B. Contributions are immediately tax deductible C. Contributions are not tax deductible D. Upon withdrawal only the earnings are subject to taxation
B. Because the plan is non-qualified many of the tax benefits are not available, such as tax deductibility of contributions.
Which of these is a qualified plan designed specifically for unincorporated self-employed individuals? A. 403(b) Plan B. Keogh Plan C. IRA D. Tax-Deferred Annuity
B. The key element in the description is a plan specifically designed for self-employed individuals.
Which of the following plans is for employees of non-profits and schools? A HR 10s B 401(k)s C TSAs D SEPs
C 403(b) Tax-Sheltered Annuities (TSA) are qualified annuity plans benefitting employees of not for profit organizations. This includes public, private, and parochial school employees as well as other nonprofit organizations as qualified by the internal revenue code 501(c)(3).
Sherman is the custodian at an elementary school and participates in its qualified retirement plan. This describes a: A Simplified Employee Pension B HR-10 Keogh Plan C 403(b) Tax-Sheltered Annuity D SIMPLE IRA
C 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.
Which is true regarding the taxation of the cash value in a Universal Life Policy prior to withdrawal? A Tax free B Tax interpolated C Tax deferred D Tax deductible
C All life insurance cash value accumulations are tax deferred. The primary benefit of Universal Life is the potential of a higher interest crediting rate than the fixed rate in whole life policies.
If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A. The entire amount received is subject to ordinary income tax B. 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 C. The amount received in excess of cost basis is taxed as a long-term capital gain D. Any amount received in excess of its cost basis is taxable as ordinary income
D. 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.
Roth IRAs and Traditional IRAs have only one of the following in common. Which one is it? A If a person owns a traditional IRA and a Roth IRA, the combined contributions to both cannot exceed the annual maximum IRA contribution for one IRA B Someone with earned income over 70 1/2 can establish and fund one C The account has to be open for at least 5 years and the owner at least 59 1/2 for proceeds to be received tax free D There are no required minimum distributions
A Roth IRA is a nondeductible tax-free retirement plan for anyone with earned income. As long as the account has been open for at least 5 years and the owner is at least 59 1/2, proceeds may be received tax free. If a person owns a traditional IRA and a Roth IRA, the combined contributions to both cannot exceed the annual maximum IRA contribution for one IRA
To be a qualified accelerated death benefit it must meet all of the following criteria, except: A The benefit amount cannot exceed the lesser of $50,000 or 7.5% of AGI B The amount of the benefit must at least be equal to the present value of the reduced death benefit remaining after payment of the accelerated benefit C A physician must give a prognosis of 24 months or less life expectancy for the named insured D The insurer provides a monthly report to the insured showing the amount paid and the amount of benefit remaining in the life insurance policy
A To be a qualified accelerated death benefit the benefit must meet the following conditions: a physician must give a prognosis of 24 months or less life expectancy for the named insured, the amount of the benefit must at least be equal to the present value of the reduced death benefit remaining after payment of the accelerated benefit, and the insurer provides a monthly report for the insured showing the amount paid and the amount of benefit remaining in the life insurance policy.
All of the following tax-free exchanges of life insurance and annuities are permitted, EXCEPT: A. Annuity to life insurance B. Life insurance to long term care insurance C. Annuity to long term care insurance D. Life insurance to annuity
A. Annuities may not be exchanged for life insurance.
When may an employer deduct the premiums it pays for an employee's life insurance benefit? A. As long as the business does not derive a direct benefit from the policy B. If the business does not receive more than 50% of the death benefit C. Employers can always deduct the premiums it pays for an employee's life insurance benefit D. An employer cannot ever deduct premiums it pays for an employee's life insurance benefit
A. As long as the insurance death benefit is not payable to the employer when an employee dies, the premiums paid for the life insurance are deductible to the business.
If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC). A Endowment contract B Annuity C Life insurance policy D Viatical settlement
C When a life insurance policy does not pass the 7-pay test, it will be deemed a MEC.
If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A The entire amount received is subject to ordinary income tax B Any amount received in excess of its cost basis is taxable as ordinary income C The amount received in excess of cost basis is taxed as a long-term capital gain D 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
B 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.
