Utah Life and Health Exam- Chapter 6: Federal Tax Considerations for Life Insurance and Annuities

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? a- Tax-sheltered account plan b- HR 10 plan c- Profit sharing plan d- 401(k) plan

c- Profit sharing plan; A profit sharing plan is one where the employer will contribute monies into an employee's retirement plan when the company shows a profit. The others are all qualified plans, but company profit isn't an issue with them.

Which type of retirement account allows contributions to continue beyond age 70 1/2 and does not force distributions to start at age 70 1/2? a- Roth IRA b- Flexible IRA c- Standard IRA d- Traditional IRA

Roth IRA; A Roth IRA allows contributions to continue beyond age 70½ and does not force distributions to start at age 70½.

Who can make a fully deductible contribution to a traditional IRA? a- A person whose contributions are funded by a return on investment b- An individual not covered by an employer-sponsored plan who has earned income c- Anybody: all IRA contributions are fully deductible regardless of income level d- Someone making contributions to an educational IRA

b- An individual not covered by an employer-sponsored plan who has earned income; Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.

If taken as a lump sum, life insurance proceeds to beneficiaries are passed? a- Without interest b- Free of federal income taxation c- Tax-deductible d- Part tax-free and part taxable

b- Free of federal income taxation; Life insurance proceeds to beneficiaries are passed free of federal income taxation if taken as a lump sum distribution. If the proceeds are taken as other than lump sum, part of the proceeds will be tax-free and part will be taxable. When paid in installments, part of the proceeds contains principal and some interest, so the interest portion is subject to federal income taxation.

Death benefits payable to a beneficiary under a life insurance policy are generally? a- Exempt from income taxation if over $7,000 b- Not subject to income taxation by the Federal Government c- Subject to income taxation by the Federal Government d- Exempt from income taxation if under $7,000

b- Not subject to income taxation by the Federal Government; When premiums are paid with after tax dollars, the death benefit is generally not subject to federal income taxation.

All of the following employees may use a 403(b) plan for their retirement EXCEPT? a- The vice president of a charitable organization. b- The CEO of a private corporation. c- A school bus driver. d- A part-time classroom aide.

b- The CEO of a private corporation; Not all public employees are eligible for 403(b) plans, or tax-sheltered annuities, only employees of public education (local, state, or federal), as well as employees of charitable organizations.

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? a- Neither principal nor interest b- Principal only c- Interest only d- Both principal and interest

c- Interest only; If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.

For an individual who is NOT covered by an employer-sponsored plan, IRA contributions are? a- Never tax deductible. b- Partially tax deductible depending on the income level. c- Tax deductible. d- Deducted based on the income level.

c- Tax deductible; Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.

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 rollover 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? a- $8,000, 30 days b- $10,000, 60 days c- $10,000, 30 days d- $8,000, 60 days

d- $8,000, 60 days; Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor.

An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At the policy surrender, the cash value was $18,000. What part of the surrender value would be income taxable? a- $50,000 b- $18,000 c- $15,000 d- $3,000

d- $3,000; The difference between the premiums paid and the cash value would be taxable. In this example, the difference between the premiums paid ($15,000) and the cash value ($18,000) is $3,000.

Which of the following is NOT true regarding a nonqualified retirement plan? a- Earnings grow tax deferred. b- It needs IRS approval. c- Contributions are not currently tax deductible. d- It can discriminate in benefits and selecting participants.

b- It needs IRS approval; Nonqualified 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 IRS.

All of the following would be different between qualified and nonqualified retirement plans EXCEPT? a- IRS approval requirements b- Taxation on accumulation c- Taxation of withdrawals d- Taxation of contributions

b- Taxation on accumulation; Taxation on accumulation is deferred in both types of plans. The rest of the characteristics would differ.

Which of the following statements is TRUE concerning whole life insurance? a- Lump sum death benefits are not taxable. b- Dividend interest is not taxable. c- Premiums are tax deductible. d- Policy loans are tax deductible.

a- Lump sum death benefits are not taxable; Dividend interest is taxable; policy loans are not tax deductible, and premiums are not tax deductible.

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually? a- $7,000 b- $3,000 c- $13,000 d- $10,000

b- $3,000; If $100,000 of life insurance proceeds were used in a settlement option paying $13,000 per year for 10 years, $10,000 per year would be income tax free (as principal) and $3,000 per year would be income taxable (as interest).

