Chapter 7: Unknowns

ERISA requires which of the following? A - Qualified plans must meet certain minimum standards B - Employers must be able to benefit equally with the employees and beneficiaries C - That every plan has the same vesting schedule D - That employers establish pension plans for their employees

A - Qualified plans must meet certain minimum standards ERISA requires that qualified plans must meet certain minimum standards.

If no __________ is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate. A Relative B Beneficiary C Insured D Spouse

B Beneficiary

Nancy has an IRA and wants to move her funds directly from one financial institution to another while still maintaining the assets within an IRA account. How many times can she do this? A - Once every 6 months B - As often as she likes C - Once a year D - Once a quarter

B - As often as she likes This describes an IRA transfer which can be done as often as she wants.

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________. A Income tax-deductible B Income tax penalty-free C Income tax-free D Income tax-deferred

C Income tax-free

If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period. A - Non-guaranteed B - Exclusion C - Pre-tax D - After-tax

D - After-tax Only the after-tax investment is recovered income tax-free from an annuity that is annuitized. It represents a return of the cost basis.

Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified. A. Taxable B. Tax free up to $50,000 C. Taxable to the extent it exceeds 7.5% of AGI D. Tax free

D. Tax free

Why are dividends not taxable as income when paid out to a participating policyholder? A. Because they are often the sole source of a policyholders' income B. They are paid from a non-profit organization C. To create parity with nonparticipating policies under the tax code D. They represent a return of a portion of the premium paid

D. They represent a return of a portion of the premium paid

Any employee-paid group life insurance premiums are __________. a). Not tax-deductible B - Tax-deductible C - Tax-deferred D - Tax-exempt

a). Not tax-deductible Any employee-paid group life insurance premiums are not tax-deductible.

H has an annuity funded with pre-tax dollars. So far H has placed $10,000 into the policy and it is now worth $25,000. If H cashes out the annuity, how much is taxable? A $25,000 B $10,000 C Zero D $15,000

A $25,000

All employer-paid premiums for amounts above $_________ of group life insurance are reported as taxable income to the employee. A $50,000 B $100,000 C $75,000 D $25,000

A $50,000

Life insurance policy premiums establish a _________ in the policy for tax purposes. A Cost basis B Loan C Dividend D Cash value

A Cost basis

To eliminate the use of life insurance as a short-term, tax-free savings vehicle, what tax law change took place? A The Modified Endowment Contract (MEC) rules were put into place B Loan interest became tax-deductible C Employer-paid premiums were made non-tax-deductible D Death benefits became income-taxable

A The Modified Endowment Contract (MEC) rules were put into place

When may an employer deduct the premiums it pays for an employee's life insurance benefit? A - As long as the business does not derive a direct benefit from the policy B - An employer cannot ever deduct premiums it pays for an employee's life insurance benefit C - Employers can always deduct the premiums it pays for an employee's life insurance benefit D - If the business does not receive more than 50% of the death benefit

A - As long as the business does not derive a direct benefit from the policy As long as the insurance death benefit is not payable to the employer when an employee dies, the premiums paid for the life insurance are deductible to the business.

All of the following are ways in which the 10% additional tax can be waived, except: A - Buying a new car B - Qualified education costs C - Disability D - First-time homebuyers

A - Buying a new car Distributions taken prior to 59 1/2 are subject to taxation and a 10% penalty. The penalty may be waived for death, disability, qualified education costs, medical expenses, first-time homebuyers, and substantially equal payments over life expectancy.

The exclusion ratio states that once the entire cost basis has been recovered from a non-qualified annuity income benefit payout then any further payments are __________. A - Fully taxable since the excess payments must represent only earnings B - Taxed at the favorable annuity continuation income rates C - Still tax favored for annuitants over the age of 70 D - Taxed as capital gain but only 50% of the gain is applied

A - Fully taxable since the excess payments must represent only earnings Once the entire cost basis is recovered than any remaining payments are fully taxable as ordinary income.

Qualified pension and profit-sharing plans were created by Congress to: A - Help employees accumulate assets for retirement and provide tax advantages for contributions made by employers B - Reduce retiree dependence on Social Security C - Help banks, insurance companies, and investment firms increase their asset base D - Help educate employees about the benefits of saving for his/her future

A - Help employees accumulate assets for retirement and provide tax advantages for contributions made by employers Qualified pension and profit-sharing plans were created by Congress to help employees accumulate assets for retirement and provide tax advantages for contributions made by employers.

