Life and health exam chapter 7 and a half
In a SIMPLE plan, employer contributions vest:
immediately at 100%
If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC).
life insurance policy
If money is paid to change the ownership on a policy covering an insured who is not terminally ill, this is referred to as a(n
life settlement
____________ plans do not meet the requirements of federal law to be eligible for favorable tax treatment.
non qualified
What are the three times in which life insurance policy cash values can become taxable
policy surrender, policy sold or if the policy fails to meet the IRS definition of life insurance
Janelle is the beneficiary of a life insurance policy in which the insured has died. What is the only way she can receive the claim amount totally free from income taxes?
receive the claim in a lump sum
What is true regarding taxes for IRA's?
the contributions are not taxable
What is true regarding employer contributions for qualified plans?
they are immediately tax deductible and they are not taxable to the employee till withdrawn
Anyone under the age of ______ who has earned income may open an IRA.
70 and 1/2
What is the age that is used to determine when the owner of a traditional IRA must begin to take Required Minimum Distributions?
70 and 1/2
A Section 1035 exchange is most similar to which of the following transactions?
An IRA rollover
If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence?
Any amount received in excess of its cost basis is taxable as ordinary income
All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee.
$50,000
Employer-paid premiums for employee group term life do not constitute taxable income to the employee for coverage up to ___________.
$50,000
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?
$500
SIMPLE plans are only available to companies that have ______ employees or less, and must be the only type of plan the company has available for the employees.
100 employees
Regarding an accelerated death benefit, a physician must give a prognosis of ___ months or less life expectancy for the named insured.
24 months
Regarding an accelerated death benefit, a physician must give a prognosis of ___ months or less life expectancy for the named insured. =
24 months
When establishing a SIMPLE, what two different types of qualified plans must employers choose between?
401(k) or IRA
Which of these is a qualified plan designed specifically for unincorporated self-employed individuals?
Keogh plan
If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________.
MEC
When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit:
Pays income tax on any gains at his or her own income tax rate
M has a traditional tax-deductible IRA invested in dividend-paying stocks. Which of the following statements is true about how withdrawals from the account will be taxed?
All gains will be taxed as ordinary income
An annuity held within a traditional IRA ____________.
Does not provide any additional tax-deferral benefit
Which of the following best defines the 'Cost Recovery Rule'?
Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender
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
A SIMPLE plan may be established either as a(n):
IRA or a 401(k) plan
A life insurance 1035 exchange can only be completed after:
Proof of insurability has been provided and accepted
Chad and Sue have successfully owned and operated their bakery for 10 years and have decided to plan for their retirement. They are not incorporated and have no full-time employees, and want a qualified plan to maximize the tax advantages while at the same time not bog them down with paperwork. Which of the following plans would be their best option?
Simplified Employee Pension (SEP)
Which of the following plans is designed for employees of non-profit organizations, which includes schools and other 501(c)(3) entities?
Tax-Sheltered Annuity (TSA
Joe had $500,000 of life insurance at work. He has an additional $40,000 life insurance policy the company purchased on all employees. His wife is the primary beneficiary and their four children are contingent beneficiaries. Upon Joe's death, what are the tax consequences to his beneficiaries?
The $540,000 lump sum proceeds will be received income tax-free
If dividends are left on deposit with an insurer to earn interest
The dividend is tax-free, but the interest is taxable
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 and at death no beneficiaries are alive
Participating policy dividends become taxable as income when:
The total amount of dividends received by a policyowner exceeds the total amount of premium he/she has paid
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
What is the main purpose that IRC section 1035 was enacted?
To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one
P is 75. P's required minimum distribution for this year is $10,000. P only withdraws $2,000. What is the consequence to P for this?
a $4,000 tax penalty
What type of retirement plan is not required to have a vesting schedule, is not approved by the IRS, can discriminate in favor of highly compensated employees, and can benefit the employer?
a non qualified plan
Sherman is the custodian at an elementary school and participates in its qualified retirement plan. This describes a:
403(b) Tax-Sheltered Annuity
There are four qualified plans, but the one specifically designed for employees of nonprofit organizations and public schools is?
403(b) Tax-Sheltered Annuity
What are the defined contribution plans?
403b, 401k and profit sharing
The IRS allows for 'catch-up' IRA contributions for those age _______ and older.
50
In which of the following situations will the annuity's value be included in the deceased annuitant's estate?
If the annuitant dies during the annuity or payout phase with any remaining value
Under what circumstances are participating policy dividends declared?
