Wrong answers on practice exam
Tom is a 45-year-old senior accountant employed by ABC, Inc. Under ABC's employer-pay-all group life plan, Tom's coverage is $120,000. The premiums for what amount of that coverage are taxable to Tom?
$70,000. The cost of the first $50,000 of coverage is tax exempt for employees. Because Tom has $120,000 of coverage, the premiums for $70,000 ($120,000 - $50,000) are taxable to him.
ABC Life Insurance Co. just sold Alex a new life insurance policy that will replace his existing policy. Alex may examine the policy and return it within how many days if he is not satisfied for any reason?
30 days; If a life insurance policy replaces another, the policyowner is entitled to a free-look period of at least 30 days following delivery of the policy. The policyowner can return the policy within the free-look period for an immediate refund of the entire premium paid.
What is the maximum amount of time most states allow insurers to delay paying cash surrender values?
6 months
Which of the following most correctly describes the nonforfeiture option(s) available with universal life insurance?
cash surrender option only. Universal life policies normally do not contain the standard nonforfeiture options. Universal life insurance policies remain in force as long as their cash value allows the insurer to make a monthly deduction to cover the policy's insurance and operational costs. If universal life still has cash values, cash surrender and cash withdrawal remain options.
Which of the following is recognized as a standard life insurance nonforfeiture options?
cash surrender; Under the cash surrender option, the owner surrenders the policy and the insurer pays the cash value to the policyowner in a lump sum. along with extended term insurance & reduced paid-up insurance
To qualify for Social Security disability benefits, a worker must satisfy a waiting period of how many months?
five months: To qualify for Social Security disability benefits, a worker must be totally disabled, which means that he or she is unable to engage in any substantial gainful employment. The disability must be expected to last at least 12 months (or result in an earlier death). Benefits will begin only after the worker has satisfied a waiting period of five consecutive months, during which he or she must remain disabled.
All the following are types of life settlement options that include a life contingency, EXCEPT
fixed period option
Which of the following is NOT one of an agent's responsibilities to an applicant?
helping write an applicant's insurance policy. Agents must act in the applicant's or insured's best interests at all times. This means that agents must disclose all important information about a proposed policy. They cannot misrepresent the terms or conditions of a policy, and must avoid replacing policies unless it is in the applicant's best interests. Agents do not help write the actual insurance policy.
The replacement regulations apply to transactions involving which of the following?
individual life insurance; The replacement regulations apply to transactions involving individual life insurance. Insurers selling group life insurance, credit life insurance, and immediate annuities are not subject to the replacement transactions.
Settlement options with life contingencies involve income payments the payee cannot outlive. These settlement options are called which of the following?
life income options
Settlement options with life contingencies involve income payments the payee cannot outlive. These settlement options are called which of the following?
life income options;
A worker who is considered fully insured is entitled to all of the following benefits under Social Security EXCEPT:
medical care benefits
From an insurance risk perspective, a person who smokes heavily and drinks alcohol to excess exhibits which of the following traits?
moral hazard. Moral hazards are individual traits or habits, like smoking and excessive drinking, that increase the chance of a loss.
Universal life policies derive much of their flexibility from unbundling. What elements are unbundled in UL policies?
mortality, interest, and expenses
The premiums that Acme Company pays for corporate-owned life insurance on the lives of its employees are generally
not tax deductible
Which of the following is NOT recognized as a standard life insurance nonforfeiture options?
policy loans
As distribution vehicles, which of the following can annuities NOT do?
protect against the financial impact of dying too soon
Under which nonforfeiture option does permanent life insurance continue in force with no further need for premiums?
reduced paid-up option. A paid-up policy under the reduced paid-up option requires no further premiums (nor can any be paid). The paid-up policy retains a cash value that will continue to grow throughout the life of the policy. However, it will grow much more slowly than during the period that premiums were being paid.
Which of the following is an standard practice used by insurers to reduce the chance of adverse selection in a group life insurance policy?
require a minimum group size
For what purpose are annuities used most often?
retirement planning
What rule lets a policyowner return a policy for a refund of premiums paid for a certain period of time after the policy is issued?
right to examine (free look). All insurance policies require a free-look provision. Grace has a set period in which to review the policy and to decide whether to keep it. The free look begins when the agent delivers the policy.
Income accumulation is usually done using
short-term savings vehicles.
To be considered currently insured, a worker must have earned how many quarters of coverage in the 13-quarter period before he or she dies?
six
Section 457 plans are qualified retirement plans that are reserved for employees of which type of organization?
state and local government units; Educational organizations can establish 403(b) plans, known as tax-sheltered annuity plans, for their employees but are not eligible to establish Section 457 plans.
What type of life insurance company is owned by its stockholders
stock company. Stock companies are owned by stockholders, just like other public companies.
For any given life policy death benefit amount, which of the following settlement options generally provides the largest monthly income to the payee?
straight life income settlement option
Julie is the beneficiary of her husband's $150,000 life insurance policy. When he dies, Julie chooses to receive payments of about $800 a month, or $9,600 a year, which will continue as long as she lives, whether she lives past her life expectancy or dies before it. Payments are to cease when she dies, whenever that may occur. Julie has chosen which of the following settlement options?
straight life income settlement option
All the following are types of life settlement options that include a life contingency
straight life income settlement option life income with refund joint and survivor life income
In a collateral assignment, policyowners may (or must) do all the following, EXCEPT
surrender the policy.