Roth IRAs and Traditional IRAs have only one of the following in common. Which one is it? A - If a person owns a traditional IRA and a Roth IRA, the combined contributions to both cannot exceed the annual maximum IRA contribution for one IRA B - Someone with earned income over 70 1/2 can establish and fund one C - The account has to be open for at least 5 years and the owner at least 59 1/2 for proceeds to be received tax free D - There are no required minimum distributions

A - If a person owns a traditional IRA and a Roth IRA, the combined contributions to both cannot exceed the annual maximum IRA contribution for one IRA

In which of the following circumstances is an annuity's tax-deferral benefit lost? A - The annuity is owned by a corporation B - The annuity has a long-term care rider C - The annuity is held beyond age 70 1/2 D - The annuity is owned by someone other than the annuitant

A - The annuity is owned by a corporation If a corporation owns an annuity, the tax-deferral benefit is lost. Tax-deferral of annuity earnings is only for natural persons.

To be a qualified accelerated death benefit it must meet all of the following criteria, except: A - The benefit amount cannot exceed the lesser of $50,000 or 7.5% of AGI B - The amount of the benefit must at least be equal to the present value of the reduced death benefit remaining after payment of the accelerated benefit C - A physician must give a prognosis of 24 months or less life expectancy for the named insured D - The insurer provides a monthly report to the insured showing the amount paid and the amount of benefit remaining in the life insurance policy

A - The benefit amount cannot exceed the lesser of $50,000 or 7.5% of AGI

A non-school employer can set up a TSA plan for their employees under which of the following IRC section? A. 501(c)(3) B. 401(k) C. 408(a) D. 403(b)

A. 501(c)(3) A non-school employer that is a non-profit organization can set up a TSA for its employees under IRC 501(c)(3).

All of the following tax-free exchanges of life insurance and annuities are permitted, EXCEPT: A. Annuity to life insurance B. Life insurance to long term care insurance C. Annuity to long term care insurance D. Life insurance to annuity

A. Annuity to life insurance

A Roth IRA is unique for which of the following reasons? A. Contributions are nondeductible and distributions are nontaxable B. Contributions are nondeductible and distributions are taxable C. Contributions are tax deductible and distributions are nontaxable D. Contributions are tax-deductible and distributions are taxable

A. Contributions are nondeductible and distributions are nontaxable

The federal law that governs the rights of plan participants and beneficiaries of most employer-sponsored benefit plans is ____________. A. ERISA B. HIPAA C. FCRA D. COBRA

A. ERISA The Employee Retirement Income Security Act defines the manner in which most employee benefit plans must be administered. Plans operated by federal, state, and local government agencies are generally exempt from the provisions of ERISA.

A SIMPLE plan may be established either as a(n): A. IRA or 401(k) plan B. TSA or Keogh plan C. 401(k) or Keogh plan D. IRA or TSA plan

A. IRA or 401(k) plan A SIMPLE plan may be established either as an IRA or a 401(k) plan.

When the dividends received exceed the total premium paid in for the life insurance policy, the excess dividend is considered __________. A. Taxable Income B. Tax Free C. Dividend Income D. Capital Gain

A. Taxable Income

All of the following will determine whether or not an IRA contribution is deductible, except: A. Whether the IRA owner is over a specified age B. Whether the IRA owner is a participant in an employer sponsored retirement plan C. Whether the IRA owner chooses a Roth or a Traditional IRA D. Whether the IRA owner has gross income that exceeds a certain amount

A. Whether the IRA owner is over a specified age An individual's age does not determine whether or not a contribution is deductible. Age may determine whether a contribution can be made, but not if it is deductible. All other choices determine if the contribution is deductible or nondeductible.

G, being undecided on what to do with $100,000 just received on F's policy, decides to leave the proceeds on deposit with the insurer at interest. The rate being paid is 5%. In one year, what amount will be taxable to G? A Zero B $5,000 C $105,000 D $500

B $5,000 While the lump sum death benefit is not income taxable, the interest paid on the amount left on deposit with the insurer is, whether taken in cash or left on deposit.

