Taxes, retirement, and other insurance concepts
qualified plans must have a _________________
vesting requirement
lump-sum death benefits are _________________.
not taxable
nonqualified retirement plans do not need...
IRS approval
what is the official name for the social security program?
Old Age Survivors Disability Insurance (OASDI)
Who can make a fully deductible contribution to a traditional IRA?
an individual not covered by an employer sponsored plan who has earned income
SEPs allow the employer to make annual contributions of up to ____ of an employees earned income
25%
in a noncontributory group plan, the employer pays ______ of the premiums. They help to reduce _________ against the insurer.
100% adverse selection
which type of retirement account allows contributions to continue beyond age 70.5 and does not force distributions to start at age 70.5?
Roth IRA
regarding tax qualified annuities, tax accumulation is ____________.
deferred
Regarding policy loans, money borrowed from the cash value is _________.
not taxable
regarding tax qualified annuities, they must be approved by ______.
the IRS
regarding the use of insurance as an executive bonus, the policy is owned by...
the employee
T/F? regarding life settlements, they could be used for a key person coverage
true
a person has to work at least _______ a year to qualify for A Keough plan
1000 hours
two attorneys operate their practice as a partnership. They want to start a program through their practice that will provide retirement benefits for themselves and 3 employees. They would likely choose....
HR-10 (Keogh)
The president of a manufacturing company has offered one of the company's officers a special individual annuity plan that is unavailable to lower-echelon employees. This plan would be funded with before tax corporate dollars, and it does not meet government approval standards this annuity plan is...
a nonqualified annuity plan
a life insurance policy used to fund an agreement that contractually establishes the intent of someone to purchase a business upon the insured business owner's death is called...
buy-sell agreement
a partnership buy-sell agreement in which each partner purchases insurance on the life of each other is called a _____________.
cross-purchase plan
life insurance death proceeds are...
generally not taxed as income
For SEPs, employer contributions are not included in the employee's _______.
gross income
SEPs have a _________ tax deductible contribution limit than an IRA
higher
An employee is joining a group insurance plan. In order to avoid having to prove insurability, what must the employee do?
join during the open enrollment period
regarding a non-qualified retirement plan, it is a ________ method for accumulating money for retirement needs.
legal
group life insurance premiums are usually _______ than those of an individual policy.
lower
death benefits payable to a beneficiary under a life insurance policy are generally
not subject to income taxation by the federal government
Social security is designed to protect eligible workers and their independents against financial loss due to
old age disability death
Who may contribute to an HR-10 plan?
self-employed persons
HR-10 (Keough Plans) are plans...
specifically for self employed and their employees
employer contributions made to a qualified plan are
subject to vesting requirements
A policy loan may be repaid after the policy is ___________.
surrendered
personal uses of life insurance includes:
survivor protection estate creation and conservation cash accumulation liquidity
regarding a non-qualified retirement plan, earnings grow _______________.
tax deferred
a corporation is the policyowner and the beneficiary of a key person life policy. If the corporation collects the policy benefit, then the benefit is received _________.
tax free
the advantage of qualified plans to employers is...
tax-deductible contributions
a corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then....
the benefit is received tax free
viatical producer represents
the provider
Group life insurance can be converted into an individual __________ life; not a ______ policy.
whole life term policy
Under simple plans, participating employees may defer up to a specified amount each year, and the employer then makes a matching contribution up to an amount equal to what percent of an employees annual wages?
3%
If a company has a simplified employee pension plan what kind of plan is it?
a qualified plan for a small business
what type of life insurance is commonly used for group plans?
annually renewable term
Key person coverage may be funded by ______________.
any type of life insurance
business uses of insurance
buy-sell funding executive bonuses key person
Policy loans can be repaid at __________.
death
individuals who are not covered by an employer sponsored plan, may...
deduct the amount of their IRA contributions regardless of their income level
the term for non taxed return of unused premiums
dividends
for a retirement plan to be qualified, it must be designed for the benefit of
employees
T/F? regarding life settlements, the seller must be terminally ill
false, insured does not have to be terminally ill
if taken as a lump sum, life insurance proceeds to beneficiaries are passed....
free of federal income taxation
what is the main purpose of the 7-pay test?
it determines if the insurance policy is an MEC (Modified Endowment Contract) aka "over funded"
if a retirement plan or annuity is "qualified", this means...
it is approved by the IRS. So, it gives the employer and employee benefits such as deductible contributions and tax-deferred growth
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?
it is only taxable if the cash value exceeds the amount paid for premiums
in whole life insurance, lump sum death benefits are...
not taxable
viatical settlements are not __________, they are __________ in which the insured sells the death benefit to a __________ at a discounted rate.
policy options separate contracts third party
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she does a direct transfer from her plan to a traditional IRA, how much will be transferred from one plan administrator to another, and what is the tax consequence of a direct transfer?