A currently insured worker is eligible for which of the following Social Security benefits
survivor death benefits only
Social Security benefits are a function of a worker's average indexed monthly earnings and primary insurance amount (PIA). What is a worker's PIA?
the amount of the retirement benefit the worker will receive at normal retirement age
Settlement options with a life contingency base payments on which of the following?
the beneficiary's lifespan
Under Social Security, what is the primary insurance amount?
the monthly amount a person will receive if he or she elects to take benefits at full retirement age; The primary insurance amount (PIA) is the monthly amount a person will receive if he or she elects to take benefits at full retirement age.
If a variable universal life policyowner chooses death benefit option 3, what will the benefit equal
the policy's specified amount plus the total premiums paid: Death benefit option 3 under a variable universal life insurance policy pays a death benefit equal to the policy's specified amount plus the total premiums paid.
If a transfer of ownership of a life insurance policy is for "valuable consideration," the transfer-for-value rule can apply. To what extent are death benefits from a transferred policy considered taxable income to the assignee?
to the extent that they exceed the assignee's cost basis in the policy
Val has owned a whole life insurance policy for the past 25 years. She would like to use the values in her existing policy to purchase a new variable universal life policy. Which strategy should she use to ensure neutral tax treatment and to avoid taxation of any policy gain?
use a Section 1035 exchange of the existing policy for a new policy Explanation: Val should use a Section 1035 exchange to exchange her existing policy for a new policy. Under this Internal Revenue Code Section, life insurance, annuities, and long-term care insurance contracts can be exchanged income tax free for other similar products, and there are no tax consequences to the policyowner.
A prospective client, Nick, wants to open an individual retirement account. As the agent on this transaction, what would be the first thing you want to know about Nick before you advise him on his purchase?
whether he is covered by an employer-sponsored retirement plan; As of 1986, tax deductibility of traditional IRA contributions depends on two factors: whether the IRA owner is covered by an employer-sponsored retirement plan and the owner's income level if covered under such a plan. If Nicholas is not already covered, his initial IRA contribution is fully deductible up to $5,500.
Steve, age 72, owns an IRA. The required minimum distribution (RMD) for Steve this year was $6,000, but he only withdrew $4,000. Based only on this information, what penalty tax will Steve have to pay?
$1000. Because Steve did not take his entire required minimum distribution for the year, he will have to pay a 50 percent penalty tax on the shortfall. The amount is determined by taking the additional amount that he should have received ($2,000) and multiplying it by 50 percent.
Teddy's 403(b) plan account was worth $200,000 when he was laid off from his job. He plans to roll over the entire amount into an IRA and has asked the plan administrator to distribute his account balance directly to him. What amount will Teddy receive from the 403(b) plan administrator?
$160,000 ; If a rollover distribution is paid directly to an employee, the employer is required to withhold 20 percent. To avoid this requirement, the employee must tell the employer to transfer the funds directly to an IRA or qualified plan (known as a direct trustee-to-trustee rollover).
Wally annuitized his fixed annuity and now receives $1,800 each month. Of this amount, $1,500 represents his investment in the annuity, and $300 represents interest earnings. Which statement regarding the taxation of Wally's annuity payments is correct?
$300 is taxed as ordinary income. Explanation: Annuitized income is taxed by applying the exclusion ratio, which calculates the proportion of income that is attributable to principal and is not taxed. In this case, $1,500 of Wally's monthly payment is a return of principal and is not taxable; the remaining $300 in interest earnings is taxed as ordinary income.
Shannon, age 56, works full-time and maintains both a traditional and a Roth IRA. She wants to contribute the maximum amount possible to her accounts and has already made a $1,000 catch-up contribution to her traditional IRA this year. How much can she contribute to her Roth IRA if she does not contribute any more funds to her traditional IRA?
$5,500 Explanation: A person can maintain both a Roth IRA and a traditional IRA and can make contributions to both for a given year. However, the maximum amount that a person can contribute to both combined is limited to the overall contribution limit. Shannon can therefore contribute a total of $5,500 plus a $1,000 catch-up contribution.
Which of the following types of qualified retirement plan is permitted to include life insurance in the plan funding?
412(i) plan
Failure to begin taking required minimum distributions (RMDs) from a qualified retirement plan when required can result is a penalty tax equal to
50 percent of the difference between the amount that was taken and the RMD amount that should have been taken.
A worker can receive full retirement benefits if he or she retires at the full retirement age. However, a worker can also choose to collect permanently reduced Social Security benefits as early as what age?
62
Richard just retired at age 72 and owns a $500,000 life insurance policy. Because he no longer needs insurance protection, Richard would like to sell his policy and use the proceeds to travel during retirement. Which option would be best suited for this purpose?
A life settlement sale is reserved for seniors age 65 or older who are not facing a life-threatening illness. Life settlements offer a way for an owner to sell a policy and derive the largest possible value from the policy, short of its death benefit.