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A Any amount that represents an excess over cost basis that has been held for over 1 year is treated as long-term capital gain with the balance considered short-term capital gain B Any amount received in excess of its cost basis is taxable as ordinary income C The amount received in excess of cost basis is taxed as a long-term capital gain D The entire amount received is subject to ordinary income tax

B Any amount received in excess of its cost basis is taxable as ordinary income

A qualified pension plan must meet ___________ requirements. A COBRA B ERISA C OSHA D SEC

B ERISA

All of the following regarding employer group life insurance are true, except: A Premiums paid by an employer are tax-deductible to the business as an ordinary and necessary business expense B Employee-paid premiums are tax-deductible to the employee C Death benefit proceeds paid to an employee's named beneficiary are received income tax-free D Employer-paid premiums do not constitute taxable income to the employee unless the death benefit exceeds $50,000

B Employee-paid premiums are tax-deductible to the employee

Which of the following best defines the 'Cost Recovery Rule'? A When a policy is surrendered, the earnings within the policy are accounted for first B Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender C The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender D The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy

B Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE? A Taxable distributions include cash value surrenders and policy loans B If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment C Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains D The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy

B If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

When would a life insurance policy loan be subject to income taxation? A When the policy loan is greater than the premiums paid into the policy B If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis C When any part of the policy loan is used to pay for the policy's premium D When the outstanding loan is in excess of $10,000

B If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis

During the accumulation phase of an annuity, if the contract owner dies and the annuitant is someone other than the owner, the value of the annuity is: A 100% taxable to the beneficiary B Included in the owner's estate for valuation C Included in the beneficiary's estate for immediate estate taxation D Paid out income tax-free to the beneficiary

B Included in the owner's estate for valuation

Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate? A A business partner owns a life insurance policy on the other partner that died B The insured is also the policyowner C The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up D An employer owns a policy on the life of a key employee who dies

B The insured is also the policyowner

H is employed by a company that provides group life insurance. The amount provided is $150,000. How much, if any, of the coverage is going to be reported as taxable income to H? A The premium paid for $50,000 B The premium paid for $100,000 C The premium paid for $75,000 D Zero

B The premium paid for $100,000 Employer paid premiums in connection with group life insurance does not constitute taxable income to the employee unless the death benefit paid for by the employer exceeds $50,000. All employer paid premiums for amounts above $50,000 are reported as taxable income to the employee.

What is the main purpose that IRC section 1035 was enacted? A To allow policyowners to obtain features and benefits not available on their existing policies B To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one C To allow consumers to get better performance from a new policy D To allow consumers to obtain less expensive life insurance policies

B To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one

All of the following are times in which life insurance policy cash values can become taxable, except: A At policy surrender B When a policy loan is taken out C When the policy is sold D If the policy fails to meet the IRS definition of life insurance Sorry! Policy loans do not trigger a taxable event.

B When a policy loan is taken out

Unless an exception applies, life insurance proceeds are income taxable in which of the following circumstances? A When a policy is used for collateral for a bank loan B When a transfer of ownership takes place while the insured was alive C When there is a change of beneficiary from a non-policyowner to the policyowner D If a transfer of ownership occurs after the insured dies

B When a transfer of ownership takes place while the insured was alive

What happens if a traditional IRA account owner fails to start taking required minimum distributions on time or for the proper amount? A - Withholdings go from 20% to 30% for each and every future withdrawal B - 50% tax penalty on the excess accumulation C - Investment choices get restricted until the account is back in compliance D - The tax rate that normally applies doubles

B - 50% tax penalty on the excess accumulation Withdrawals, known as Required Minimum Distributions (RMDs), from the account must start by April 1 of the year following the year the owner turns age 70 1/2. Failure to take all or part of an annual RMD incurs a 50% penalty tax on the amount not distributed.

Which of the following statements about Section 1035 transactions is TRUE? A - Any surrender charges satisfied on the old policy carry over into the new policy B - A new application is required when moving into a new life insurance policy C - All surrender charges are waived on any existing policy D - A 1035 allows an annuity to be exchanged for life insurance

B - A new application is required when moving into a new life insurance policy If an existing policy has a surrender charge, it is still applied. The new policy requires evidence of insurability, and new surrender charges will apply to the new policy if it has them.

