Taxes, Retirement, and Other Insurance Concepts

In a life settlement contract, whom does the life settlement broker represent?

The owner

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called?

Profit sharing plan

All of the following are general requirements of a qualified plan EXCEPT

The plan must provide an offset for social security benefits.

Which of the following is TRUE of a qualified plan?

It has a tax benefit for both employer and employee.

An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses. What option could the insured utilize?

Viatical settlement

What is the name of the insured who enters into a viatical settlement?

Viator

A key person insurance policy can pay for which of the following? ACosts of training a replacement BLoss of personal income CWorkers compensation DHospital bills of the key employee

Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee.

For a retirement plan to be qualified, it must be designed for the benefit of

Employees.

Two attorneys operate their practice as a partnership. They want to start a program through their practice that will provide retirement benefits for themselves and three employees. They would likely choose

HR-10 (Keogh Plan).

Which of the following is an eligibility requirement for all Social Security Disability Income benefits?

Have attained fully insured status

If a company has a Simplified Employee Pension plan, what type of plan is it? AA qualified plan for a small business BThe same as a 401(k) plan CThe same as an IRA, with the same contribution limits DAn undefined contribution plan for large businesses

AA qualified plan for a small business A Simplified Employee Pension (SEP) is a type of qualified plan suited for the small employer or for self-employed. A SEP is an employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or a specified maximum contribution amount.-

All of the following are business uses of life insurance EXCEPT ACompensating executives. BFunding against financial loss caused by the death of a key employee. CFunding business continuation agreements. DFunding against company's general financial loss.

Funding against company's general financial loss. Both life and health insurance can be used for a variety of purposes in a business setting, including the funding of business continuation agreements, compensating executives, and protecting the firm against financial loss resulting from the death or disability of key employees.

All of the following would be different between qualified and nonqualified retirement plans EXCEPT

Taxation on accumulation

Which of the following is the best reason to purchase life insurance rather than annuities? ATo liquidate a sum of money over a period of years BTo create regular income payments CTo liquidate a sum of money over a lifetime DTo create an estate

To create an estate With insurance, the death benefit creates an immediate estate should the insured die.

An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer? A$8,000, no tax consequence B$8,000, tax on growth only C$10,000, tax on growth only D$10,000, no tax consequence

$10,000, no tax consequence During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other.

What percentage of a company's employees must take part in a noncontributory group life plan? A 0 B 25 C 75 D 100

100% If the employer pays all of the premium, all employees must be covered to avoid adverse selection.

All of the following are requirements of eligibility for Social Security disability income benefits EXCEPT AFully insured status. BWaiting period of 5 months. CBeing age 65. DInability to perform any gainful work.

CBeing age 65. The term fully insured refers to someone who has earned 40 quarters of coverage (the equivalent of 10 years of work), and is therefore entitled to receive Social Security retirement, Medicare, and survivor benefits. The waiting, or elimination period for Social Security disability benefits is 5 months.

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then AIRS has no jurisdiction. BThe benefit is received as taxable income. CThe benefit is received tax free. DThe benefit is subject to the exclusionary rule.

The benefit is received tax free. Should a key person die, the benefit is treated as a reimbursement to the business for loss of services from that key person.

Which of the following would be considered a nonqualified retirement plan? AKeogh plan BRoth IRA CSplit-dollar plan D401(k)

CSplit-dollar plan Examples of nonqualified plans are individual annuities and deferred compensation plans for highly paid executives, split-dollar insurance arrangements, and Section 162 executive bonus plans.

All of the following benefits are available under Social Security EXCEPT AOld-age and retirement benefits. BDisability benefits. CDeath benefits. DWelfare benefits.

D Welfare benefits Social Security is an entitlement program, not a welfare program.

Which of the following is NOT an example of a business use of Life Insurance? ABuy-sell Funding BExecutive Bonuses CKey Person DWorkers Compensation

Workers Compensation Workers Compensation is a benefit payable when a worker is injured by a work-related injury, regardless of fault or negligence. It is not considered a business use of insurance.

Which of the following is INCORRECT concerning a noncontributory group plan? AThe employees receive individual policies. BThey help to reduce adverse selection against the insurer. CThey require 100% employee participation. DThe employer pays 100% of the premiums.