Jack's required minimum distribution from his 401(k) plan this year was $8,000. However, he mistakenly withdrew only $6,000. Jack must pay a penalty tax equal to what amount?
A person who does not take the correct required minimum distribution from a qualified plan must pay a penalty tax equal to 50 percent of the difference between the amount that was taken and the amount that should have been taken. Jack must therefore pay a $1,000 penalty tax (50 percent of $2,000).
People who are members of associations, such as school districts or towns, can be insured under an association group life insurance plan. Which of the following statements regarding association group life is correct?
All members must be eligible to participate in the plan. If an association offers a group life insurance plan, all members must be eligible to participate.
Which statement regarding life insurance cost-of-living riders is NOT correct?
As the Consumer Price Index (CPI) increases, so does the policyowner's coverage, providing the insured can prove insurability. As the CPI increases, so does the policyowner's coverage, without requiring the insured to prove insurability.
As a legal contract, a life insurance requires all of the following elements, EXCEPT
Basis; Basis has different meanings in different contexts. In options trading, for example, "basis" is a term used to evaluate the value differential between a call option and a put option. Also referred to as the reversal/conversion rate, it is calculated by determining the costs and benefits of being long or short the underlying security.
By offering tax incentives, the federal government encourages employees to participate in qualified retirement plans. Which of the following is NOT one of these incentives?
Benefits are taxed only if withdrawn at retirement. Benefits are taxed only when they are withdrawn OR otherwise distributed from the plan to the employee.
Which statement about profit-sharing plans is NOT correct?
Both the employer and employee contribute to the plan. The employer is the sole contributor to a profit-sharing plan. Contributions are calculated using a pre-determined formula, which is usually based on a percentage of an employee's salary.
Brian earned $100,000 this year and contributed $10,000 to his 401(k) plan account. His employer contributed an additional $2,000 on his behalf. All the following statements regarding this are correct, EXCEPT
Brian's taxable income will be reduced by the amount that both he and his employer contributed to his 401(k) plan account.
Brian worked as a chemical engineer for the past 25 years until he died last month. He left behind his wife Janet, age 45, and two children, ages 12 and 14. Which one of the following statements is most correct?
Brian's two children are entitled to receive survivor benefits equal to 75 percent of his primary insurance amount until they reach age 18..; Because Janet has dependent children under age 16, she can receive a monthly benefit of up to 75 percent of Brian's primary insurance amount. However, once the youngest child reaches age 16, these benefits stop until she turns age 60. This is known as the blackout period.
Chester and his wife, Nellie, established a 529 plan for their daughter and contributed $5,000 to her account this year. Six months later, they withdrew $20,000 to pay for their daughter's college tuition. Which statement is correct?
Chester and Nellie do not have to pay tax on the distribution.Funds withdrawn from a Section 529 plan (and the interest earned on those funds) are not taxable. To escape taxes, these funds must be used for qualifying college expenses, such as tuition, fees, room and board, and books. Although contributions are not federally tax deductible, some states may allow contributions to be deducted for state tax purposes.
Which of the following riders gives the policyowner the option to increase his or her life insurance policy's face amount based an inflation index?
Cost of Living Rider; An accelerated benefits rider pays out part or all of the policy's face value while the insured is still living.
Which statement about the tax treatment of endowment contracts is correct?
Endowment contracts no longer meet the legal definition of life insurance. As a result, they do not get the same good tax treatment.
A policyowner may divide premiums for a variable universal life insurance policy between a fixed account and variable subaccounts. With respect to this policy, which of the following statements is NOT correct?
Funds can be transferred from one subaccount to another without income tax consequences.; in contrast A policyowner can transfer funds from one variable subaccount to another within the variable universal policy with no income tax consequences.
Gloria chooses to take her life insurance policy dividends in cash. The insurance company sends a check for the amount of the declared dividend on the anniversary date of the policy. What is the tax consequence to Gloria for receiving cash dividends?
Her dividends are not income taxable.
Fred, age 65, never married and has been working for more than 40 years. He provided more than 80 percent of his elderly mother's financial support. He died a year after he began caring for her. Which of the following statements is correct?
His mother is eligible to receive monthly benefits equal to 82.5 percent of Fred's primary insurance amount (PIA). Beginning at age 62, each parent of a deceased worker is eligible to receive monthly survivor benefits if the parent was at least one-half supported by the worker when the worker died. If only one parent is eligible, he or she receives 82.5 percent of the worker's PIA.
All of the following are permitted as tax-free transactions under a Section 1035 exchange EXCEPT:
IRS Section 1035 exchange rules do not allow the exchange of an annuity contract for a life insurance contract.
XYZ Company is a close corporation with several shareholders. The company buys the ownership interest of a recently deceased shareholder. This buy-sell agreement is known as an entity plan or which of the following
If the business that owns the entity plan is a close corporation, the buy-out agreement is also called a stock redemption agreement.
Which one of the following statements most correctly describes the main difference between current assumption whole life and interest-sensitive whole life insurance?
In an interest-sensitive policy, only the mortality charges and expense charges are guaranteed. The investment (interest credited to the policy's cash value) is not guaranteed.
