Life Insurance Exam 4 (sample)

For estate tax purposes, life insurance

held by a revocable life insurance trust is includable in the grantor's estate

The advantages of using a revocable life insurance trust include all but which of the following?

it is less costly and simpler than selecting a settlement option

Which of the following goals can be achieved by the use of key employee life insurance?

Assure shareholders of a public corporation that the price of the stock will not plummet at the death of a president or other senior executive.

Compared to alternative plan investment, life insurance typically provides lower expenses and higher rates of return.

False

In order to take a deduction for amounts paid under a Section 162 plan, the corporation must pay the bonus directly to the insurer providing the coverage.

False

Key employee life insurance is an insurance policy owned by a business and payable to the insureds' beneficiary.

False

Once a grantor transfers assets to a revocable living trust, any income losses, deductions, or credits become taxable to the trust, even if the grantor is the trustee.

False

One of the benefits of placing assets in a revocable trust is that they are protected from the claims of the grantor's creditors during his lifetime.

False

Premiums paid by the corporation for key employee life insurance are deductible for federal income tax purposes.

False

Section 162 plans are usually some form of term insurance.

False

Special nondiscrimination rules set forth in IRS regulations apply to split dollar life insurance

False

Split dollar life insurance is a specialized type of life insurance designed to meet specific business needs

False

The endorsement method of owning life insurance in a split dollar arrangement provides more protection to the employee than does the collateral assignment method of ownership.

False

The larger the business is, the greater the need is for key employee life insurance.

False

The principal requirement in implementing a pension maximization strategy is compliance with ERISA.

False

The sale of a key employee policy to the employee following his retirement or termination will trigger the transfer for value rule.

False

When life insurance is provided through a qualified plan, the costs resulting from any substandard ratings are taxable income to the insured employee.

False

Which of the following features is a characteristic of key employee life insurance?

The corporation pays the premiums on the policy.

Which of the following statements is true regarding the "classic'' split dollar plan?

The employee includes in income an amount equal to the value of the insurance protection he received during the year, reduced by any amount paid during the year toward the premium.

Which of the following statements regarding the tax implications of key employee life insurance is correct?

The sale of key employee insurance to the insured employee is exempt from the transfer for value rule.

A Section 162 plan can be terminated by the employer at any time for any reason.

True

A Section 162 plan is frequently referred to as an "Executive Bonus" plan.

True

One of the key elements of a pension maximization plan is that the couple be sufficiently disciplined and secure financially to keep the life insurance in force.

True

Ordinarily, the cost of life insurance purchased at retirement in an amount sufficient for a pension maximization plan will be greater than the differential between the single and joint life annuity payouts.

True

Premiums on life insurance in a qualified plan are deductible by the employer as part of its annual contribution for covered employees.

True

Under the insurance feature of the joint & survivor annuity, the pensioner generally has no rights to:

accelerate benefit payments if a need occurs choose an alternative or substitute beneficiary wait to select the type of benefit to be paid Correct all of the above

Which of the following statements accurately describes one of the characteristics of a Section 162 plan?

at no time does the employer have any incident of ownership in the policy

The disadvantages of using a revocable life insurance trust include all but which of the following?

insurance proceeds would be available to a testamentary trust before they would be available for a revocable trust

A life insurance policy provided to an employee under a Section 162 plan:

is fully portable by the employee because the policy is the employee's sole property

Which of the following is one of the key advantages of using life insurance in a qualified plan?

the ability of an employer to provide employees with retirement benefits on more favorable terms than would be available through individually purchased products

Which of the following circumstances, if true, would make a nonqualified deferred compensation plan inadvisable?

the business is not likely to survive the death, disability or retirement of its key employees

Mr. Jones' pension pays $3,000 a month under the single life annuity option or $2,550 a month under the joint and 50% survivor annuity option. Mr. and Mrs. Jones elect the joint and 50% survivor annuity. What is the effective "cost'' of the 50% survivor annuity?

$450 per month

A split dollar life insurance arrangement would be appropriate under all of the following circumstances, except:

when the employer wants to be able to provide for the future security of its employees with tax deductible dollars

The life insurance products used to fund a qualified plan may provide employees with retirement benefits at more favorable terms than individual contracts.

True

The principle advantage of pension maximization is increased planning flexibility.

True

The rule against perpetuities is a state law restriction designed to limit the period during which a trust can withhold property or its income from outright ownership.

True

Which of the following is true regarding variations on the "classic'' split dollar plan?

Under the Reverse Split Dollar Plan the employee's share of the premium is the amount of the cash value increase in the year with the employer paying the balance.

Corporate owned life insurance (COLI) is an attractive means of financing an employer's obligations under a nonqualified deferred compensation plan for all but one of the following reasons. Which one is inapplicable?

a plan funded with life insurance is exempt from all state and federal regulatory requirements

In order for a participant to avoid current taxation of his benefits under a nonqualified deferred compensation plan, he must not be deemed to have constructive receipt of income under the plan. Constructive receipt can be avoided if certain provisions are included in the design of the plan. Which one of the three following provisions will not avoid constructive receipt?

a provision that permits the employee to place his benefits beyond the reach of the employer's creditors if he suspects that the employer is in financial difficulty

The term "pension maximizing'' refers to

a strategy for providing a more attractive overall benefit package for married couples by insuring the participant's life outside the plan

Three of the following are advantages of fully-insured pension plans (i.e., plans holding only life insurance and annuity contracts that meet certain requirements). Which statement is not an advantage of fully insured plans?

fully insured plan cash values are not subject to income tax

Which of the following types of qualified plans provides the most advantageous treatment of life insurance?

defined benefit plan

All of these recent changes in qualified plan pension law have made nonqualifying deferred compensation plans more attractive, except

easier nondiscrimination rules place fewer restraints on employer's discretion

A Section 162 plan is based on an Internal Revenue Code section that:

permits an employer to deduct amounts paid for premiums on life insurance covering selected employees provided that the amount is charged to the covered employee as a bonus (compensation)

The advantages of a split-dollar arrangement include all of the following, except

premiums are not tax deductible at any time by either party

Which of the following accurately describes one of the disadvantages of a Section 162 plan?

the employer has no control over either the employee or the policy through the plan

All of the following statements about the income taxation of an insured death benefit received by a plan participant's beneficiary are accurate except:

the entire death benefit received by a plan participant's beneficiary is recovered tax free

For income tax purposes,

the grantor of a revocable life insurance trust generally reports trust income, losses, deductions, and credits if he is trustee

Which of the following is one of the advantages of a pension maximization strategy?

the life insurance policy provides more planning flexibility as compared with a joint and survivor payout

The advantages of key employee life insurance include all of the following except:

the premiums can be paid with after-tax dollars