Federal Tax Considerations

All employer-paid premiums for amounts above $_________ of group life insurance are reported as taxable income to the employee. A. $25,000 B. $50,000 C. $75,000 D. $100,000

B. All employer-paid premiums for amounts above $50,000 are reported as taxable income to the employee.

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________. A. Income tax-deferred B. Income tax-free C. Income tax-deductible D. Income tax penalty-free

B. Death benefits paid in a lump sum to a named beneficiary are income tax-free.

If dividends are left on deposit with an insurer to earn interest: A. The dividend is taxable as well as the interest B. The dividend is tax-free, but the interest is taxable C. The dividend is taxable, but the interest is tax-free D. The interest is tax-free as well as the dividend

B. Interest paid by insurers on dividends left on deposit is taxable as income.

If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period. A. Pre-tax B. After-tax C. Exclusion D. Non-guaranteed

B. Only the after-tax investment is recovered income tax-free from an annuity that is annuitized. It represents a return of the cost basis.

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit: A. Pays income tax on any gains using the deceased's income tax bracket B. Pays income tax on any gains at his or her own income tax rate C. Pays no income tax on any portion of the proceeds D. Pays taxes based on the estate tax rate of the deceased

B. When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit must pay income tax on any gain from the policy at his or her own income tax rate.

All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee. A. $150,000 B. $100,000 C. $50,000 D. $25,000

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.

A qualified pension plan must meet ___________ requirements. A. ERISA B. OSHA C. SEC D. COBRA

A. A qualified plan must meet the requirements of the Employee Retirement Income Security Act (ERISA).

Which of the following Is the reason why premiums paid on personal life insurance are not deductible? A. They are considered a personal expense B. They are considered to produce a guaranteed source of income C. They rarely exceed 7.5% of a taxpayer's AGI D. It makes the deductibility of employer-paid premiums more attractive

A. For individuals, premiums are considered a personal expense and are not deductible. They are paid with after-tax dollars. This establishes a cost basis in the policy for tax purposes.

Generally, life insurance will be considered 'incidental' to a qualified plan if no more than what percentage of the contributions are used to pay insurance premiums? A. 50% B. 60% C. 70% D. 80%

A. Generally, life insurance will be considered 'incidental' to a qualified plan if no more than 50% of the contributions are used to pay insurance premiums, and the insurance amount is not more than 100 times the expected monthly benefit amount.

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 ________. A. End of the contract year B. End of the tax year C. End of the calendar year D. Latest premium payment was received

A. 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 the annuitant, now deceased, was receiving income from a pure life or straight life annuity, how much goes into the annuitant's estate for valuation? A. Nothing B. The cost basis C. The tax-deferred earnings D. The cost basis and the remaining tax-deferred earnings

A. If the annuitant was receiving income from a pure life or straight life annuity, the annuity has no residual values at the annuitant's death and nothing goes into the annuitant's estate for valuation.

When a life insurance policy does not pass the ______-pay test, it becomes classified as a MEC. A. 7 B. 8 C. 9 D. 10

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

F has a $100,000 face amount term life policy for which F paid $10,000 in premium to date. F dies and the benefit is paid out to G, the beneficiary. What amount of the death benefit received is taxable as income to G? A. Nothing B. $50,000 C. $90,000 D. $100,000

A. Lump sum death proceeds are not taxable as income to a named beneficiary.

The Modified Endowment Contract (MEC) rules were put into place because: A. Individuals were abusing life insurance policies as tax-free investment vehicles B. Life insurance companies needed to become more competitive with other financial institutions C. The federal government needed a new source of tax revenue D. Too many consumers were being sold life insurance when they thought they were buying annuities

A. Prior to 1988, individuals were using life insurance policies in place of investment vehicles to avoid paying taxes.

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A. Any amount received in excess of its cost basis is taxable as ordinary income B. The amount received in excess of cost basis is taxed as a long-term capital gain C. 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 D. The entire amount received is subject to ordinary income tax

A. 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.

Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)? A. Lump sum death benefit paid to the beneficiary B. Withdrawal of cash value to pay for a daughter's wedding C. Cash surrender of the policy D. Taking out a policy loan

A. Withdrawal of any cash value to pay for a daughter's wedding, policy loans, and cash surrender of the policy are all taxable distributions. Lump-sum death benefits are considered to be tax-free life insurance proceeds.

Qualified pension and profit-sharing plans created by Congress to: A. Help banks, insurance companies, and investment firms increase their asset base B. Reduce retiree dependence on Social Security C. Help employees accumulate assets for retirement and provide tax advantages for contributions made by employers D. Help educate employees about the benefits of saving for his/her future

C. Qualified pension and profit-sharing plans were created by Congress to help employees accumulate assets for retirement and provide tax advantages for contributions made by employers.

Why are dividends not taxable as income when paid out to a participating policyholder? A. To create parity with nonparticipating policies under the tax code B. Because they are often the sole source of a policyholders' income C. They are paid from a non-profit organization 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.

Any employee-paid group life insurance premiums are __________. A. Tax-deferred B. Tax-exempt C. Tax-deductible D. Not tax-deductible

D. Any employee-paid group life insurance premiums are not tax-deductible.

Cash values within an ordinary straight whole life insurance policy _______ over time. A. Vary B. Decrease C. Remain constant D. Increase

D. Cash values increase over time as premium is paid in and interest is reflected in the cash values shown in the policy's nonforfeiture table.

If the annuitant dies during the annuity or payout phase, the remaining value in the account will be: A. 100% taxable as income to the recipient B. Added to the beneficiary's estate for immediate estate taxation C. Added to the original owner's estate for valuation, if the owner is different from the annuitant D. Added to the deceased annuitant's estate for valuation

D. If the annuitant dies during the annuity or payout phase, the remaining value in the account will be added to the deceased annuitant's estate for valuation.

All of the following regarding policy loans are true, except: A. The interest on a policy loan is not deductible B. The policy loan is not taxable so long as the policy remains in force C. Policy loans cannot exceed the amount in the cash value D. Policy loans are taxable if the policy remains in effect and the amount borrowed exceeds the premiums paid

D. If the policy lapses with a loan outstanding, the excess borrowed over the premium paid becomes taxable as ordinary income.

Which of the following would always be considered a Modified Endowment Contract? A. Limited Pay Whole Life B. Straight or Continuous Pay Whole Life C. Variable Whole Life D. Single Premium Whole Life

D. Single Premium Whole Life would always be a MEC as it would always fail the 7-Pay Test.

The restrictions on the amount of life insurance that can be held in a qualified plan are known as: A. Unsuitability B. Overinsurance C. Undue concentration D. Incidental benefits limitation

D. There are limitations on the types of benefits that may be included in a qualified plan, such as a restriction on the amount of life insurance that can be held, referred to as the 'incidental benefits' limitation, which the IRS developed standards, or rules, to determine the allowable limits.

If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________. A. Savings account B. Annuity C. Commodity D. MEC

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