What does a viatical settlement allow?
It allows a chronically or terminally ill insured to gain a sum of money that is needed to pay medical expenses or to enhance the quality of life. A viatical settlement allows a chronically or terminally ill insured to gain a sum of money that might be needed to pay medical expenses or to enhance quality of life.
Jason, age 27, is single, works for a small computer company, and earns $125,000 a year. Because the company does not have any retirement plan for its employees, Jason set up and contributed to a traditional IRA this year. Which of the following statements is correct?
Jason can deduct the full amount that he contributes to his traditional IRA
Jenna, age 40, works full time and earns $175,000 a year while her husband, Rick, age 42, currently does not work. Which of the following statements is correct?
Jenna can contribute the maximum contribution amount to a traditional IRA for both herself and for Rick.
Which one of the following most correctly describes the tax treatment of life insurance policy loans?
Life insurance policy loans are not taxed.
Which of the following statements about deferred annuity surrender charges is NOT correct?
Most deferred annuities apply surrender charges for all years after the contract is issued.
Which of the following is a characteristic of industrial life insurance?
Premiums are payable monthly or weekly
The universal life waiver of cost of insurance waives the cost of insurance deducted monthly from the policy's cash value.
Premiums decrease; An indeterminate premium whole life policy is issued with two premium rates: a lower fixed rate and a guaranteed maximum rate. The policyowner pays the lower fixed rate for a specified number of years. At the end of that period, the premium rate moves up or down based on the investment earnings that the insurer experiences. Premiums will decrease if the insurer's investment experience is good.
Which statement regarding prepaid tuition plans is NOT correct?
Prepaid tuition plans are typically open to both state residents and non-residents.
After completing an application for health insurance but before the policy is delivered, Mack decides he wants a $1,000 deductible instead of the $500 deductible he told his agent. Agent Jackson already has the policy ready for delivery, so he changes the deductible, and they both initial it. This alteration
Prohibited
Richard is the father of Danny, age seven. Richard has applied for a juvenile life insurance policy on his son's life. Which one of the following statements is most correct?
Richard will be the policy owner ; Juvenile life insurance offers a way to give a child long-term affordable whole life protection. When Danny reaches age 21, the death benefit jumps to $5,000 per unit. However, the premium does not change nor is proof of insurability required.
For Social Security purposes, Brian is considered currently insured while Samantha is fully insured. Which of the following statements is correct?
Samantha is eligible for more Social Security benefits than Brian. The Social Security benefits available to a fully insured worker are much greater than those available to a currently insured worker. Brian's currently insured status only entitles Brian's family to certain survivor benefits if he dies. In contrast, Samantha is entitled to retirement, survivor, and disability benefits as a fully insured worker.
Social Security benefits are funded through payroll taxes split between the employee and employer. Which of the following best explains the amount of tax paid by self-employed individuals
Self-employed individuals pay a tax rate equal to the combined employer and employee rate. Self-employed individuals pay a tax that is equal to the combined employer and employee rate.
Becky works as an agent for Delta Insurance Company, which is located in North Carolina. What must Becky do in order to sell life insurance on behalf of Delta to U.S. military personnel who are stationed in Germany
She must obtain a restricted license; The Commissioner may issue a restricted military sales agent license to a person who represents a domestic life insurance company in a foreign country on a U.S. military installation or with U.S. military personnel.
Jessica's traditional IRA is worth $300,000 and consists only of prior deductible contributions and earnings. What are the tax implications if Jessica converts her IRA to a Roth IRA?
She must pay income taxes on the entire $300,000, If Jessica converts her traditional IRA to a Roth IRA, the 10 percent early withdrawal penalty will not be imposed. However, the amount converted will be subject to income taxes.
Which one of the following statements regarding Social Security disability benefits is most correct
Social Security disability benefits are available to eligible workers at any age.
To avoid being recognized as a modified endowment contract (MEC), a life insurance policy must meet the 7-pay test. Which one of the following most correctly describes the 7-pay test
The 7-pay test applies specifically to the premiums paid into a contract during its first seven years. If this amount exceeds the net level premiums that would have been required to produce a paid-up policy after seven level annual payments, then the policy is a MEC.
Jill is insured under a $250,000 convertible term policy and would like to convert to a permanent policy. Which of the following statements is most correct?
The amount of the new policy cannot exceed $250,000
At the time the application is signed, which one of the following is a requirement for life insurance ownership in all cases?
The applicant must have an insurable interest in the proposed insured.
Which of the following establishes that in exchange for the premium, the insurer promises to indemnify the insured against loss covered by the terms of the policy?
The consideration clause establishes that in exchange for the consideration the insurer promises to indemnify the insured against loss covered by the terms of the policy.
Henry, age 34, has a SIMPLE IRA account with his employer; the account has increased in value to $80,000. He is fully vested in the account and decides to take a $10,000 distribution to use as a down payment on his first house. Which of the following statements regarding tax consequences of this action is correct?
The early distribution penalty tax will not apply to distributions from SIMPLE plans before age 59.5; if used to purchase a first house, to pay for higher education expenses, or to pay health insurance premiums while unemployed.
