Ch. 4 Taxes, retirement, and other insurance concepts
Which type of retirement account does not require the owner to start taking distributions at age 72? A Traditional IRA B Roth IRA C Nonqualified IRA D Standard IRA
Roth IRA
What percentage of a company's employees must take part in a noncontributory group life plan? A 0% B 25% C 75% D 100%
100%
A 403(b) plan, commonly referred to as a TSA, is available to be used by A Teachers and not-for-profit organizations. B Government workers. C Postal employees. D Self-employed persons.
Teachers and not-for-profit organizations.
All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT A The employer pays a bonus to a selected employee to fund the policy. B It is considered a nonqualified employee benefit. C The policy is owned by the company. D Any type of insurance policy may be used.
The policy is owned by the company.
What is the number of credits required for fully insured status for Social Security disability benefits? A 4 B 10 C 30 D 40
40
For a retirement plan to be qualified, it must be designed for the benefit of A Key employee. B Employer. C IRS. D Employees.
Employees
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 three employees. They would likely choose A 403(b) plan. B 401(k) plan. C HR-10 (Keogh Plan). D Section 457 Deferred Compensation Plan.
HR-10 (Keogh Plan).
Which of the following is an IRS qualified retirement program for the self-employed? A 401(k) B Keogh C Split Dollar D Buy and Sell Agreement
Keogh
Which of the following is the best reason to purchase life insurance rather than annuities? A To liquidate a sum of money over a period of years B To create regular income payments C To liquidate a sum of money over a lifetime D To create an estate
To create an estate
A key person insurance policy can pay for which of the following? A Costs of training a replacement B Loss of personal income C Workers compensation D Hospital bills of the key employee
Costs of training a replacement
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.
Not subject to income taxation by the Federal Government.
To attain currently insured status under Social Security, a worker must have earned at least how many credits during the last 13 quarters? A 4 credits B 6 credits C 10 credits D 40 credits
6 credits
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 Settlement option. B Nontaxable exchange. C Nonforfeiture option. D Rollover.
Settlement option.
If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is A Permanently insured. B Fully insured. C Partially insured. D Correctly insured.
Fully insured
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 $10,000 B $7,000 C $3,000 D $13,000
$3,000
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) A Aleatory contract. B Executive bonus. C Key person policy. D Fraternal association.
Executive bonus.
All of the following are characteristics of a group life insurance plan EXCEPT A The cost of the plan is determined by the average age of the group. B There is a requirement to prove insurability on the part of the participants. C The participants receive a Certificate of Insurance as their proof of insurance. D A minimum number of participants is required in order to underwrite the plan.
There is a requirement to prove insurability on the part of the participants.
A tax-sheltered annuity is a special tax-favored retirement plan available to A Certain age groups only. B Certain groups depending on factors such as race, gender, and age. C Certain groups of employees only. D Anyone.
Certain groups of employees only.
Which of the following terms is used to name the nontaxed return of unused premiums? A Surrender B Dividend C Premium return D Interest
Dividend
In group life policies, a certificate of insurance is given to A The group sponsor. B The insurance producer. C The policyholder to keep on file. D Each insured person.
Each insured person.
Who may contribute to a Keogh (HR-10) plan? A Partner with at least 5% ownership B Self-employed plumber C Manager of a store D Corporate executive
Self-employed plumber
An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n) A SEP. B 403(b) Plan (TSA). C Keogh Plan. D Roth IRA.
403(b) Plan (TSA)
Life insurance death proceeds are A Taxable to the extent that they exceed 7.5% of the beneficiary's adjusted gross income. B Taxed as a capital gain. C Taxed as ordinary income. D Generally not taxed as income.
Generally not taxed as income.
Which of the following is an example of liquidity in a life insurance contract? A The death benefit paid to the beneficiary B The flexible premium C The money in a savings account D The cash value available to the policyowner
The cash value available to the policyowner
The minimum number of credits required for partially insured status for Social Security disability benefits is A 4 credits. B 6 credits. C 10 credits. D 40 credits.
6 credits.
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.
Are subject to vesting requirements.
A partnership buy-sell agreement in which each partner purchases insurance on the life of each of the other partners is called a A Split-dollar plan. B Stock redemption plan. C Cross-purchase plan. D Key person plan.
Cross-purchase plan.
Traditional IRA contributions are tax deductible based on which of the following? A IRA limit B Owner's income C Age of the plan D Owner's age
Owner's income
All of the following statements concerning an employer sponsored nonqualified retirement plan are true EXCEPT A The employer can receive a current tax deduction for any contributions made to the plan. B The plan is a legal method of accumulating money for retirement needs. C The plan can discriminate as to who may participate. D The plan is not approved for favorable tax treatment by the IRS.
