CA Life and Health Chapter 10 Multiple Choice

What is the penalty for IRA distributions that are below the required minimum for the year? A) 10% B) 25% C) 50% D) 60%

C) 50%

What method is used to determine the taxable portion of each annuity payment? A) The exclusion ratio B) The excise ratio C) The annuity to age ratio D) The marginal tax formula

A) The exclusion ratio

What type of annuity will cause immediate taxation of the interest earned? A) Changing a settlement option B) Failing to make a planned contribution C) Surrendering the annuity for cash D) Using the contract as collateral for a loan

C) Surrendering the annuity for cash

What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences? A) Section 457 Deferred Compensation Plan B) Section 1035 Policy Exchange C) Modified Endowment Exchange D) 401(k) Plan

B) Section 1035 Policy Exchange

An annuitant dies before the effective date of a purchased annuity. Assuming the annuitant's wife is the beneficiary, what will occur? A) The premiums will decrease B) The interest will continue to accumulate tax deferred C) The interest will become immediately taxable D) The premiums will increase

B) The interest will continue to accumulate tax deferred

An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true? A) He will have to pay a penalty regardless of his age B) He will not have to pay a penalty, regardless of his age C) He cannot withdraw money from his MEC before age 59 1/2 D) He will have to pay a penalty if he is younger than 59 1/2

D) He will have to pay a penalty if he is younger than 59 1/2

Which of the following best describes taxation during the accumulation period of an annuity? A) The annuity is subject to state taxes only B) The annuity is subject to both state and federal taxation C) The growth is subject to immediate taxation D) Taxes are deferred

D) Taxes are deferred

Which of the following terms is used to name the nontaxed return of unused premiums? A) Surrender B) Dividend C) Premium return D) Interest

B) Dividend

The premiums paid by the employer in a business life insurance policy are A) Tax deductible by the employee B) Always taxable to the employee C) Never taxable to the employee D) Tax deductible by the employer

D) Tax deductible by the employer

Which of the following is true regarding taxation of dividends in participating policies? A) Dividends are not taxable B) Dividends are taxable only after a certain amount is accumulated annually C) Dividends are taxable in some life insurance policies and nontaxable in others D) Dividends are considered income for tax purposes

A) Dividends are not taxable

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT A) Employer contributions are tax deductible as ordinary business expense B) Funds accumulate on a tax-deferred basis C) Employee and employer contributions are not counted as income to the employee for income tax purposes D) At distribution, all amounts received by the employee are tax free

D) At distribution, all amounts received by the employee are tax free

An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits? A) The entire living benefit is considered taxable income B) A portion of the benefit up to a limit is tax free; the rest is taxable income C) Principal is tax free, but interest is taxed D) The entire benefit will be received tax free

B) A portion of the benefit up to a limit is tax free; the rest is taxable income

A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called A) Premature distribution B) Rollover C) 1035 exchange D) Qualified distribution

C) 1035 exchange

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions? A) Distributions cannot begin prior to age 72 B) There are no distributions C) Distributions are taxable D) Distributions are nontaxable

C) Distributions are taxable

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/ an A) Endowment B) Nonqualified annuity C) Modified endowment contract D) Accelerated benefit policy

C) Modified endowment contract

An IRA uses immediate annuities to pay out benefits; the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay? A) 50% tax on the amount not distributed as required B) No penalties, since the owner is older than 59 1/2 C) 10% for early withdrawal D) 15% for early withdrawal

A) 50% tax on the amount not distributed as required

In which of the following instances would the premium be tax deductible? A) Premiums paid by a mother on her son's policy B) Premiums paid by an employer on the life of a key person C) Premiums paid by an employer on a $30,000 group term life insurance plan D) Premiums paid by an individual on his/her own life insurance

C) Premiums paid by an employer on a $30,000 group term life insurance plan

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a A) Nonforfeiture option B) Rollover C) Settlement option D) Nontaxable exchange

C) Settlement option

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE? A) Policy loans are taxable distributions B) Accumulations are tax deferred C) Withdrawals are not taxable D) Distributions before age 59 1/2 incur a 10% penalty on policy gains

C) Withdrawals are not taxable

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? A) Interest only B) Both principal and interest C) Neither principal nor interest D) Principal only

A) Interest only

In life insurance policies, cash value increases A) Are only taxed when the owner reaches age 65 B) Grow tax deferred C) Are income taxable immediately D) Are taxed annually