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A - The entire amount received is subject to ordinary income tax B - Any amount received in excess of its cost basis is taxable as ordinary income C - The amount received in excess of cost basis is taxed as a long-term capital gain D - Any amount that represents an excess over cost basis that has been held for over 1 year is treated as long-term capital gain with the balance considered short-term capital gain

B - Any amount received in excess of its cost basis is taxable as ordinary income The same tax rules apply to both fixed and variable annuities. The funds received in excess of the cost basis are taxable as ordinary income.

When an employee receives a fixed and known benefit at retirement, it comes from a(n) __________ plan. A - Defined Contribution B - Defined Benefit C - SEP-IRA D - Profit-Sharing

B - Defined Benefit Defined benefit plans pay out a fixed and known benefit to retirees based on a formula considering years of employment and highest earnings.

The exclusion ratio states that once the entire cost basis has been recovered from a non-qualified annuity income benefit payout then any further payments are __________. A - Still tax favored for annuitants over the age of 70 B - Fully taxable since the excess payments must represent only earnings C - Taxed as capital gain but only 50% of the gain is applied D - Taxed at the favorable annuity continuation income rates

B - Fully taxable since the excess payments must represent only earnings Once the entire cost basis is recovered than any remaining payments are fully taxable as ordinary income.

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE? A - Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains B - If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment C - The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy D - Taxable distributions include cash value surrenders and policy loans

B - If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

When the dividends received exceed the total premium paid in for the life insurance policy, the excess dividend is considered __________. A - Tax Free B - Taxable Income C - Capital Gain D - Dividend Income

B - Taxable Income When the total dividend paid out exceeds the total premium paid in then the dividend becomes taxable as ordinary income.

If Robert wishes to cash out his annuity at age 70 after having it for over 40 years, what should he know about prior to doing it? A - He will pay a surrender charge B - The amount of tax-deferred earnings will now become taxable C - He will receive only the principal amount he invested D - Because he is 70, he is not subject to income taxes

B - The amount of tax-deferred earnings will now become taxable

Death benefits are paid to the estate of the policyowner/insured in which of the following situations? A - The contingent beneficiary has outlived the primary beneficiary B - The beneficiary is the estate C - The primary beneficiary is a minor D - The primary beneficiary is the deceased's spouse

B - The beneficiary is the estate

If dividends are left on deposit with an insurer to earn interest: A - The dividend is taxable, but the interest is tax-free B - The dividend is tax-free, but the interest is taxable C - The interest is tax-free as well as the dividend D - The dividend is taxable as well as the interest

B - The dividend is tax-free, but the interest is taxable Interest paid by insurers on dividends left on deposit is taxable as income.

All of the following are TRUE regarding non-qualified retirement plans, except: A. Earnings can be tax deferred until withdrawn B. Contributions are immediately tax deductible C. Contributions are not tax deductible D. Upon withdrawal only the earnings are subject to taxation

B. Contributions are immediately tax deductible Because the plan is non-qualified many of the tax benefits are not available, such as tax deductibility of contributions.

Which of these is a qualified plan designed specifically for unincorporated self-employed individuals? A. 403(b) Plan B. Keogh Plan C. IRA D. Tax-Deferred Annuity

B. Keogh Plan The key element in the description is a plan specifically designed for self-employed individuals.

An Individual Retirement Account (IRA) may be funded with all of the following, except: A. Mutual Funds B. Life Insurance C. Annuities D. Certificates of Deposit (CDs)

B. Life Insurance Life insurance does not meet the IRS qualifications for funding an IRA.

If a corporation owns an annuity, what is the tax ramifications? A. Since the corporation is a non-natural person there is no tax penalty for early withdrawal B. There is no tax deferral benefit on any earnings C. The premiums are tax deductible as an ordinary and necessary business expense D. Any withdrawals are taxed at the favorable corporate tax rate

B. There is no tax deferral benefit on any earnings Any annuity policy earnings are not tax deferred rather they are taxed each and every year.