$10,000 no tax consequence
An employee is insured under her employers group life plan. If she terminates her coverage, 1. Would she need to prove insurability for a conversion policy? 2. How long can she wait to convert her coverage to an individual policy? 3. The premium for individual coverage will be based on what? 4. Can she choose what type of policy she will have?
1. NO 2. 31 days 3. her attained age 4. no- the insurer will determine the type of coverage (usually permanent).
To attain currently insured status under Social Security, a worker must have earned how many credits during the last 13 quarters?
6 credits
An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. What is true?
He will have to pay a 10% penalty if he is under the age of 59.5
In Roth IRAs, contributions are not tax deductible, meaning what?
The account owner does not have to pay taxes on the growth of his account
A 60 year old participant in a 401 k plan takes a distribution and rolls it over to an IRA within 60 days. What is true?
The amount of the distribution is reduced by the amount of a 20% withholding tax
The cost of coverage for a group life policy is based on what?
The average age of the group and the ratio of men and women
in life insurance policies, cash value increases...
grow tax deferred
who would be eligible for all social security disability income benefits
only people who have attained fully insured status
if an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a
settlement option
which of the following would be considered a nonqualified retirement plan?
split dollar insurance arrangements
life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as...
survivor protection
policy loans are not ________
tax deductible
the premiums paid for by the employer in a business life insurance policy are
tax deductible by the employer
A 403-B plan, aka a TSA, is available to be used by
teachers (tax sheltered annuities) and not-for-profit organizations
an employee quits his job on May 15th and doesnt convert his group life isnurance policy to an individual policy for two weeks. he dies in a freak accident on june 1st. What will happen
the insurer will pay the full death benefit from the group policy to the beneficiary because an employee has 31 days to convert. During those 31 days they are still covered under the group plan
in a life settlement contract, whom does the life settlement broker represent?
the owner or policy owner
what best defines the "owner" as it pertains to life settlement contracts?
the policy owner of the life insurance policy
which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
they are tax free to terminally ill insured. and tax free UP TO A LIMIT for chronically ill insured
what is true regarding taxation of dividends in participating policies?
dividends are not taxable they are not considered to be income for tax purposes, since they are the return of unused premium. The interest earned, however, on dividends is subject to taxation as ordinary income.
third party owner is a legal term used to
identify an individual or entity that is not an insured under the contract, but has a legally enforceable right under it
which of the following is the best reason to purchase life insurance as opposed to an annuity?
to create an estate
an employee quits her job where she has a balance of $10,000 in her qualified plan. The balance was paid out directly to the employee in order for her to move the funds to a new account. If she decides to roll over her plan to a traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax free rollover?
$8,000 (since directly paid out, 20% is withheld by payor) 60 days
General requirements of a qualified plan:
- the plan must be communicated to all emploees - the plan must be for the exclusive benefit of the employees and their beneficiaries - the plan must be permanent, written, and legally binding
SIMPLE plans require what?
-Employees must receive a minimum of $5,000 in annual compensation -no other qualified plan can be used -no more than 100 employees
if an insurance policy develops cash value faster than a seven-pay whole life contract, it is
a Modified Endowment contract
in a direct rollover, how is the money transferred from one plan to the new one?
from trustee to trustee or from plan to trustee A trustee legally holds assets for the benefit of another person, the beneficiary.
requirements of eligibility for social security disability benefits:
fully insured status (40 credits/10 years of work) waiting period of 5 months inability to perform any gainful work
For group life insurance the group sponsor receives a _______________. and the participants receive _______________.
master contract Certificates of Insurance
regarding tax qualified annuities, withdrawals are ______
taxed
regarding a non-qualified retirement plan, employers do not receive a _______________________ for any contributions made
current tax deduction
When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called a(n)...
