Ch 7

Taxed as ordinary income Upon surrender, any equity (i.e., amount above total premiums paid) is taxed as ordinary income. The premiums paid are also referred to as 'cost basis.'

A permanent policy is surrendered for its cash value, and that sum is greater than the amount of premiums paid in. How is the excess taxed?

Buying a first vacation home First-time home buyers, meaning primary residence would be one of the exceptions but not for a vacation home.

A qualified plan pre-mature withdrawal tax penalty can be waived in all of the following circumstances, except:

$50,000

All employer-paid premiums for amounts above $_________ of group life insurance are reported as taxable income to the employee.

$50,000

All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee.

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.

All of the following are TRUE regarding qualified plans, except:

Plan withdrawals are tax free Employer contributions are immediately tax deductible to the employer at the time the contribution is made. These contributions are not taxable to the employee until withdrawn. Earnings grow tax deferred.

All of the following are the benefits of having an employer sponsored retirement plan be ERISA qualified, except:

When a policy loan is taken out Policy loans do not trigger a taxable event.

All of the following are times in which life insurance policy cash values can become taxable, except:

Employee-paid premiums are tax-deductible to the employee

All of the following regarding employer group life insurance are true, except:

Not tax-deductible

Any employee-paid group life insurance premiums are __________.

Not tax-deductible Contributions to a nonqualified plan are not tax-deductible.

Contributions to a nonqualified plan are:

The beneficiary is the estate

Death benefits are paid to the estate of the policyowner/insured in which of the following situations?

$500 If a policy lapses with an outstanding loan greater than the premium paid in, tax must be paid on the difference. In E's case, that's $500 ($4,000 - $3,500).

E has a $10,000 traditional whole life policy with a $4,000 cash value. Premiums paid to date are $3,500. If the policy lapses with a $4,000 loan outstanding, what amount will be taxable as income to E?

Federal

ERISA is a ________ law.

Qualified plans must meet certain minimum standards

ERISA requires which of the following?

$50,000 Employer-paid group life insurance premiums for coverage up to $50,000 are not taxable as income to the employee.

Employer-paid premiums for employee group term life do not constitute taxable income to the employee for coverage up to ___________.

$5,000 While the lump sum death benefit is not income taxable, the interest paid on the amount left on deposit with the insurer is, whether taken in cash or left on deposit.

G, being undecided on what to do with $100,000 just received on F's policy, decides to leave the proceeds on deposit with the insurer at interest. The rate being paid is 5%. In one year, what amount will be taxable to G?

Tax free Generally, the payment of an accelerated death benefit is tax free to a recipient if the benefit payment is qualified.

Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified.

MEC When a life insurance policy does not pass the 7-pay test, it will be deemed a MEC.

If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________.

60 Any excess premium can be refunded by the insurer within 60 days after the end of the contract year.

If a policyowner of a life insurance policy accidently pays in premiums in excess of the MEC guidelines, the insurer can refund the excess within ______ days of the end of the contract year.

End of the contract year If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the end of the contract year.

If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the ________.

Monthly The insurer is required to provide the report monthly.

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit?

Into the insured's estate The policyowner may name the estate as a beneficiary, or by default, if no beneficiary is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate.

If no beneficiary is living at the time of the insured's death, the benefit will automatically be paid __________.

The amount of the accelerated payment, the remaining death benefit and cash values

In the event that an insured receives a periodic benefit as the result of exercising the Accelerated Death Benefit Rider, what information must the insurer provide to the insured?

The total amount of dividends received by a policyowner exceeds the total amount of premium he/she has paid When the total amount of dividends received exceeds the total amount of premium paid, the excess is taxable as income to the policyowner.

Participating policy dividends become taxable as income when:

They are made

Qualified plan employer contributions are tax deductible when _________.

24

Regarding an accelerated death benefit, a physician must give a prognosis of ___ months or less life expectancy for the named insured.

Individuals were overfunding life insurance policies and using them as tax-free investment vehicles instead of a way to protect survivors against the financial cost of one's death Prior to 1988, individuals were using life insurance policies in place of investment vehicles to avoid paying taxes.

The Modified Endowment Contract (MEC) rules were put into place because:

Premiums paid less dividends or withdrawals

The cost basis of a life insurance policy is __________.

The Modified Endowment Contract (MEC) rules were put into place The rule states that if a policy is funded too quickly, it will be classified as a Modified Endowment Contract (MEC). MEC rules impose stiff penalties to eliminate the use of life insurance as a short-term, tax-free savings vehicle.

To eliminate the use of life insurance as a short-term, tax-free savings vehicle, what tax law change took place?

The entire withdrawal Since the contributions were pre-tax and all earnings were tax deferred, then the entire withdrawal would be subject to taxation unless one of the exceptions apply.

What portion of an employee's pension plan withdrawal is subject to tax?

7 It is the 7-pay test that must be passed in order not to be classified as a MEC.

When a life insurance policy does not pass the ______-pay test, it becomes classified as a MEC.

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.

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:

Single Premium Whole Life Since a single premium life insurance policy clearly does not pass the 7-pay test, it will automatically be deemed a MEC.

Which of the following policies would be deemed a MEC?

The insured is also the policyowner

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 insured is also the policyowner If the policyowner and the insured are the same person, the death benefit will be included in the insured's estate.

Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate?

A dividend A participating insurer's dividend consists of the amount of premium returned to the policyowner if the insurer achieves lower mortality and expenses than expected.

_________ consist(s) of the amount of premium that is returned to the policyowner if the insurer achieves lower mortality and expense costs than expected.