Which of the following statements about Section 1035 transactions is TRUE? A Any surrender charges satisfied on the old policy carry over into the new policy B A 1035 allows an annuity to be exchanged for life insurance C A new application is required when moving into a new life insurance policy D All surrender charges are waived on any existing policy

C A new application is required when moving into a new life insurance policy

Withdrawals from a non-qualified annuity that is not part of an annuitization are taxed on which of the following methods? A First-in, last-out basis (FIFO) B Weighted average C Last-in, first-out basis (LIFO) D Cost basis identification

C Last-in, first-out basis (LIFO)

Janelle is the beneficiary of a life insurance policy in which the insured has died. What is the only way she can receive the claim amount totally free from income taxes? A Select the 10-year period certain settlement option B Elect the life only settlement option C Receive the claim amount in a lump sum D Choose the interest income only settlement option

C Receive the claim amount in a lump sum

By what means is a transfer for value made? A By way of collateral assignment B By requesting a change in the beneficiary designations C Through an absolute assignment D By a partial withdrawal

C Through an absolute assignment

All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee. A - $25,000 B - $100,000 C - $50,000 D - $150,000

C - $50,000 Premiums paid for death benefits exceeding $50,000 are taxable as income to the employee for the year in which the premium was paid.

Sherman is the custodian at an elementary school and participates in its qualified retirement plan. This describes a: A - Simplified Employee Pension B - HR-10 Keogh Plan C - 403(b) Tax-Sheltered Annuity D - SIMPLE IRA

C - 403(b) Tax-Sheltered Annuity

If a policyowner of a life insurance policy accidently pays in premiums in excess of the MEC guidelines, the insurer can refund the excess within ______ days of the end of the contract year. A - 10 B - 45 C - 60 D - 30

C - 60

Which of the following persons may contribute to an HR-10 Keogh Plan? A - An unemployed person B - A corporate executive C - A self-employed musician D - An employee of the YMCA

C - A self-employed musician An HR-10 Keogh plan is designed to provide unincorporated self-employed individuals the opportunity to fund retirement in a tax-advantaged method.

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A - Any amount that represents an excess over cost basis that has been held for over 1 year is treated as long-term capital gain with the balance considered short-term capital gain B - The entire amount received is subject to ordinary income tax C - Any amount received in excess of its cost basis is taxable as ordinary income D - The amount received in excess of cost basis is taxed as a long-term capital gain

C - Any amount received in excess of its cost basis is taxable as ordinary income The same tax rules apply to both fixed and variable annuities. The funds received in excess of the cost basis are taxable as ordinary income.

Which of the following statements regarding Roth IRAs is FALSE? A - There are no Required Minimum Distribution (RMD) age or amounts B - Contributions are not tax-deductible C - As long as the account owner is under age 59 1/2 there is no maximum contribution limit D - If the account owner is at least 59 1/2 and has held the account assets at least 5 years, there is no tax on earnings withdrawn

C - As long as the account owner is under age 59 1/2 there is no maximum contribution limit Roth IRAs are subject to the same maximum contribution limits as other IRAs.

All of the following statements about Group Life Insurance are true, except: A - Employees are taxed on any premiums paid on insurance in excess of $50,000 B - Employer paid premiums are tax deductible C - Employees receive a tax deduction for employer paid premiums D - Employee paid premiums are not tax deductible

C - Employees receive a tax deduction for employer paid premiums Employer, not employee, paid premiums are tax deductible. Only when the insurance benefit exceeds $50,000 does the employee have to report it as taxable income.

hich of the following best defines the 'Cost Recovery Rule'? A - When a policy is surrendered, the earnings within the policy are accounted for first B - The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy C - Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender D - The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender

C - Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender The 'Cost Recovery Rule' stipulates that upon a partial withdrawal of cash or the surrender of a policy, the cash value in excess of premiums paid (cost basis) is subject to income tax.

A SEP uses employer funded _______ accounts. A - 401(k) B - Profit Sharing C - IRA D - Defined Benefit

C - IRA Section 501(c)(3) is the section of tax code that defines what a non-profit organization is. Section 403(b) is the section of tax code that specifies who may participate in a 403(b) retirement plan.

In which of the following situations will the annuity's value be included in the deceased annuitant's estate? A - If the annuitant dies while receiving income from a life only settlement option B - If the annuitant dies in year 11 when receiving a life and 10 year period certain payout from a variable annuity C - If the annuitant dies during the annuity or payout phase with any remaining value D - If the annuitant dies just after cashing in check number 180 from a 15-year period certain payout that was funded with $100,000

C - If the annuitant dies during the annuity or payout phase with any remaining value If the annuitant dies during the payout phase of an annuity with any remaining values, those values will be included in the annuitant's estate. For all of the other answer choices, there would be zero remaining value and therefore nothing would be left to include in the estate.