executive bonus
In the Executive Bonus plan, who is the owner of the policy and who pays the premium?
executive is the owner and the executive pays the premium
T/F? In group insurance, participants in the policy each receive a policy
false participants each receive a certificate of insurance
There is _____________ on the number of key employee plans in force at any one time.
no limitation
In a key person life insurance policy, premiums are ______________ as a business expense
not tax deductible
if an employee wants to enter the group outside of the open enrollment period, to reduce adverse selection, an insurer may...
require evidence of insurability
regarding a non-qualified retirement plan, contributions are not currently __________________.
tax deductible
regarding tax qualified annuities, employer contributions are ________
tax deductible
How are contributions to a tax-sheltered annuity treated with regards to taxation?
they are not included as income for the employee, but are taxable upon distribution
Under a simple plan, what is true regarding taxation on both contributions and earnings?
they are tax deferred until withdrawn
T/F? regarding life settlements, they involve insurance policies with large face amounts
true
If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years. What amount would be taxable annually?
$3,000 Key word: settlement option. which is a settlement that is owed to you that will be paid for in a yearly amount of $13,000 and the payments will last for 10 years. The principle amount per year would be $10,000. The $3,000 extra each year is because it is interest, which is taxable.
regarding a non-qualified retirement plan, it can discriminate how?
in benefits and selecting participants
Benefits available under social security:
old-age and retirement benefits disability benefits death benefits
examples on non qualified plans are:
individual annuities and deferred compensation plans for highly paid executives, split dollar insurance arrangements, and section 162 executive bonus plans
An insurer can charge interest on _______________ policy loans.
outstanding
viatical broker represents
the insureds
Non-qualified retirement plans do not meet the IRS requirements for favorable tax treatment of deductions and contributions; therefore, ..........
they do not need to be approved by the IRS
as a general rule, premiums paid for life insurance are not ___________________. An exception to this rule is when ___________________________________ since it is considered a _________________________.
-tax deductible -an employer buys group term life insurance for his employees -business expense.
what is the name of the insured who enters into a viatical settlement?
viator
3 business uses of life insurance
1. funding business continuation agreements 2. compensating executives 3. funding against financial loss caused by the death of a key employee
what is the purpose of key person insurance?
to lessen the risk of financial loss because of the death of a key employee
When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the Interest Settlement Option. If at the time of withdraw the interest paid was $11,000, the beneficiary would be required to pay income tax on...
$11,000 the death benefit is not income taxable, but any interest earned is income taxable
federal tax advantages of a qualified plan?
1. accumulate on a tax deferred basis 2. employee and employer contributions are not counted as income to the employee for income tax purposes 3. employer contributions are tax deductible as ordinary business expense
An IRA purchased by a small employer to cover employees is known as...
Simplified Employee Pension Plan (SEP)
a tax-sheltered annuity is a special tax-favored retirement plan available to...
certain groups of employees only
T/F? regarding life settlements, they could be sold for an amount greater than the current cash value
true
what does liquidity refer to in a life insurance policy?
cash values can be borrowed at any time
what is the primary purpose for a 401 k plan?
retirement
which of the following describes the tax advantage of a qualified retirement plan?
the earnings in the plan accumulate tax deferred
3 characteristics of group life insurance plans: 1. There is no individual ______________. 2. The participants will receive what as their proof of insurance? 3. A minimum number of ___________ is required in order to underwrite the plan
1. underwriting 2. Certificate of Insurance 3. participants
For group life insurance, ______% participation of members is required in non contributory plans.
100% but for contributory, only 75% participation is required
An employee has ___________ under the conversion privilege to convert to an individual policy.
31 days
in order to qualify for conversion from a group life policy to an individual policy of the same coverage, a person must have been insured under the group plan for how many years?
5
an employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called?
Profit sharing plan Realized profit: Realized profit is usually already deposited into the trader's trading account, and can be withdrawn from their trading account to a bank account.
An individual who has been diagnosed with Alzheimer's disease. He is insured under a life policy with the accelerated benefits rider. What is true regarding taxation of the accelerated benefits?
a portion of a benefit up to a limit is tax free; the rest is taxable income
taxation on accumulation is ___________ in qualified and nonqualified retirement plans.
deferred