If a Roth IRA owner takes a withdrawal at age 50 to pay for a grandchild's education after having owned the account for three years, then:
The earnings portion of the withdrawal is subject to income tax and a 10 percent penalty tax
To be eligible for participation in an employer's Simplified Employee Pension (SEP) plan, an employee must meet all the following requirements EXCEPT
The employee must own at least 5 percent or more of the business or be recognized as a key employee. Under a SEP plan, an employer sets up individual retirement accounts (IRAs) for each participating employee. All employees who are age 21 or older, have worked for the employer for three of the past five years, and earn at least $450 yearly must be included in the plan. A participant need not own any part of the business.
Defined benefit plans provide a specific, defined benefit for plan participants when they reach retirement age. All of the following statements regarding defined benefit plans are correct EXCEPT:
The employee typically contributes a portion of the plan funding, through pre-tax contributions.
All of the following statements regarding the extended term nonforfeiture option are correct EXCEPT
The extended term option is available whether the original policy was issued on a standard or substandard (rated) basis.
All the following statements about family term riders with life insurance are correct, EXCEPT
The family term rider covers multiple family members (spouse plus children) with term insurance based on their ages
If Lynn accidentally misstated her age on her life insurance application, what will the insurer do if this is discovered after the end of the contestability period?
The insurer will re-calculate the death benefit
Under a Section 1035 exchange, how many contracts can be exchanged for a single contract?
The number of contracts that can be exchanged for one contract under a 1035 exchange is unlimited. However, all contracts involved must have all the same insureds and have the same owner.
What is the primary distinction between individual life insurance and group life insurance?
The number of lives covered under the policy.
George purchased an annuity in which his wife will receive income for as long as she lives. In this scenario, what is George most correctly called?
The owner; The annuitant is the person the owner chooses to receive the periodic annuity payments when the contract annuitizes. The owner is not always the annuitant.
If the total amount of a policy loan plus interest is less than the policy's cash surrender value, which of the following will happen?
The policy will remain in effect
Which statement regarding the life insurance return of premium rider is NOT correct?
The return of premium rider pays a beneficiary a sum equal to the death benefit. The return of premium rider pays to the owner of a term life insurance policy a sum equal to all or a portion of the premiums paid if the insured is alive at the end of the policy term.
Under Social Security, a fully insured worker dies and leaves behind a husband, age 50, and a son, age 10. Based on this scenario, which of the following is correct?
The son will receive survivor benefits until he reaches age 18.
A married couple is insured under a joint life policy. The first spouse dies. What can the surviving spouse do with the policy?
The surviving spouse may convert the policy without proving insurability. When the first spouse dies in a joint life policy, the surviving spouse has a conversion right that allows him or her to buy an individual policy with the same or lesser face amount. The surviving insured does not have to prove insurability.
Under the "transfer-for-value" rule, the portion of a life insurance death benefit recognized as taxable income is calculated in which of the following ways?
The taxable gain is calculated as the death benefit minus the purchase price and premiums paid by the new owner.
Question 29 of 39 The four shareholders of ABC Corporation each own a $1,000,000 interest in the company and enter into a stock redemption agreement. One of the shareholders dies six months later. All the following statements regarding this scenario are correct EXCEPT
The three remaining shareholders will buy the deceased owner's interest from his estate.Explanation: Under a stock redemption agreement, the business agrees to buy the interest or shares of a deceased partner or shareholder. To fund the agreement, the company buys life insurance, which will generate the funds needed to buy out an owner's share.
Which of the following riders waives the cost of insurance from being deducted from a universal life insurance policy's cash value in the event the insured becomes disabled?
The universal life waiver of cost of insurance waives the cost of insurance deducted monthly from the policy's cash value.
All the following statements about standard policy exclusions are correct EXCEPT,
The war and commission of a felony exclusions are required by law.
Which one of the following most accurately describes the income tax treatment of life insurance death benefits received by a terminally ill insured under the accelerated benefits rider?
These benefits are not taxable as ordinary income while the insured is alive—though the rest of the death benefit is received tax free.
When do funds in a deferred annuity become the owner's?
They always belong to the contract owner. Funds in a deferred annuity always belong to the contract owner.
Which statement about death benefits paid to a beneficiary under a group life insurance plan is NOT correct
They are fully tax exempt. The taxation of the death benefit paid under a group plan is the same as that of individually owned policies.
Which of the following is true about warranties in an insurance contract?
They are guaranteed to be true.
Which one of the following most correctly describes the basic tax treatment of deferred annuity death proceeds paid to a beneficiary before the contract is annuitized?
They are taxable to the beneficiary when received. Unlike life insurance death benefits, the death proceeds from an annuity are taxable to the beneficiary when they are received.
Which one of the following most accurately describes how annuities owned by non-natural entities (corporations, for instance) are taxed?
They are taxed differently than personally owned annuities are taxed
All the following are generally accepted reasons for owning an annuity, EXCEPT
They are useful to a person looking for income protection in case of premature death.
Which statement about endowment contracts is NOT correct?