The employees receive individual policies. The employer receives a master policy, and employees receive a certificate of insurance.

An employee is insured under her employer's group life plan. If she terminates her group coverage, which of the following statements is INCORRECT?

The insured may choose to convert to term or permanent individual coverage.

All of the following are personal uses of life insurance EXCEPT AEstate creation. BCash accumulation. CBuy-sell agreement. DSurvivor protection.

Buy-sell agreement. Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.

In which of the following instances would the premium be tax deductible?

Premiums paid by an employer on a $30,000 group term life insurance plan for employees

When an employee terminates coverage under a group insurance policy, coverage continues in force AUntil the employee can obtain coverage under a new group plan. BUntil the employee notifies the group insurance provider that coverage conversion policy is issued. CFor 31 days. DFor 60 days.

For 31 days. An employee has 31 days under the conversion privilege to convert to an individual policy.

All of the following are examples of third-party ownership of a life insurance policy EXCEPT

An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan.

A life insurance policy used to fund an agreement that contractually establishes the intent of someone to purchase a business upon the insured business owner's death is a AKey person policy. BSplit-dollar plan. CStock redemption plan. DBuy-sell agreement.

Buy-sell agreement. Buy-Sell agreements are used to contractually establish the intent of someone else to purchase the business upon the insured's death, and to set a value (purchase price) on a business. Life insurance is used to fund the buy-sell agreement. Any type of life insurance may be purchased to provide the necessary funds for the agreement. Insurance can be used to either fully or partially fund the buy-sell agreement.

What is the primary purpose of a 401(k) plan? ATo receive dividends over a certain period BLife insurance distribution CRetirement DEducation funds

C Retirement Profit-sharing plans are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees. A 401(k) qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also somehow match the employee's contribution, whether it is dollar for dollar or on a percentage basis.

If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is ACorrectly insured. BPermanently insured. CFully insured. DPartially insured.

C. Fully Insured A worker is fully insured under Social Security if the worker has accumulated the required number of credits based on his/her age.

Traditional IRA contributions are tax deductible based on which of the following? AOwner's age BIRA limit COwner's income DHow long the plan has been in force

COwner's income Traditional IRA contributions are tax deductible, but may be limited if the owner's income exceeds a certain level.

In life insurance policies, cash value increases AAre income taxable immediately. BAre taxed annually. CAre only taxed when the owner reaches age 65. DGrow tax deferred.

DGrow tax deferred. Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.

In a direct rollover, how is the money transferred from one plan to the new one?

From trustee to trustee

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as

Survivor protection.

Traditional IRA contributions are

Tax deductible.

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE? AWithdrawals are not taxable. BDistributions before age 59 1/2 incur a 10% penalty on policy gains. CPolicy loans are taxable distributions. DAccumulations are tax deferred.

Withdrawals are not taxable. Any distributions from MECs are taxable, including withdrawals and policy loans. All of the other statements are true.

Who is a third-party owner?

A policyowner who is not the insured

Social Security was created to provide all of the following benefits EXCEPT ARetirement income. BUnemployment income. CSurvivor's benefits. DDisability income.

Unemployment income. Social Security is designed to provide protection against financial loss due to old age, disability, or death. It also provides income during retirement.

An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable? A$50,000 B$18,000 C$15,000 D$3,000

$3,000 The difference between the premiums paid and the cash value would be taxable. In this example, the difference between the premiums paid ($15,000) and the cash value ($18,000) is $3,000.

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? ABoth principal and interest BNeither principal nor interest CPrincipal only DInterest only

DInterest only If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.

A partnership buy-sell agreement in which each partner purchases insurance on the life of each of the other partners is called a ASplit-dollar plan. BStock redemption plan. CCross-purchase plan. DKey person plan.

Cross-purchase plan. In a Cross-Purchase Plan each partner involved purchases insurance on the life of each of the other partners. With a cross-purchase plan, each partner is the owner, premium-payor, and beneficiary of the life insurance on the lives of the other partners. The amount of the life insurance is equal to each partner's share of the purchase price of the deceased partner's interest in the business.