What is the main purpose of the Seven-pay Test? a- It guarantees interest minimum. b- It determines if the insurance policy is an MEC. c- It requires level premium payments for 7 years. d- It ensures that the policy benefits are paid out in 7 years.

b- It determines if the insurance policy is an MEC; The Seven-pay Test determines whether an insurance policy is "over-funded" or if it's a Modified Endowment Contract. In other words, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.

What is the primary purpose of a 401(k) plan? a- Life insurance distribution b- Retirement c- Education funds d- To receive dividends over a certain period

b- Retirement; Profit-sharing plans are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees. A 401(k) qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also somehow match the employee's contribution, whether it is dollar for dollar or on a percentage basis.

What is the tax consequence of amounts received from a Traditional IRA after the money was left in the tax-deferred account by the beneficiary? a- Capital gains tax on distributions plus 10% penalty. b- Income tax on distributions and no penalty. c- Income tax on distributions plus 10% penalty. d- Capital gains tax on distributions and no penalty.

b- Income tax on distributions and no penalty; If the beneficiary chooses to leave the money in the tax-deferred account until the calendar year in which the owner would have attained age 70½, the distributions would be subject to income taxation at the rate at the time of withdrawal.

If a company has a Simplified Employee Pension plan, what type of plan is it? a- A qualified plan for a small business b- The same as a 401(k) plan c- The same as an IRA, with the same contribution limits d- An undefined contribution plan for large businesses

a- A qualified plan for a small business; A Simplified Employee Pension (SEP) is a type of qualified plan suited for the small employer or for self-employed. A SEP is an employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or a specified maximum contribution amount.

Employer contributions made to a qualified plan... a- May discriminate in favor of highly paid employees. b- Are after-tax contributions. c- Are taxed annually as salary. d- Are subject to vesting requirements.

d- Are subject to vesting requirements; Qualified plans must have a vesting requirement.

All of the following statements are true regarding tax-qualified annuities EXCEPT? a- Tax accumulation is deferred. b- They must be approved by the IRS. c- Withdrawals are taxed. d- Employer contributions are not tax deductible.

d- Employer contributions are not tax deductible; Tax qualified annuities are required to be approved by the IRS. Tax qualified annuities provide tax deductible employer contributions and all tax accumulation is deferred.

Which of the following is true regarding taxation of dividends in participating policies? a- Dividends are taxable in some life insurance policies and nontaxable in others. b- Dividends are considered income for tax purposes. c- Dividends are not taxable. d- Dividends are taxable only after a certain amount is accumulated annually.

c- Dividends are not taxable; Dividends are not considered to be income for tax purposes, since they are the return of unused premiums. The interest earned on the dividends, however, is subject to taxation as ordinary income.

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? a- It is taxable only if it exceeds the amounts paid for premiums by 50%. b- It is automatically taxable. c- It is only taxable if the cash value exceeds the amount paid for premiums. d- It is not considered to be taxable.

c- It is only taxable if the cash value exceeds the amount paid for premiums; The cash value of a surrendered policy is only considered to be taxable as income if the cash value exceeds the amount of premiums paid for the policy.

Which of the following describes the tax advantage of a qualified retirement plan? a- Distributions prior to age 59½ are tax deductible. b- Employer contributions are deductible as a business expense when the employee receives benefits. c- Employer contributions are not taxed when paid out to the employee. d- The earnings in the plan accumulate tax deferred.

The earnings in the plan accumulate tax deferred; Contributions are tax deferred, and earnings on the money in the plan accrue on a tax-deferred basis.

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is considered a(n)? a- A Modified Endowment Contract b- An Accelerated policy c- An endowment d- A Multiplicative Policy

a- A Modified Endowment Contract; Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract.

For a retirement plan to be qualified, it must be designated for the benefit of? a- IRS b- Employees c- Key Employee d- Employer

b- Employees; Qualified plans are designed for the exclusive benefit of the employees and their beneficiaries.

When would life insurance policy proceeds be included in the insured's taxable estate? a- When there are any incidents of ownership at the time of death. b- If the insured's spouse is the policyowner. c- If the insured transfers ownership of the policy or makes a gift of the policy 5 years prior to his or her death. d- When the beneficiary is named in the policy.

a- When there are any incidents of ownership at the time of death; If the insured were the owner of the policy at the time of death or possessed any incidents of ownership at the time of death, the value of the policy will be included in the insured's taxable estate. If the insured, as policyowner, assigns or transfers ownership of the policy or makes a gift of the policy within 3 years prior to his or her death, the entire face amount of the policy will be included in his or her taxable estate.