They pay a death benefit whether the insured dies during or after the endowment period. ; Endowment contracts are a special form of life insurance in which cash values grow rapidly. As a result, the policy endows well before age 120
All of the following statements regarding the conversion of a traditional IRA to a Roth IRA are correct EXCEPT:
To convert to a Roth IRA, a person must currently be eligible to contribute to a Roth IR
Leo has chosen to receive a $1,500 monthly payment from his annuity, and payments will be made for as long as it takes to entirely liquidate the annuity principal whether or not Leo is alive. Which annuity settlement option has Leo chosen
Under a fixed amount option, the contract owner chooses a monthly payment amount, and the insurer then computes how long it will take to liquidate the principal at the selected amount. Income payments are made for as long as it takes to entirely liquidate the annuity principal.
Melanie is young and purchases a variable annuity. She has a high risk tolerance, her investment horizon is long, and she intends to use the annuity as a retirement funding vehicle. She wants to allocate all premiums to the insurer's separate account. If she makes such an allocation, which of the following is she least likely to be investing in?
a fixed account Explanation: Along with market-driven subaccounts, variable annuities usually offer owners the opportunity to allocate premiums to a fixed account. Melanie is probably willing to allocate all of her premiums to the insurer's separate account because of her intended use of the funds and her high risk tolerance and long investment horizon.
All of the following are means of regulation for the insurance business EXCEPT:
agency regulation
What is the typical life insurance contract's reinstatement provision period
The reinstatement provision lets policyowners put a lapsed policy back in force within a certain period. This period is typically three years but may be longer depending on the case and the laws of the state that control the policy.
All the following statements regarding the life insurance return of premium rider are correct EXCEPT:
The return of premium rider pays a beneficiary a sum equal to the policy face amount.
Which statement regarding the "spendthrift clause" of a life insurance policy is NOT correct?
The spendthrift clause keeps beneficiaries from claiming any death benefits until the insurer checks their personal and business credit histories
What is the reason an annuity cannot be exchanged tax free for a life insurance policy
This exchange is not possible because annuity values are taxed when withdrawn or paid out. Life insurance death benefits are not.......WHY YOUR ANSWER WAS WRONG....Annuity values are taxed when withdrawn or paid out. Life insurance death benefits are not. The tax laws do not provide favorable tax treatment when a contract with taxable benefits is exchanged for a contract with non-taxable benefits.
To qualify for the accelerated benefit rider, Beth must prove she either has a terminal illness or had an accident, either of which will result in her death within what time frame?
This period is typically one to two years
Which of the following best describes a partial surrender of a permanent (non-universal) life insurance policy?
Under a partial surrender, the death benefit is reduced proportionately by the amount of the surrender. The death benefit under a partial surrender is reduced proportionately by the amount of the surrender.
Which statement about cash value withdrawals from a universal life insurance policy is NOT correct?
Withdrawals incur interest charges. Universal life withdrawals do not incur interest charges.
Which of the following information about a proposed life insurance policy is not contained in the policy summary given to a buyer?
appropriate amount of insurance; The policy summary states the coverage, costs, benefits, limitations, exclusions, and terms of a proposed life insurance policy for the prospective buyer. Information about selecting the appropriate amount of insurance is provided in the life insurance Buyer's Guide.
When selling a life insurance policy that replaces an existing policy, the agent must leave all of the following items with the applicant EXCEPT:
confirmation that any existing insurers have been notified of the replacement; The insurer, not the agent, confirms that any existing insurers are notified of the replacement. However, the insurer is not required to provide this confirmation to the applicant.
Life insurance policies are contracts of adhesion. The insurance company writes the contract, and the policyowner accepts the terms of the contract "as is." However, after the insurer issues the policy, certain changes are typically allowed. Depending on the type of policy, a policyowner may change all of the following without needing a new policy, EXCEPT
the incontestability provision. Changes to the basic contract provisions are not permitted, and producers do not have the right to endorse modifications to basic policy provisions.
Life insurers cannot discriminate between persons of which group?
the same class and life expectancy; Life insurers cannot discriminate between persons of the same class and equal life expectancy when setting rates or premiums, benefits, or any other terms and conditions of a life insurance or annuity contract.
The group term life insurance premiums an employer pays are fully tax deductible to the employer. Which of the following statements is true for a covered employee?
the value of coverage under $50,000 is not taxable
Proceeds from a life insurance policy can be paid out in a variety of ways. Which one of the following most correctly describes the two general categories of life insurance settlement options?
those without a life contingency and those with a life contingency
Some types of life insurance policy ownership transfers are not "transfers for value" and are therefore not taxable. Which of the following ownership transfers is a taxable transfer for value?
transfers to the beneficiary
When comparing her insurance company's policies to those of Zenith Insurance, Melanie makes a misleading statement to convince an insurance prospect to terminate a policy with Zenith and buy one from Melanie's company. What practice has Melanie engaged in?
twisting; A person cannot make a false or misleading statement or comparison about an insurance policy in order to induce someone to lapse, surrender, terminate, retain, or convert an insurance policy or buy a policy with another insurer.
Which of the following best describes the difference between a disability income benefit rider and a waiver of premium rider?