What is the number of credits required for fully insured status for Social Security disability benefits? A4 B10 C30 D40

D 40 The term "fully insured" refers to someone who has earned 40 quarters of coverage (10 years of work times 4 maximum annual credits).

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? APremiums are tax deductible by the key employee. BPremiums are tax deductible as a business expense. CPremiums are taxable to the employee. DPremiums are not tax deductible as a business expense.

Premiums are not tax deductible as a business expense. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.

Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? A The employer is the owner and the key employee is the beneficiary B The key employee is the owner and beneficiary C The key employee is the owner and the employer is the beneficiary D The employer is the owner and and beneficiary

The employer is the owner and beneficiary. With the key person coverage, the business ( the employer) is the applicant, owner, premium payer, and beneficary

Which of the following best defines the "owner" as it pertains to life settlement contracts? AA fiduciary for the contract BThe insurance provider CThe policyowner of the life insurance policy DA financial entity that sponsors the transaction

The policyowner of the life insurance policy The term owner refers to the owner of the policy who may seek to enter into a life settlement contract. The term does not include an insurance provider, a qualified institutional buyer, a financing entity, a special purpose entity, or a related provider trust.

An employee quits his job on May 15 and doesn't convert his Group Life policy to an individual policy for 2 weeks. He dies in a freak accident on June 1. Which of the following statements best describes what will happen? AThe insurer will pay a reduced death benefit to the beneficiary. BThe insurer will pay the death benefit minus one month's premium. CThe insurer will pay nothing because the employee has terminated his group insurance and hasn't started the individual one. DThe insurer will pay the full death benefit from the group policy to the beneficiary.

The insurer will pay the full death benefit from the group policy to the beneficiary. The employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy.

What does "liquidity" refer to in a life insurance policy? AThe insured receives payments each month in retirement. BCash values can be borrowed at any time. CThe death benefit replaces the assets that would have accumulated if the insured had not died. DThe policyowner receives dividend checks each year.

Cash values can be borrowed at any time. Liquidity in life insurance refers to availability of cash to the insured through cash values.

Employer contributions made to a qualified plan

Are subject to vesting requirements.

An employee quits his job and converts his group policy to an individual policy; the premium for the individual policy will be based on his

Attained age.

Which of the following terms is used to name the nontaxed return of unused premiums? ASurrender BDividend CPremium return DInterest

BDividend The return of unused premiums is called a dividend. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums.

Which of the following is an example of liquidity in a life insurance contract? AThe flexible premium BThe money in a savings account CThe cash value available to the policyowner DThe death benefit paid to the beneficiary

CThe cash value available to the policyowner Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

If a retirement plan or annuity is "qualified," this means AIt accepts after-tax contributions. BIt is noncancellable. CIt is approved by the IRS. DIt has a penalty for early withdrawal.

It is approved by the IRS. A qualified retirement plan is approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth.

The premiums paid by the employer in a business life insurance policy are AAlways taxable to the employee. BNever taxable to the employee. CTax deductible by the employer. DTax deductible by the employee.

Tax deductible by the employer. The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are tax deductible to the employer as a business expense.

Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated? AThose who have dependents BThose who have no history of claims CThose who have been insured under the plan for at least 5 years DThose who have worked in the company for at least 3 years

Those who have been insured under the plan for at least 5 years If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.

Which of the following terms means a result of calculation based on the average number of months the insured is projected to live due to medical history and mortality factors?

Life expectancy

An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy? AShe can only convert her coverage without proof of insurability if she has the master policy. BShe must apply for a new policy, which requires her to provide proof of insurability. CShe can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. DShe will still be covered under the group plan, but will have to pay an individual policy premium.

She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. If a person has life insurance under a group plan and then leaves the group, he/she may convert group coverage to individual coverage within 31 days of leaving the plan without proof of insurability.

Group life insurance is a single policy written to provide coverage to members of a group. Which of the following statements concerning group life is CORRECT? APremiums are determined by age, occupation, and individual underwriting. B100% participation of members is required in noncontributory plans. CEach member covered receives a policy. DCoverage cannot be converted when an individual leaves the group.

100% participation of members is required in noncontributory plans. If the employer pays all of the premium, then all employees must be included.