The employer can receive a current tax deduction for any contributions made to the plan.
An employee is insured under her employer's group life plan. If she terminates her group coverage, which of the following statements is INCORRECT? A The premium for individual coverage will be based upon the insured's attained age. B The insured may choose to convert to term or permanent individual coverage. C The insured would not need to prove insurability for a conversion policy. D The insured may convert coverage to an individual policy within 31 days.
The insured may choose to convert to term or permanent individual coverage.
Which of the following is NOT true of life settlements? A The seller must be terminally ill. B They could be used for a key person coverage. C They could be sold for an amount greater than the current cash value. D They involve insurance policies with large face amounts.
The seller must be terminally ill.
Social Security was created to provide all of the following benefits EXCEPT A Retirement income. B Unemployment income. C Survivor's benefits. D Disability income.
Unemployment income.
Group life insurance is a single policy written to provide coverage to members of a group. Which of the following statements concerning group life is CORRECT? A 100% participation of members is required in noncontributory plans. B Each member covered receives a policy. C Coverage cannot be converted when an individual leaves the group. D Premiums are determined by age, occupation, and individual underwriting.
100% participation of members is required in noncontributory plans.
If a retirement plan or annuity is "qualified," this means A It is approved by the IRS. B It has a penalty for early withdrawal. C It accepts after-tax contributions. D It is noncancellable.
It is approved by the IRS.
All of the following are business uses of life insurance EXCEPT A Funding against financial loss caused by the death of a key employee. B Funding business continuation agreements. C Funding against company's general financial loss. D Compensating executives.
Funding against company's general financial loss.
Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? A Premiums are tax deductible by the key employee. B Premiums are tax deductible as a business expense. C Premiums are taxable to the employee. D Premiums are not tax deductible as a business expense.
Premiums are not tax deductible as a business expense.
SIMPLE Plans require all of the following EXCEPT A No more than 100 employees. B Employees must receive a minimum of $5,000 in annual compensation. C At least 1,000 employees. D No other qualified plan can be used.
At least 1,000 employees.
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.
Tax deductible by the employer.
All of the following would be different between qualified and nonqualified retirement plans EXCEPT A Taxation on accumulation B Taxation of withdrawals C Taxation of contributions D IRS approval requirements
Taxation on accumulation
Which of the following is INCORRECT concerning a noncontributory group plan? A They help to reduce adverse selection against the insurer. B They require 100% employee participation. C The employer pays 100% of the premiums. D The employees receive individual policies.
The employees receive individual policies.
Which of the following best defines the "owner" as it pertains to life settlement contracts? A The insurance provider B The policyowner of the life insurance policy C A financial entity that sponsors the transaction D A fiduciary for the contract
The policyowner of the life insurance policy
Which of the following is NOT an example of a business use of Life Insurance? A Buy-sell Funding B Executive Bonuses C Key Person D Workers Compensation
Workers Compensation
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do 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? A $8,000, tax on growth only B $10,000, tax on growth only C $10,000, no tax consequence D $8,000, no tax consequence
$10,000, no tax consequence
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 withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on A None, because the beneficiary has not received the death benefit. B $261,000. C $239,000. D $11,000.
$11,000
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 A portion of the benefit up to a limit is tax free; the rest is taxable income. B Principal is tax free, but interest is taxed. C The entire benefit will be received tax free. D The entire living benefit is considered taxable income.
A portion of the benefit up to a limit is tax free; the rest is taxable income.
All of the following benefits are available under Social Security EXCEPT A Old-age and retirement benefits. B Disability benefits. C Death benefits. D Welfare benefits.
Welfare benefits.
An employee quits his job on May 15 and doesn't convert his Group Life policy to an individual policy for 2 weeks. He dies in a freak accident on June 1. Which of the following statements best describes what will happen? A The insurer will pay the death benefit minus one month's premium. B The insurer will pay nothing because the employee has terminated his group insurance and hasn't started the individual one. C The insurer will pay the full death benefit from the group policy to the beneficiary. D The insurer will pay a reduced death benefit to the beneficiary.
The insurer will pay the full death benefit from the group policy to the beneficiary.
All of the following are requirements of eligibility for Social Security disability income benefits EXCEPT A Fully insured status. B Waiting period of 5 months. C Being age 65. D Inability to perform any gainful work.
Being age 65.
All of the following statements are true regarding group insurance EXCEPT A Small groups such as labor unions are eligible for group insurance. B Participants in the policy each receive a policy. C The group sponsor is the policyholder. D Participants in a group insurance plan are issued certificates of insurance.
Participants in the policy each receive a policy.