A disability income benefit rider pays a monthly income to the insured if he or she becomes disabled. The waiver of premium rider waives the policy's premiums. A disability income benefit rider pays a monthly income to the insured if he or she becomes disabled. The waiver of premium rider waives the policy's premiums.
Six months ago, Bill surrendered his life insurance policy for its cash value. He now realizes his mistake and asks to reinstate his coverage at his then-attained age. The insurance company is obligated to do which of the following?
Do nothing as the company has no contractual obligation to the policy owner at this point. If Bill surrendered the policy for cash, the insurer cannot reinstate it. Had he elected a nonforfeiture option that retained some form of life insurance (e.g., reduced paid up), then he would have the right to seek policy reinstatement.
Some types of transfers are not "transfers for value" and therefore are not taxable. Which of the following transfers is taxable?
If a transfer is made to the beneficiary the death benefits are taxable.
If the policy loan amount plus interest owed is greater than the policy's cash value, which of the following will happen?
The insurer will cancel the policy
How long is the standard incontestability period?
Under most policies, the incontestability period is two years from the issue date
The life insurance Buyer's Guide helps prospective buyers determine
what kind of insurance they need, how much insurance they should buy, and how to find a suitable policy that best suits their needs and objectives.
Which of the following is NOT a factor in determining the tax treatment that applies to life insurance and annuity products? What does factor in determining?
what the owner does for a living; when and how the product benefits are received, who owns or controls the product & how the product is designed
Under variable life insurance plans, policy loans can be as high as what percent of the cash value?
75 to 90 percent: Loans taken from variable life policies are typically limited to 75 to 90 percent of the cash value.
A 10 percent premature distribution penalty tax may be imposed on distributions from a qualified plan before what age?
Distributions from a qualified plan before age 59.5 may be subject to a 10 percent penalty tax, unless the distribution qualifies for an exception (e.g., death, disability, medical expenses).
Which one of the following most accurately describes the income tax treatment of life insurance death benefits received by a terminally ill insured under the accelerated benefits rider?
Except in so-called transfer for value cases that are beyond the scope of this course, the qualifying insured pays no income tax on accelerated death benefit payments made prior to death.
Defined benefit and defined contribution plans each have certain advantages and disadvantages. Which one of the following comparisons is most correct?
Individual accounts are typically created for each employee participating in a defined contribution plan but not for defined benefit plans.; The employer's annual contribution to a defined benefit plan is determined by the amount of future benefits it agreed to fund. Under a defined contribution plan, employer contributions can be in the form of fixed contributions of cash. Contributions are based on a pre-determined formula that does not discriminate.
Which statement regarding the practice of backdating a life insurance application is NOT correct?
It effectively extends the incontestability period by adding the backdated period to the two-year incontestability period provided in the contract.
Which statement about credit life insurance is. correct
It is usually sold in the form of decreasing term insurance. The creditor is the policyowner and the borrower is the insured. As the borrower's loan balance decreases, the amount of coverage also decreases. Credit life insurance may be offered as group or individual insurance.
Melissa asks to continue her lapsed universal life insurance policy under the extended term option. How will the insurance company respond?
It will tell Melissa that her policy does not have the extended term option. Universal life policies normally do not contain the standard nonforfeiture options for policy lapses. Universal life policies normally do not contain the standard nonforfeiture options for policy lapses
Liam takes out a life insurance policy on his own life and names his son, Brian, as the irrevocable beneficiary. The policy has accumulated considerable cash value, and Liam wants to take out a loan against it. Which of the following statements is correct?
Liam cannot take a loan without Brian's consent; A policyowner cannot make a policy loan or surrender any part of the cash value of the policy without the consent of the irrevocable beneficiary, and the irrevocable beneficiary can be removed only with his or her signed consent.
Life insurance applies to business arrangements in all of the following ways, EXCEPT:
Life insurance is used to make up for the financial losses that might occur when a large-volume customer dies.
The IRS encourages the use of annuities for long-term retirement savings. Therefore, the IRS may impose a penalty tax on any withdrawal that occurs before which of the following?
The contract owner reaches age 59 1/2; Because the IRS encourages the use of annuities for long-term retirement savings, they may impose a penalty on any withdrawal that occurs before the contract owner reaches age 59.
If an insured, Nan, dies during her life insurance policy's grace period without having paid her premium, what is the insurance company's obligation?
The insurer pays the death benefit after first deducting the unpaid premium.
Which of the following is represented by the sum of the present values of all expected benefits under a life insurance policy?
The net single premium is the sum of the present values of all the expected benefits under the policy. That is, the net single premium is the premium that a person would need to pay in a lump sum to receive all the benefits promised in the policy if no insurer expenses were considered.
Which statement regarding the reduced paid-up life insurance nonforfeiture option is NOT correct?
The paid-up policy will not build any more cash value
If a policyowner partially surrenders an adjustable life insurance policy, which of the following happens?
The premium goes down
Which of the following best describes how group life insurance premiums are treated for tax purposes?
The premiums an employer pays for employee group life insurance are considered employee income.
In a cross-purchase buy-sell agreement involving three partners, what portion of the partnership does the business itself own?
Zero; In a cross-purchase buy-sell agreement, the business itself is not involved in the purchase agreement.
