Chapter 13

Which of the following statements is (are) true regarding taxation of life insurance? I. Life insurance proceeds paid in a lump-sum are received free of federal income taxes. II. The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased.

Life insurance proceeds paid in a lump sum are received free of federal income taxes

Paul is shopping for life insurance. An agent asked Paul if he would like to purchase a participating policy. What is a "participating" policy? (a)a policy which has a cash value (b)a policy which pays dividends (c)a policy which invests in stock (d)a policy which provides for an increasing death benefit

b) a policy which pays dividends

The Linton Yield is one method a.to determine the interest rate credited to a cash value account b.to determine the rate of return on the savings portion of a cash value policy c.to determine the mortality costs to be charged d.to determine the policy reserve

b) to determine the rate of return on the savings portion of a cash value policy

The first step in "shopping for life insurance" is to (a)estimate the amount of life insurance to purchase. (b)decide whether you want a policy which pays dividends. (c)determine if you need life insurance. (d)decide on the best type of life insurance for you.

c) determine if you need life insurance

Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT (a)Consider the financial strength of the insurer. (b)Deal with a competent agent. (c)Ignore all factors other than cost. (d)Shop around for a low-cost policy

c) ignore all factors other than cost

All of the following about the tax treatment of individually-purchased life insurance are true EXCEPT (a)policyowner dividends are received tax-free. (b)the annual increase in cash value is not taxable while the policy remains in force. (c)premiums paid for individual life insurance are tax deductible. (d)life insurance proceeds paid to a beneficiary in a lump-sum are received tax-free.

c) premiums paid for individual life insurance are tax deductible

Major factors that must be considered in determining the cost of life insurance include all of the following EXCEPT (a)time value of money. (b)premiums paid. (c)settlement options. (d)dividends

c) settlement options

If the insured has any incidents of ownership in the policy at the time of death a. the entire proceeds are included in the gross estate of the insured for federal income tax purposes b. the value above his/her basis is included in the gross estate of the insured for federal estate tax purposes c. the entire proceeds are included in the gross estate of the insured for federal estate tax purposes d. none of the above

c) the entire proceeds are included in the gross estate of the insured for federal estate tax purposes