If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC). A - Endowment contract B - Annuity C - Life insurance policy D - Viatical settlement

C - Life insurance policy

ERISA sets ________ standards for pension plans in private industry. A - Flexible B - Voluntary C - Minimum D - Maximum

C - Minimum ERISA sets minimum standards.

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit: A - Pays no income tax on any portion of the proceeds B - Pays income tax on any gains using the deceased's income tax bracket C - Pays income tax on any gains at his or her own income tax rate D - Pays taxes based on the estate tax rate of the deceased

C - Pays income tax on any gains at his or her own income tax rate When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit must pay income tax on any gain from the policy at his or her own income tax rate.

ERISA sets minimum standards for pension plans primarily in the ______ industry. A - Public and Private B - Quasi-government C - Private D - Public

C - Private ERISA focuses in on the private industry pension plans.

Which of the following policies would be deemed a MEC? A - 10-pay Whole Life B - Variable Universal Life C - Single Premium Whole Life D - Universal Life

C - Single Premium Whole Life Since a single premium life insurance policy clearly does not pass the 7-pay test, it will automatically be deemed a MEC.

Which is true regarding the taxation of the cash value in a Universal Life Policy prior to withdrawal? A - Tax free B - Tax interpolated C - Tax deferred D - Tax deductible

C - Tax deferred All life insurance cash value accumulations are tax deferred. The primary benefit of Universal Life is the potential of a higher interest crediting rate than the fixed rate in whole life policies.

Qualified plan employer contributions are tax deductible when _________. A - The employee dies B - The employee makes a contribution C - They are made D - The employee retires

C - They are made

How are employer paid premiums on a group life insurance plan treated for tax purposes? A. A barter transaction B. As compensation in lieu of cash C. As an ordinary and necessary business expense D. As a personal expense paid on behalf of the employee

C. As an ordinary and necessary business expense

A life insurance 1035 exchange can only be completed after: A. All surrender charges have disappeared B. Policy conversion has taken place C. Proof of insurability has been provided and accepted D. The policy has been declared a MEC

C. Proof of insurability has been provided and accepted A life insurance 1035 exchange requires that the insured prove insurability in order to obtain new life insurance as part of the transaction.

What is "defined" in a defined contribution plan? A. The employer's percentage or amount of distribution to an employee from the plan B. The percentage of the employee's income provided as life insurance to the employee C. The percentage or amount of an employee's deposits to the plan D. The percentage or amount of an employee's distributions from the plan

C. The percentage or amount of an employee's deposits to the plan In a defined contribution plan, the employee chooses how much of his/her pay to contribute to the plan each payroll period. The employer deducts that amount from the employee's pay before income tax is calculated and remits that amount to the plan's custodian for the benefit of the employee.

If a policyowner of a life insurance policy accidently pays in premiums in excess of the MEC guidelines, the insurer can refund the excess within ______ days of the end of the contract year. A 30 B 45 C 10 D 60

D 60

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit must pay income tax on any gain from the policy at _________ tax rates. A Short-term capital gain B Alternative Minimum Tax (AMT) C Long-term capital gain D Ordinary income

D Ordinary income

Life insurance will be considered 'incidental' to a qualified plan if the insurance amount is not more than ________ times the expected monthly benefit amount. A - 150 B - 250 C - 200 D - 100

D - 100 Generally, life insurance will be considered 'incidental' to a qualified plan if no more than 50% of the contributions are used to pay insurance premiums, and the insurance amount is not more than 100 times the expected monthly benefit amount.

To qualify for a tax-free accelerated death benefit, the insured must be given a prognosis of how many months or less life expectancy? A - 6 B - 36 C - 12 D - 24

D - 24 Federal law establishes 24 months as a person's maximum life expectancy to be defined as terminally ill. For the activation of an accelerated death benefit rider, and for the purpose of limiting such claims, insurance companies often define terminal illness as one which would result in death within 12 months.

