Chapter 4 quiz

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

C. Dividend The return of unused premiums is called a dividend. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums.

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. Split-dollar plan. B. Stock redemption plan. C. Buy-sell agreement. D. Key person policy.

C. Buy-sell agreement. Buy-Sell agreements are used to contractually establish the intent of someone else to purchase the business upon the insured's death, and to set a value (purchase price) on a business. Life insurance is used to fund the buy-sell agreement. Any type of life insurance may be purchased to provide the necessary funds for the agreement. Insurance can be used to either fully or partially fund the buy-sell agreement.

What is the name of the insured who enters into a viatical settlement? A. Contingent B. Viatical broker C. Viator D. Third party

C. Viator Viator means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.

Which of the following types of insurance policies would perform the function of cash accumulation? A. Credit life B. Increasing term C. Whole life D. Term life

C. Whole life Life insurance is unique from other types of insurance in that it could perform the function of cash accumulation. Cash values are available in whole life policies.

All of the following are true of key person insurance EXCEPT A. The key employee is the insured. B. The plan is funded by permanent insurance only. C. There is no limitation on the number of key employee plans in force at any one time. D. The employer is the owner, payor and beneficiary of the policy.

B. The plan is funded by permanent insurance only. Key Person coverage may be funded by any type of life insurance.

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

D. The cash value available to the policyowner Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

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

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

A key person insurance policy can pay for which of the following? A. Hospital bills of the key employee B. Costs of training a replacement C. Loss of personal income D. Workers compensation

B. Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee.

Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? A. The employer is the owner and the key employee is the beneficiary. B. The key employee is the owner and beneficiary. C. The key employee is the owner and the employer is the beneficiary. D. The employer is the owner and beneficiary.

D. The employer is the owner and beneficiary. With the key-person coverage, the business (the employer) is the applicant, owner, premium payer, and beneficiary.

What is the purpose of key person insurance? A. To provide health insurance to the families of key employees B. To insure retirement benefits are available to all key employees C. To maintain an account that insures the owner of a company remains solvent D. To lessen the risk of financial loss because of the death of a key employee

D. To lessen the risk of financial loss because of the death of a key employee A business can suffer a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.

What percentage of a company's employees must take part in a noncontributory group life plan? A. 0% B. 25% C. 75% D. 100%

D. 100% If the employer pays all of the premium, all employees must be covered to avoid adverse selection.

Which of the following is NOT true of life settlements? A. They could be used for a key person coverage. B. They could be sold for an amount greater than the current cash value. C. They involve insurance policies with large face amounts. D. The seller must be terminally ill.

D. The seller must be terminally ill. With Life Settlements, unlike with viatical settlements, the seller does not need to be terminally ill. They usually involve life insurance policies with a face amount of $250,000 or more, "key-person" coverage, corporate owned policies, or policies representing excess coverage that is no longer needed, and could be sold for an amount greater than the current cash value.

An employee quits her job where she has a balance of $10,000 in her qualified plan. The balance was paid out directly to the employee in order for her to move the funds to a new account. If she decides to rollover her plan to a Traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover? A. $8,000, 30 days B. $10,000, 60 days C. $10,000, 30 days D. $8,000, 60 days

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

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

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

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 can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. B. She will still be covered under the group plan, but will have to pay an individual policy premium. C. She can only convert her coverage without proof of insurability if she has the master policy. D. She must apply for a new policy, which requires her to provide proof of insurability.

A. She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. If a person has life insurance under a group plan and then leaves the group, he/she may convert group coverage to individual coverage within 31 days of leaving the plan without proof of insurability.