An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses. What option could the insured utilize? A Estate liquidation B Nonpayment of premium C Change of beneficiary D Viatical settlement
Viatical settlement
In order to qualify for conversion from a group life policy that has been terminated to an individual policy of the same coverage, a person must have been insured under the group plan for how many years? A 1 B 3 C 5 D 10
5
Who is a third-party owner? A An irrevocable beneficiary B A policyowner who is not the insured C An insurer who issues a policy for two people D An employee in a group policy
A policyowner who is not the insured
All of the following are examples of third-party ownership of a life insurance policy EXCEPT A A company purchases a life insurance policy on their manager, who is an important part of the operation. B When an insured purchased a new home, the insured made an absolute assignment of a life insurance policy to the mortgage company. C An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan. D An insured couple purchases a life insurance policy insuring the life of their grandson.
An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan.
An employee quits his job and converts his group policy to an individual policy; the premium for the individual policy will be based on his A Experience Rating. B Group rate. C Insurer's scheduled rate. D Attained age.
Attained age.
An IRA purchased by a small employer to cover employees is known as a A 403(b) plan. B Simplified Employee Pension plan. C 401(k) plan. D Defined contribution plan.
Simplified Employee Pension plan.
All of the following statements are true regarding tax-qualified annuities EXCEPT A Annuity earnings are tax deferred. B They must be approved by the IRS. C Withdrawals are taxed. D Employer contributions are not tax deductible.
Employer contributions are not tax deductible.
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.
Free of federal income taxation.
An employee is joining a group insurance plan. In order to avoid having to prove insurability, what must the employee do? A Join during the open enrollment period B Provide medical records to the insurer C Sign a statement of continued good health D Nothing: proof of insurability is never required in group policies
Join during the open enrollment period
Which of the following statements concerning a Simplified Employee Pension plan (SEP) is INCORRECT? A SEPs allow the employer to make annual tax deductible contributions up to 25% of an employee's earned income. B SEPs have a higher tax deductible contribution limit than an IRA. C Employer contributions are not included in the employee's gross income. D SEPs are suitable for large companies.
SEPs are suitable for large companies.
Which of the following would be considered a nonqualified retirement plan? A 401(k) B Keogh plan C Roth IRA D Split-dollar plan
Split-dollar plan
A 60-year-old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true? A The amount of the distribution is reduced by the amount of a 20% withholding tax. B No taxes are due since the plan participant is over age 59 1/2. C There is a 10% early withdrawal penalty. D The amount distributed is subject to ordinary income tax.
The amount of the distribution is reduced by the amount of a 20% withholding tax.
All of the following are true of key person insurance EXCEPT A The plan is funded by permanent insurance only. B There is no limitation on the number of key employee plans in force at any one time. C The employer is the owner, payor and beneficiary of the policy. D The key employee is the insured.
The plan is funded by permanent insurance only.
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 qualified plan for a small business
How are contributions to a tax-sheltered annuity treated with regards to taxation? AThey are taxed as income for the employee. BThey are taxed as income for the employee, but are tax free upon withdrawal. CThey are not included as income for the employee, but are taxable upon distribution. DThey are never taxed.
They are not included as income for the employee, but are taxable upon distribution. D They are never taxed.
Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings? A Employer's matching contribution can be 50% of employee's salary. B 75% of employee's contributions are taxed. C They are tax deferred until withdrawn. D Taxes must be paid in full.
They are tax deferred until withdrawn.
A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then A The benefit is received tax free. B The benefit is subject to the exclusionary rule. C IRS has no jurisdiction. D The benefit is received as taxable income.
The benefit is received tax free.
In which of the following instances would the premium be tax deductible? A Premiums paid by an employer on a $30,000 group term life insurance plan for employees B Premiums paid by an individual on his/her own life insurance C Premiums paid by a mother on her son's policy D Premiums paid by an employer on the life of a key person
Premiums paid by an employer on a $30,000 group term life insurance plan for employees
If an employee wants to enter the group outside of the open enrollment period, to reduce adverse selection, the insurer may A Increase medical requirements on existing members. B Require evidence of insurability. C Require a higher premium. D Prolong the open enrollment period.
Require evidence of insurability.
In life insurance policies, cash value increases A Are income taxable immediately. B Are taxed annually. C Are only taxed when the owner reaches age 65. D Grow tax deferred.
Grow tax deferred.
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.
Which of the following is NOT true regarding policy loans? A A policy loan may be repaid after the policy is surrendered. B Money borrowed from the cash value is taxable. C Policy loans can be repaid at death. D An insurer can charge interest on outstanding policy loans.
Money borrowed from the cash value is taxable.
An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy? A She will still be covered under the group plan, but will have to pay an individual policy premium. B She can only convert her coverage without proof of insurability if she has the master policy. C She must apply for a new policy, which requires her to provide proof of insurability. D She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan.