B) Grow tax deferred

An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable A) Annuitant B) Spouse C) Charitable organization D) Dependents

B) Spouse

The advantage of qualified plans to employers is A) Taxable contributions B) Tax-deductible contributions C) Tax-free earnings D) No lump-sum payments

B) Tax-deductible contributions

If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate? A) Full annuity benefit B) No benefits C) Policy loans D) Accumulated cash value

D) Accumulated cash value

Which concept is associated with "exclusion ratio"? A) Dividend distribution B) How exclusion riders affect an insurance premium C) Policy provisions D) Annuities payments

D) Annuities payments

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? A) It is only taxable if the cash value exceeds the amount paid for premiums B) It is not considered taxable C) It is taxable only if it exceeds the amounts paid for premiums by 50% D) It is automatically taxable

A) It is only taxable if the cash value exceeds the amount paid for premiums

Which of the following is NOT true of Section 1035 Policy Exchanges? A) It requires an absolute assignment of the existing policy to the replacing company who surrenders the contract and issues a replacement policy B) It is an IRS Code which permits like kind exchanges of property C) It is typically used when exchanging or replacing a less competitive life policy with a more competitive life policy D) Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days

D) Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase? A) Withdrawn amounts are taxed on a last in, first out basis B) Withdrawn amount are taxed on a first in, last out basis C) Taxes are deferred on withdrawn amounts, but a flat penalty is charged D) Taxes are deferred on withdrawn amounts

A) Withdrawn amounts are taxed on a last in, first out basis

Which of the following is NOT an allowable 1035 exchange? A) Life insurance policy is exchanged for an annuity B) A whole life insurance policy is exchanged for a term insurance policy C) A whole life insurance policy is exchanged for a Universal life insurance policy D) An annuity is exchanged for another annuity

B) A whole life insurance policy is exchanged for a term insurance policy

During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal? A) Nontaxable principal may be withdrawn first, but the 10% penalty will be imposed if under age 59 1/2 B) Both interest and principal are taxed; no other penalties are imposed C) Neither interest nor principal is taxed, but penalties may be imposed D) Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2

D) Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2

Which of the following is NOT true regarding policy loans? A) An insurer can charge interest on outstanding policy loans B) A policy loan may be repaid after the policy is surrendered C) Money borrowed from the cash value is taxable D) Policy loans can be repaid at death

C) Money borrowed from the cash value is taxable

Which of the following describes the tax advantage of a qualified retirement plan? A) The earnings in the plan accumulate tax deferred B) Distributions prior to age 59 1/2 are tax deductible C) Employer contributions are deductible as a business expense when the employee receives benefits D) Employer contributions are not taxed when paid out to the employee

A) The earnings in the plan accumulate tax deferred

What is the main purpose of the Seven-pay test? A) It ensures that the policy benefits are paid out in 7 years B) It guarantees the minimum interest C) It determines if the insurance policy is a MEC D) It requires level premium payments for 7 years

C) It determines if the insurance policy is a MEC

Death benefits payable to a beneficiary under a life insurance policy are generally A) Exempt from income taxation if under $10,000 B) Exempt from income taxation if over $10,000 C) Not subject to income taxation by the Federal Government D) Subject to income taxation by the Federal Government

C) Not subject to income taxation by the Federal Government

An insured decides to surrender his $100,000 Whole Life Policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable? A) 50,000 B) 18,000 C) 15,000 D) 3000

D) 3000

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) 3000 B) 13,000 C) 10,000 D) 7000

A) 3000

Life insurance death proceeds are A) Generally not taxed as income B) Taxable to the extent that they exceed 7.5% of the beneficiary's adjusted gross income C) Taxed as capital gain D) Taxed as ordinary income

A) Generally not taxed as income

Which of the following is true regarding taxation of accelerated benefits under a life insurance policy? A) They are tax free to terminally ill insured B) They are always taxable to chronically ill insured C) They are always taxed D) There is a 10% penalty for early distribution of the death benefit

A) They are tax free to terminally ill insured

Which of the following statements is TRUE concerning whole life insurance? A) Dividend interest is not taxable B) Premiums are tax deductible C) Policy loans are tax deductible D) Lump-sum death benefits are not taxable

D) Lump-sum death benefits are not taxable

Which of the following statements regarding deferred compensation funds is INCORRECT? A) They can be established by employers B) They can be made with cash deposits to an annuity C) They generally provide additional retirement benefits D) They are usually qualified plans

D) They are usually qualified plans