A qualified plan pre-mature withdrawal tax penalty can be waived in all of the following circumstances, except: A Disability B Qualified educational expenses C Death D Buying a first vacation home
D First-time home buyers, meaning primary residence would be one of the exceptions but not for a vacation home.
How often may a person perform a rollover from one IRA to another? A Once every 2 years B Once each quarter C Every 6 months D Once a year
D IRA rollovers may only be done once every 12 months.
____________ plans do not meet the requirements of federal law to be eligible for favorable tax treatment. A Pension B Qualified C ERISA D Non-qualified
D Non-qualified plans do not meet the requirements for favorable tax treatment; qualified plans do.
Once a policy is classified as a MEC, it will maintain that classification for ____________. A For 7 years B Until the issue of overfunding is resolved C For 10 years D The life of the policy
D Once a policy is classified as a MEC, it will maintain that classification for the life of the policy.
If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period. A Non-guaranteed B Exclusion C Pre-tax D After-tax
D Only the after-tax investment is recovered income tax-free from an annuity that is annuitized. It represents a return of the cost basis.
Under what circumstance would a policy loan in a life insurance policy be taxable? A If the policyowner dies, the policy loan becomes taxable B If the insured dies, the policy loan is taxable unless there is sufficient death benefit available to pay off the loan C Policy loans in life insurance are always tax-free D If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable
D Policy loans and unpaid loan interest are subject to taxation if the loan amount exceeds the cost basis (premiums paid less any dividends received in cash) in the contract in the event the policy lapses or is surrendered for its cash value. Surrender charges, if any, may be applied as an offset to cost basis.
A Roth IRA is unique for which of the following reasons? A Contributions are nondeductible and distributions are taxable B Contributions are tax deductible and distributions are nontaxable C Contributions are tax-deductible and distributions are taxable D Contributions are nondeductible and distributions are nontaxable
D Roth retirement plans are funded with after-tax (nondeductible) money. Under current tax law, distributions are received tax-free, including all gains.
For an individually purchased life insurance policy, the premiums are considered a __________. A Deductible personal expense B Nondeductible business expense C Deductible business expense D Nondeductible personal expense
D The premiums paid for an individual life insurance policy are a personal expense and are not deductible.
A Tax Sheltered Annuity may be established and funded by which of the following? A. Johnson Accountants, Inc. B. XYZ's Catering, a small unincorporated business C. A professional law firm D. A not-for-profit community hospital association
D. 403(b) plans are established for nonprofit organizations.
Why are dividends not taxable as income when paid out to a participating policyholder? A. Because they are often the sole source of a policyholders' income B. They are paid from a non-profit organization C. To create parity with nonparticipating policies under the tax code D. They represent a return of a portion of the premium paid
D. A participating insurance company's dividend consists of the amount of premium that is returned to the policyowner if the insurance company achieves lower mortality and expense costs than expected.
All of the following are true regarding ERISA (Employee Retirement Income Security Act) qualified plans, except: A. The plan must be IRS approved B. The plan must benefit employees and beneficiaries C. A vesting schedule must be established D. Employers must establish a pension plan
D. 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.
In order for the life insurance policy's death benefit to remain income tax free to the beneficiary, the transfer of policy ownership must ____________. A. Not involve a MEC B. Take place after the policy has been in force at least 2 years C. Not involve a policy with a face amount greater than $50,000 D. Qualify for one of the exceptions
D. In order for the life insurance policy's death benefit to remain income tax free to the beneficiary, the transfer of policy ownership must qualify for one of the exceptions.
All of the following are ways in which the 10% additional tax can be waived, except: A Buying a new car B Qualified education costs C Disability D First-time homebuyers
A Distributions taken prior to 59 1/2 are subject to taxation and a 10% penalty. The penalty may be waived for death, disability, qualified education costs, medical expenses, first-time homebuyers, and substantially equal payments over life expectancy.