She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan.
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as A Juvenile protection provision. B Survivor protection. C Life planning. D Survivorship insurance.
Survivor protection.
In a direct rollover, how is the money transferred from one plan to the new one? A From the participant to the new plan B From the original plan to the original custodian C From trustee to trustee D From trustee to the participant
From trustee to trustee
Which of the following is an eligibility requirement for all Social Security Disability Income benefits? A Have attained fully insured status B Be disabled for at least 1 year C Have permanent kidney failure D Be at least age 50
Have attained fully insured status
Which of the following statements about group life is correct? A The premiums are higher than in an individual policy because there is no medical exam. B The group sponsor receives a Certificate of Insurance. C The policy can be converted to an individual term insurance policy. D The cost of coverage is based on the ratio of men and women in the group.
The cost of coverage is based on the ratio of men and women in the group.
All of the following would be eligible to establish a Keogh retirement plan EXCEPT A A hair dresser who operates her business at her house. B The president and employee of a family corporation. C A sole proprietor of a service station who employs four employees. D A sole proprietor of film development store with no employees.
The president and employee of a family corporation.
Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? A The key employee is the owner and beneficiary. B The key employee is the owner and the employer is the beneficiary. C The employer is the owner and beneficiary. D The employer is the owner and the key employee is the beneficiary.
The employer is the owner and beneficiary.
What does "liquidity" refer to in a life insurance policy? A The death benefit replaces the assets that would have accumulated if the insured had not died. B The policyowner receives dividend checks each year. C The insured receives payments each month in retirement. D Cash values can be borrowed at any time.
Cash values can be borrowed at any time.
In a single employer group plan, what is the name of the policy issued to the employer? A Certificate of authority B Master contract C Certificate of insurance D Employer-insurer contract
Master contract
Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated? A Those who have dependents B Those who have no history of claims C Those who have been insured under the plan for at least 5 years D Those who have worked in the company for at least 3 years
Those who have been insured under the plan for at least 5 years
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 a A Key person policy. B Split-dollar plan. C Stock redemption plan. D Buy-sell agreement.
Buy-sell agreement.
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 cannot withdraw money from his MEC before age 59½. B He will have to pay a penalty if he is younger than 59½. C He will have to pay a penalty regardless of his age. D He will not have to pay a penalty, regardless of his age.
He will have to pay a penalty if he is younger than 59½.
What is the main purpose of the Seven-pay Test? A It requires level premium payments for 7 years. B It ensures that the policy benefits are paid out in 7 years. C It guarantees the minimum interest. D It determines if the insurance policy is a MEC.
It determines if the insurance policy is a MEC.
Which of the following terms means a result of calculation based on the average number of months the insured is projected to live due to medical history and mortality factors? A Risk exposure B Morbidity C Life expectancy D Mortality rate
Life expectancy
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.
Lump-sum death benefits are not taxable.
All of the following are general requirements of a qualified plan EXCEPT A The plan must provide an offset for social security benefits. B The plan must be communicated to all employees. C The plan must be for the exclusive benefits of the employees and their beneficiaries. D The plan must be permanent, written and legally binding.
The plan must provide an offset for social security benefits.
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 $3,000
$3,000
What type of life insurance is most commonly used for group plans? A Decreasing term B Annually renewable term C Whole life D Flexible premium whole life
Annually renewable term
All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT A Funds accumulate on a tax-deferred basis. B Employee and employer contributions are not counted as income to the employee for income tax purposes. C At distribution, all amounts received by the employee are tax free. D Employer contributions are tax deductible as ordinary business expense.
At distribution, all amounts received by the employee are tax free.
Which of the following is true regarding taxation of dividends in participating policies? A Dividends are taxable only after a certain amount is accumulated annually. B Dividends are taxable in some life insurance policies and nontaxable in others. C Dividends are considered income for tax purposes. D Dividends are not taxable.
Dividends are not taxable.
Which of the following applicants would NOT qualify for a Keogh Plan? A Someone who works for a self-employed individual B Someone who works 400 hours per year C Someone who has been employed for more than 12 months D Someone who is over 25 years of age
Someone who works 400 hours per year
All of the following employees may use a 403(b) plan for their retirement EXCEPT A A part-time classroom aide. B The vice president of a charitable organization. C The CEO of a private corporation. D A school bus driver.
The CEO of a private corporation.
In a life settlement contract, whom does the life settlement broker represent? A The owner B The insurer C The beneficiary D The life settlement intermediary
The owner
Which of the following insurance arrangements will be appropriate for a parent buying a life insurance policy on a child where the parent is the policyowner? A Third-party ownership B An irrevocable beneficiary C A buy-sell agreement D Family term rider
Third-party ownership