Generally, the ________ is the amount of premiums paid into the policy less any dividends or withdrawals previously taken. A - Cash value B - Loan amount C - Net premium D - Cost basis

D - Cost basis Generally, the cost basis is the amount of premiums paid into the policy, less any dividends or withdrawals previously taken.

Anyone under the age of 70 1/2 who has _________ can open up a Traditional IRA. A - Annuity Income Benefit Payments B - Investment Income C - Investable Assets D - Earned Income

D - Earned Income

If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the ________. A - End of the calendar year B - Latest premium payment was received C - End of the tax year D - End of the contract year

D - End of the contract year

If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes. A - Probate B - Federal Income C - State Income D - Federal Estate

D - Federal Estate While the death benefit is income tax free, the amount in the deceased's estate may be subject to Federal Estate taxes.

Under what circumstance would a policy loan in a life insurance policy be taxable? A - Policy loans in life insurance are always tax-free B - If the policyowner dies, the policy loan becomes taxable C - If the insured dies, the policy loan is taxable unless there is sufficient death benefit available to pay off the loan D - If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable

D - If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable Policy loans and unpaid loan interest are subject to taxation if the loan amount exceeds the cost basis (the Cost Basis is the amount of premiums paid into the policy less any dividends or withdrawals previously taken) in the contract in the event the policy lapses or is surrendered for its cash value. Surrender charges, if any, may be applied as an offset to cost basis.

____________ plans do not meet the requirements of federal law to be eligible for favorable tax treatment. A- Pension B - Qualified C - ERISA D - Non-qualified

D - Non-qualified Non-qualified plans do not meet the requirements for favorable tax treatment; qualified plans do.

For an individually purchased life insurance policy, the premiums are considered a __________. A - Deductible personal expense B - Nondeductible business expense C - Deductible business expense D - Nondeductible personal expense

D - Nondeductible personal expense

How often may a person perform a rollover from one IRA to another? A - Once every 2 years B - Once each quarter C - Every 6 months D - Once a year

D - Once a year IRA rollovers may only be done once every 12 months.

Once a policy is classified as a MEC, it will maintain that classification for ____________. A - For 7 years B - Until the issue of overfunding is resolved C - For 10 years D - The life of the policy

D - The life of the policy Once a policy is classified as a MEC, it will maintain that classification for the life of the policy.

A Tax Sheltered Annuity may be established and funded by which of the following? A. Johnson Accountants, Inc. B. XYZ's Catering, a small unincorporated business C. A professional law firm D. A not-for-profit community hospital association

D. A not-for-profit community hospital association

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A. The entire amount received is subject to ordinary income tax B. Any amount that represents an excess over cost basis that has been held for over 1 year is treated as long-term capital gain with the balance considered short-term capital gain C. The amount received in excess of cost basis is taxed as a long-term capital gain D. Any amount received in excess of its cost basis is taxable as ordinary income

D. Any amount received in excess of its cost basis is taxable as ordinary income The same tax rules apply to both fixed and variable annuities. The funds received in excess of the cost basis are taxable as ordinary income.

All of the following are true regarding ERISA (Employee Retirement Income Security Act) qualified plans, except: A. The plan must be IRS approved B. The plan must benefit employees and beneficiaries C. A vesting schedule must be established D. Employers must establish a pension plan

D. Employers must establish a pension plan Establishing a corporate pension plan is optional; however, if one is established it must meet the ERISA requirements in order to qualify for favorable tax treatment

In order for the life insurance policy's death benefit to remain income tax free to the beneficiary, the transfer of policy ownership must ____________. A. Not involve a MEC B. Take place after the policy has been in force at least 2 years C. Not involve a policy with a face amount greater than $50,000 D. Qualify for one of the exceptions

D. Qualify for one of the exceptions In order for the life insurance policy's death benefit to remain income tax free to the beneficiary, the transfer of policy ownership must qualify for one of the exceptions.

What are the tax ramifications when an annuity contract is owned by a corporation? A - There is no tax penalty for early withdrawal b - There is no tax benefit C - The premiums are tax deductible as a business expense D - Withdrawals are taxed, but at the favorable corporate rate

b - There is no tax benefit Because a corporation is a non-natural person, a corporate-owned annuity is not treated as an annuity for tax purposes . There is no tax benefit or deferral--earnings are taxed every year