Which one of the following most correctly describes a life insurance policy dividend?
an amount returned to a policyowner out of an insurance company's surplus funds, effectively representing unused premiums
Which one of the following most correctly describes a life insurance policy dividend?
an amount returned to a policyowner out of an insurance company's surplus funds, effectively representing unused premiums; A policy dividend is not an insurer's revenues in excess of costs.
What is the type of insurance used most often in group life insurance plans?
annually renewable term
An annuity's accumulation period can be as short as a month or as long as many years. That statement describes which of the following?
immediate and deferred annuities; A fixed annuity is an annuity contract in which the insurer guarantees both the annuity principal and a specified rate of interest to be credited to the contract. With a variable annuity contract, the insurer makes no guarantee as to the annuity principal or the credited interest rate. Variable annuity premiums and contract values are invested in the insurer's separate accounts instead of its general account.
In addition to the four basic dividend options, various combination dividend options are available. Most combination dividend options involve which of the following?
one-year term life insurance
What type of life insurance policy distributes its surplus after the company accounts for liabilities, reserves, capital, and expenses?
participating policy
Which of the following is not a power granted to the North Carolina Commissioner of Insurance?
prosecuting individuals for violating insurance laws; The Commissioner reports violations concerning the insurance business to the state attorney general or other law enforcement officials, who are responsible for prosecuting criminal acts.
The basic agreement between the insured and the company, stating the company's promise to pay the policy's face amount (the death benefit) to the named beneficiary, is contained in which one of following parts of the life insurance policy?
the insuring clause
What is another name for the annuitization phase of an annuity contract?
the payout stage
Acme Insurance and Apogee Insurance agree to offer different premium rates for persons of equal risk within a particular class. They also agree to limit benefits paid to insureds within this class if the insureds live in certain counties of North Carolina. What are Acme and Apogee engaging in?
unfair and prohibited business practices; Acme and Apogee are agreeing to an unreasonable restraint of trade in the insurance business of North Carolina. Furthermore, they are engaging in unfair discrimination by charging persons of the same class and substantially equal risk different premium rates and by paying different benefits to persons in this class.
Under which one of the following circumstances are life insurance policy dividends taxable
when paid in cash to a third party
If a person buys a new life insurance policy to replace an existing one, the agent must give the applicant the Notice Regarding Replacement form no later than when?
when the application is taken; If a new life insurance policy will replace an existing one, the agent is required to give the applicant the Notice Regarding Replacement no later than at the time of application
When are partial withdrawals taxable
when withdrawals exceed the dollar amount of the premiums paid into the policy. Partial withdrawals are not taxable until they exceed the dollar amount of premiums that were paid into the policy. At that point, the withdrawals are taken from the interest earnings, which are taxable.
When Brady left Beta Industries to work for Alpha Corporation, he received a distribution of the entire account balance from his 401(k) plan on March 1. He now plans to roll it over into his IRA. How many days does Brady have to complete the rollover without penalty?
60
If Rick withdraws funds from his universal life insurance policy, what will be the effect on the policy's death benefit?
A withdrawal reduces the universal life insurance policy's death benefit by the amount of the withdrawal. It is not a loan, so there is no interest.
When completing an application for life insurance, Andrew states that he is 39 years old, though he is actually 45. When the insurer discovers this, what will it probably do?
Adjust the benefits; If the insured misstates his or her age on the life insurance application, and the premium was based on the misstatement, the insurer will adjust the benefits to reflect what the premium would have purchased for the correct age.
Agent Smith knows that his best friend, Agent Thomas, is embezzling money from clients. However, Agent Smith does not notify the Commissioner in order to protect his friend. What is the result?
Agent Smith's license will be revoked.; Anyone who believes that insurance fraud, embezzlement, or a violation of the insurance laws is being or has been committed is required to notify the Commissioner. A person's license will be revoked or not renewed if he or she willfully fails to comply with this requirement.
Which of the following requirements applies to a life insurance policy issued to a creditor-debtor group
All eligible debtors or classes of debtors are eligible for insurance; A group policy may be issued to a creditor to insure debtors, provided all of the creditor's debtors (or classes of debtors) are eligible for insurance.
In accordance with Section 1035 of the Tax Code, all the following exchanges are permitted on a tax-free basis EXCEPT
Sec. 1035 permits the exchange of any type of permanent life insurance policy for any type of annuity product.
Barry sells life insurance and annuities in North Carolina. Which of the following incentives can he lawfully offer to prospective clients?
Barry can offer token gifts, such as insurance company memorabilia, without violating North Carolina's rules regarding prohibited inducements.
Emil, an agent licensed in North Carolina, moves to a new home on April 30. He is required to notify the North Carolina Department of Insurance by what date?
May 10; An agent who changes his or her residential or e-mail address must notify the Insurance Department within ten days of the change
Under traditional whole life insurance plans, policy loans can be as high as what percent of the cash value?
Policy loans under traditional whole life insurance plans can be as high as 100 percent of the cash value
All of the following statements about the taxation of annuities are correct EXCEPT
Qualified annuities—those used in qualified plans—are taxed according to the rules that apply to life insurance.