If the insurance company achieves lower mortality and expense costs than expected
When would a life insurance policy loan be subject to income taxation?
If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis
If the annuitant dies during the annuity or payout phase, the remaining value in the account will be:
added to the deceased's annuitants estate for valuation
If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period
after tax
If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period.
after tax
Life insurance policy premiums establish a _________ in the policy for tax purposes.
cost basis
In which of the following plans does the company assume all of the investment risk
defined benefit
In which of the following plans does the company assume all of the investment risk?
defined benefit
Which of the following is a qualified retirement plan that bases an employee's retirement benefit upon length of service and highest attained salary?
defined benefit
Which of the following plans is commonly known as a pension?
defined benefit
Which of the following plans provides employees with a fixed and known benefit at retirement, the amount of which generally depends upon length of service and highest attained salary?
defined benefit
What is true regarding exchanges for IRC section 1035?
does not authorize the exchange of an annuity policy for any kind of life insurance policy.
An annuity held within a traditional IRA
does not provide any additional tax deferral benefit
Anyone under the age of 70 1/2 who has _________ can open up a Traditional IRA
earned income
All of the following are characteristics of a 403(b) plan
earnings are tax deferred and contributions are pretax
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
A qualified pension plan must meet ___________ requirements.
erisa
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:
first in first out
An employer's contribution to a SIMPLE plan is vested _________.
immediately at 100%
What is the cost recovery rule?
in the event the policyowner does sell or surrender, the difference between what is received and what is paid in is taxed as ordinary income
Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received
income tax free
Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________.
income tax free
If a life insurance policy does not pass the ___ -pay test, it will be deemed a MEC.
7
When a life insurance policy does not pass the ______-pay test, it becomes classified as a MEC.
7 pay test
Required Minimum Distributions must begin from Traditional IRAs by April 1st of the year following the year the account owner turns _____.
70 1/2
What is the age that is used to determine when the owner of a traditional IRA must begin to take Required Minimum Distributions?
70 1/2
During the accumulation phase of an annuity, if the contract owner dies and the annuitant is someone other than the owner, the value of the annuity is:
Included in the owner's estate for valuation
The Modified Endowment Contract (MEC) rules were put into place because
Individuals were abusing life insurance policies as tax-free investment vehicles
ERISA sets ________ standards for pension plans in private industry.
minimum
ERISA requires that those who establish qualified plans must meet certain ___________standards.
minimum standards
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?
monthly
An Individual Retirement Account (IRA) may be funded with all of the following,
mutual funds, annuities and certificates of deposit
plans do not meet the requirements of federal law to be eligible for favorable tax treatment.
non qualified
do not meet requirements of federal law to be eligible for favorable tax treatment
non qualified retirement plans
For an individually purchased life insurance policy, the premiums are considered a __________.
nondeductible personal expense
What do not meet requirements of federal law to be eligible for favorable tax treatment?
nonqualified retirement plans
Any employee-paid group life insurance premiums are __________.
not tax deductible
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?
nothing
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
nothing because there are no residual values
How often may a person perform a rollover from one IRA to another?
once a year
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 _________ tax rates.
ordinary income
Which of the following policies would be deemed a MEC
single premium whole life
Which of the following policies would be deemed a MEC?
single premium whole life
If the policy lapses with a loan outstanding, the excess borrowed over the premium paid becomes what?
taxable as ordinary income
Withdrawal of any cash value to pay for a daughter's wedding, policy loans, and cash surrender of the policy are all considered what?
taxable distribution
To eliminate the use of life insurance as a short-term, tax-free savings vehicle, what tax law change took place?
the MEC
What is the cost basis?
the amount of premiums paid into the policy less any dividends or withdrawals previously taken. Any withdrawals in excess of the basis will be taxed as ordinary income
Death benefits are paid to the estate of the policyowner/insured in which of the following situations?
the beneficiary is the estate
If dividends are left on deposit with an insurer to earn interest:
the dividend is tax free but the interest is taxable
Which of the following Is the reason why premiums paid on personal life insurance are not deductible?
they are considered a personal expense
Dividends are considered taxable income when...
they are left on deposit with the insurance company and what you receive exceeds the total premium paid for the life insurance policy
Lump sum death benefits are considered to be what tax wise?
they are tax free life insurance proceeds
What is so great about policy loans?
they do not trigger a taxable event
By what means is a transfer for value made?
through an absolute assignment
If money is paid when a change of ownership in a life insurance policy takes place, this is generally known as a ____________.
transfer for value