Under what circumstance would a policy loan in a life insurance policy be taxable? A. If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable B. If the insured dies, the policy loan is taxable unless there is sufficient death benefit available to pay off the loan C. If the policyowner dies, the policy loan becomes taxable D. Policy loans in life insurance are always tax-free
A. Policy loans and unpaid loan interest are subject to taxation if the loan amount exceeds the cost basis (premiums paid less any dividends received in cash) in the contract in the event the policy lapses or is surrendered for its cash value. Surrender charges, if any, may be applied as an offset to cost basis.
The exclusion ratio states that once the entire cost basis has been recovered from a non-qualified annuity income benefit payout then any further payments are __________. A Still tax favored for annuitants over the age of 70 B Fully taxable since the excess payments must represent only earnings C Taxed as capital gain but only 50% of the gain is applied D Taxed at the favorable annuity continuation income rates
B Once the entire cost basis is recovered than any remaining payments are fully taxable as ordinary income.
When the dividends received exceed the total premium paid in for the life insurance policy, the excess dividend is considered __________. A Tax Free B Taxable Income C Capital Gain D Dividend Income
B When the total dividend paid out exceeds the total premium paid in then the dividend becomes taxable as ordinary income.
What happens if a traditional IRA account owner fails to start taking required minimum distributions on time or for the proper amount? A Withholdings go from 20% to 30% for each and every future withdrawal B 50% tax penalty on the excess accumulation C Investment choices get restricted until the account is back in compliance D The tax rate that normally applies doubles
B Withdrawals, known as Required Minimum Distributions (RMDs), from the account must start by April 1 of the year following the year the owner turns age 70 1/2. Failure to take all or part of an annual RMD incurs a 50% penalty tax on the amount not distributed.
If a life insurance policy becomes a MEC, what was the cause? A. The policy was exchanged for an annuity B. The policy failed the 7-pay test C. The policy was rolled over into an IRA D. The policy owner stopped paying premiums after 7 years
B. A policy that does not pass the 7-Pay Test will be deemed a Modified Endowment Contract for the life of the contract.
If a corporation owns an annuity, what is the tax ramifications? A. Since the corporation is a non-natural person there is no tax penalty for early withdrawal B. There is no tax deferral benefit on any earnings C. The premiums are tax deductible as an ordinary and necessary business expense D. Any withdrawals are taxed at the favorable corporate tax rate
B. Any annuity policy earnings are not tax deferred rather they are taxed each and every year.
Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified. A Taxable to the extent it exceeds 7.5% of AGI B Taxable C Tax free D Tax free up to $50,000
C Generally, the payment of an accelerated death benefit is tax free to a recipient if the benefit payment is qualified.
In which of the following situations will the annuity's value be included in the deceased annuitant's estate? A If the annuitant dies while receiving income from a life only settlement option B If the annuitant dies in year 11 when receiving a life and 10 year period certain payout from a variable annuity C If the annuitant dies during the annuity or payout phase with any remaining value D If the annuitant dies just after cashing in check number 180 from a 15-year period certain payout that was funded with $100,000
C If the annuitant dies during the payout phase of an annuity with any remaining values, those values will be included in the annuitant's estate. For all of the other answer choices, there would be zero remaining value and therefore nothing would be left to include in the estate.
All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee. A $25,000 B $100,000 C $50,000 D $150,000
C Premiums paid for death benefits exceeding $50,000 are taxable as income to the employee for the year in which the premium was paid.
Which of the following statements regarding Roth IRAs is FALSE? A There are no Required Minimum Distribution (RMD) age or amounts B Contributions are not tax-deductible C As long as the account owner is under age 59 1/2 there is no maximum contribution limit D 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
C Roth IRAs are subject to the same maximum contribution limits as other IRAs.
What is "defined" in a defined contribution plan? A. The employer's percentage or amount of distribution to an employee from the plan B. The percentage of the employee's income provided as life insurance to the employee C. The percentage or amount of an employee's deposits to the plan D. The percentage or amount of an employee's distributions from the plan
C. In a defined contribution plan, the employee chooses how much of his/her pay to contribute to the plan each payroll period. The employer deducts that amount from the employee's pay before income tax is calculated and remits that amount to the plan's custodian for the benefit of the employee.