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n)

403(b) Plan (TSA).

Which of the following is NOT true of life settlements? AThe seller must be terminally ill. BThey could be used for a key person coverage. CThey could be sold for an amount greater than the current cash value. DThey involve insurance policies with large face amounts.

The seller must be terminally ill. With Life Settlements, unlike with viatical settlements, the seller does not need to be terminally ill. They usually involve life insurance policies with a face amount of $250,000 or more, "key-person" coverage, corporate owned policies, or policies representing excess coverage that is no longer needed, and could be sold for an amount greater than the current cash value.

A 60-year-old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true? ANo taxes are due since the plan participant is over age 59 1/2. BThere is a 10% early withdrawal penalty. CThe amount distributed is subject to ordinary income tax. DThe amount of the distribution is reduced by the amount of a 20% withholding tax.

DThe amount of the distribution is reduced by the amount of a 20% withholding tax. Distributions from 401(k) plans are taxable as ordinary income in the year of the distribution. However, if the distribution is rolled over to a Traditional IRA, taxes are deferred until the required minimum IRA distributions begin. Since this client actually took a distribution (instead of making a trustee-to-trustee roll over), the distribution is subject to 20% withholding tax.

In terms of Social Security, what is the interval spanning between the day when the youngest child of a family turns 16 and before the surviving spouse turns age 60 called?

Blackout Period

In order to qualify for conversion from a group life policy that has been terminated to an individual policy of the same coverage, a person must have been insured under the group plan for how many years? A1 B3 C5 D10

C 5 If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.

Who can make a fully deductible contribution to a traditional IRA? ASomeone making contributions to an educational IRA BA person whose contributions are funded by a return on investment CAn individual not covered by an employer-sponsored plan who has earned income DAnybody; all IRA contributions are fully deductible regardless of income level

CAn individual not covered by an employer-sponsored plan who has earned income Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.

Death benefits payable to a beneficiary under a life insurance policy are generally ASubject to income taxation by the Federal Government. BExempt from income taxation if under $10,000. CExempt from income taxation if over $10,000. DNot subject to income taxation by the Federal Government.

Not subject to income taxation by the Federal Government. When premiums are paid with after tax dollars, the death benefit is generally not subject to federal income taxation.

What is the official name for the Social Security program?

Old Age Survivors Disability Insurance

All of the following are characteristics of group life insurance EXCEPT

Premiums are determined by the age, sex and occupation of each individual certificate holder.

All of the following are true of key person insurance EXCEPT A The key employee is the insured BThe plan is funded by permanent insurance only. CThere is no limitation on the number of key employee plans in force at any one time. DThe employer is the owner, payor and beneficiary of the policy.

The plan is funded by permanent insurance only. Key Person coverage may be funded by any type of life insurance.

Which of the following insurance arrangements will be appropriate for a parent buying a life insurance policy on a child where the parent is the policyowner? AThird-party ownership BAn irrevocable beneficiary CA buy-sell agreement DFamily term rider

Third-party ownership Contracts that are owned by someone other than the insured are known as third-party ownership. Most policies involving third-party ownership are written in business situations or for minors in which the parent owns the policy.

What is the purpose of key person insurance? ATo provide health insurance to the families of key employees BTo insure retirement benefits are available to all key employees CTo maintain an account that insures the owner of a company remains solvent DTo lessen the risk of financial loss because of the death of a key employee

To lessen the risk of financial loss because of the death of a key employee A business can suffer a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.

Which of the following types of insurance policies would perform the function of cash accumulation?

Whole life

Which of the following is true regarding taxation of dividends in participating policies?

Dividends are not taxable.

What is the main purpose of the Seven-pay Test? AIt ensures that the policy benefits are paid out in 7 years. BIt guarantees the minimum interest. CIt determines if the insurance policy is a MEC. DIt requires level premium payments for 7 years.

It determines if the insurance policy is a MEC. The Seven-pay Test determines whether an insurance policy is "over-funded" or if it's a Modified Endowment Contract. In other words, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an ANonqualified annuity. BModified endowment contract. CAccelerated benefit policy. DEndowment.

Modified endowment contract. Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract.