General Insurance Ch 7

Why are dividends not taxable as income when paid out to a participating policyholder?

They represent a return of a portion of the premium paid

The cost basis of a life insurance policy is __________.

Premiums paid less dividends or withdrawals

C paid $20,000 in premiums into a $100,000 universal life insurance policy. The accumulated cash value was $35,000 when C received a cash withdrawal of $30,000. How much of the cash withdrawal was taxable?

$10,000

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

24

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

7

All of the following are characteristics of a qualified retirement plan, EXCEPT: A Employers in private industry are required to establish pension plans B Employee contributions are either pre-tax or tax deductible C Employer contributions are immediately tax deductible to the employer D The penalty for premature distributions may be waived for death, disability, qualified education costs, medical expenses and first -time homebuyers

A Employers in private industry are required to establish pension plans

All of the following statements regarding a Modified Endowment Contract are correct, EXCEPT: A If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status B Distributions on gains withdrawn from a MEC prior to age 59 1/2 are subject to a 10% penalty in addition to taxation C Distributions received from a MEC are subject to a LIFO tax treatment D A policy that fails the 7-pay test will be deemed a MEC

A If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status

How are employer paid premiums on a group life insurance plan treated for tax purposes?

D As an ordinary and necessary business expense

All of the following regarding employer group life insurance are true, except: A Premiums paid by an employer are tax-deductible to the business as an ordinary and necessary business expense B Death benefit proceeds paid to an employee's named beneficiary are received income tax-free C Employer-paid premiums do not constitute taxable income to the employee unless the death benefit exceeds $50,000 D Employee-paid premiums are tax-deductible to the employee

D Employee-paid premiums are tax-deductible to the employee

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

D Lump sum death benefit paid to the beneficiary

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

The early withdrawal tax penalty on an IRA account may be waived in all of the following circumstances, EXCEPT: A Educational expenses B Medical expenses C Disability D Purchase of a vacation home

D Purchase of a vacation home

If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes.

Federal Estate

The only time a policy loan is taxable is in which of the following situations?

Having the policy lapse with a loan outstanding in excess of cost basis

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________.

Income tax-free

Which of the following distributions in a life insurance policy is taxable?

Interest paid on a death benefit settlement option

____________ plans do not meet the requirements of federal law to be eligible for favorable tax treatment.

Non-qualified

If a taxable event occurs regarding the cash value of a permanent life insurance policy, in virtually every case, the taxable amount is taxed as:

Ordinary income

Which of the following statements is correct regarding an employer's ability to deduct the premiums it pays for an employee's life insurance benefit?

Premiums are deductible as long as the business does not derive a direct benefit from the policy

Under the Modified Endowment Contract rules the 7-Pay Test is defined as:

The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit