Life Insurance All Exams
An individual owns a life insurance policy with an investment in the contract of $75,000 and a cash value of $125,000. Over time, the individual withdraws $85,000 from the contract. How much of the withdrawal will the individual be required to recognize for income-tax purposes.
$10,000
Mr. Jones' pension pays $3,000 a month under the single life annuity option or $2,550 a month under the joint and 50% survivor annuity option. Mr. and Mrs. Jones elect the joint and 50% survivor annuity. What is the effective "cost'' of the 50% survivor annuity?
$450 per month
An individual owns a life insurance policy with investment in the contract of $35,000 and a cash value of $60,000. He exchanges the policy for a new one that will have a cash value of $55,000 and will also receive $5,000 in cash in the exchange. How much gain will the individual recognize on this transaction?
$5,000
An employee can name a charity as the sole beneficiary of group term life insurance and avoid any income tax on the economic benefit for coverage over what amount?
$50,000
An employee does not have to report any income with respect to what amount of group term life insurance coverage (assuming the plan is not discriminatory)?
$50,000
The process of selecting the best fixed annuity includes
-Comparing costs and features -Comparing total outlay with total annuity payments -Comparing relative financial strengths of companies -all of the above
The GST Tax may be triggered by which of the following events?
-a direct gift to a grandchild -the death of a grantor's child that leaves a grandchild as the last remaining beneficiary of a trust -a distribution from a trust to a grandchild of the grantor -all of the above
Corporate Owned Life Insurance (COLI) is an attractive means of financing an employer's obligations under a nonqualified deferred compensation plan for all but one of the following reasons. Which one is inapplicable?
-a plan funded with life insurance is exempt from all state and federal regulatory requirements
Under the insurance feature of the joint & survivor annuity, the pensioner generally has no rights to:
-choose an alternative or substitute beneficiary -wait to select the type of benefit to be paid -accelerate benefit payments if a need occurs - all of the above
Which of the following would NOT be a valid exchange under Section 1035?
After 2009, an annuity contract for a life insurance contract
All of the following are advantages of life insurance except:
Cost of coverage reduces disposable income
A gift of a donor's entire interest in a life insurance policy will be treated as a gift of appreciated capital gain property.
False
Adjustable life insurance is essentially a hybrid of term life and whole life insurance.
False
An individual may be classified as both terminally ill and chronically ill.
False
IRC Section 2035 applies to transfers within five years of death.
False
In order to take a deduction for amounts paid under a Section 162 plan, the corporation must pay the bonus directly to the insurer providing the coverage.
False
Life Settlements are generally entered into to provide for the costs of health care and medical expenses of the insured.
False
Life insurance proceeds payable to a revocable trust are not available for the trustee's disposition until the decedent's will has been probated.
False
Premiums on life insurance used to finance a DBO plan can be paid with pre-tax dollars.
False
The annual right of withdrawal for each Crummey powerholder is typically $10,000.
False
The primary reason for purchasing annuities is tax deferral.
False
The sale of a key employee policy to the employee following his retirement or termination will trigger the transfer for value rule.
False
The transfer for value rule does not apply to transferees with a valid insurable interest in the life of the insured.
False
There has always been an organized market for life insurance policies.
False
Which of the following is true regarding life insurance valuation?
For a newly issued policy, the fair market value is the cost of the policy
What IRS form does a life insurance carrier report the value of a life insurance policy?
Form 712
Which one of the following is not an advantage of group term life insurance?
It is can be used as a standard investment option under the employer's 401(k) plan.
Which of the following statements is true regarding the "classic'' split dollar plan?
It is rarely seen in practice today.
Mutual life insurance companies have all of the following advantages except:
No conflict of interest between shareholders and policyholders
There are now many different types of reserve values that can be used for valuing an insurance policy. Which of the following is NOT a type of reserve value?
P.S. 58 Reserve
Which of the following statements are true regarding viatical settlements?
The buyer will have ordinary income upon the reciept of death benefits
The advantages of death benefit only insurance includes all of the following EXCEPT:
The entire corporate payment to the benefiaiary is subject to income tax
Which of the following would NOT be a consideration when considering a 1035 exchange?
The old policy is a modified endowment contract (MEC) and the new policy will not be a MEC.
A life settlement may be entered into for any of the following reasons EXCEPT:
The policy owner is in need of cash to pay medical expenses
Which of the following statements regarding the tax implications of key employee life insurance is correct?
The sale of key employee insurance to the insured employee is exempt from the transfer for value rule.
Which of the following describes the Statutory Reserve?
The value of reserves reported on a life insurance company's financial statement filed with the state
A Section 162 plan can be terminated by the employer at any time for any reason.
True
A charitable remainder trust allows a donor to make a currently-deductible charitable gift of appreciated property while retaining a lifetime income interest.
True
A donor who names a qualified charity as recipient of any dividends from a life insurance policy receives an income tax deduction as the dividends are paid.
True
A gift of life insurance from one spouse to another will qualify for the gift tax marital deduction.
True
Gain on the sale of a life insurance policy may be taxed at both capital gains rates and ordinary income rates.
True
One of the primary purposes of a buy-sell agreement is to create a market for a shareholder's stock.
True
Ordinarily, the cost of life insurance purchased at retirement in an amount sufficient for a pension maximization plan will be greater than the differential between the single and joint life annuity payouts.
True
The GST Tax is a flat tax at the highest federal estate tax rate.
True
The value assigned to the policy may depend on the specific facts of the transaction.
True
When a life insurance policy is transferred to an irrevocable trust, a gift is made subject to the gift tax.
True
Which of the following is true regarding variations on the "classic'' split dollar plan?
Under the Reverse Split Dollar Plan the employee's share of the premium is the amount of the cash value increase in the year with the employer paying the balance.
The transfer for value rule does not apply to a transfer to:
a partnership in which the insured is a partner
Which of the following statements accurately describes one of the characteristics of a Section 162 plan?
at no time does the employer have any incident of ownership in the policy
Who is potentially liable for the gift tax on a completed gift of life insurance?
both the donor and the donee
A gift of life insurance to an irrevocable life insurance trust can make all of the following results possible, EXCEPT:
continued control and ownership of the life insurance policy
Which of the following types of qualified plans provides the most advantageous treatment of life insurance?
defined benefit plan
All of these recent changes in qualified plan pension law have made nonqualifying deferred compensation plans more attractive, EXCEPT
easier nondiscrimination rules place fewer restraints on employer's discretion
A "salary continuation" plan involves the employee voluntarily choosing to defer a portion of his future salary or bonus, as a means of deferring taxes.
false
A "salary reduction" plan is a nonelective plan that is used to provide a specified deferred amount in addition to any other compensation or benefits provided to the employee.
false
Accepting a viatical or life settlement does not reduce the policy death benefit.
false
All gifts of life insurance to a charity require an appraisal.
false
An employer wishing to provide additional benefits to a select group of employees could do so with a qualified defined contribution plan.
false
Compared to alternative plan investment, life insurance typically provides lower expenses and higher rates of return.
false
In a 1035 exchange gains are deferred, but losses may be taken at the time of the exchange.
false
In choosing life insurance policies, match the problem to the product
false
Key employee life insurance is an insurance policy owned by a business and payable to the insureds' beneficiary.
false
Once a grantor transfers assets to a revocable living trust, any income losses, deductions, or credits become taxable to the trust, even if the grantor is the trustee.
false
Premiums paid by the corporation for key employee life insurance are deductible for federal income tax purposes.
false
Section 162 plans are usually some form of term insurance.
false
Special nondiscrimination rules set forth in IRS regulations apply to split dollar life insurance arrangements.
false
Split dollar life insurance is a specialized type of life insurance designed to meet specific business needs.
false
The employer is taxed on the value of the economic benefit received from the employee's participation in the split-dollar arrangement.
false
The endorsement method of owning life insurance in a split dollar arrangement provides more protection to the employee than does the collateral assignment method of ownership.
false
The increase of a policy's cash value is subject to tax at ordinary income rates.
false
The larger the business is, the greater the need is for key employee life insurance.
false
The price of stock as determined under a buy-sell agreement will automatically fix its value for estate tax purposes.
false
The principal requirement in implementing a pension maximization strategy is compliance with ERISA.
false
When life insurance is provided through a qualified plan, the costs resulting from any substandard ratings are taxable income to the insured employee.
false
Three of the following are advantages of fully-insured pension plans (i.e., plans holding only life insurance and annuity contracts that meet certain requirements). Which statement is NOT an advantage of fully insured plans?
fully insured plan cash values are not subject to income tax
For estate tax purposes, life insurance
held by a revocable life insurance trust is includable in the grantor's estate
The disadvantages of using a revocable life insurance trust include all but which of the following?
insurance proceeds would be available to a testamentary trust before they would be available for a revocable trust
A life insurance policy provided to an employee under a Section 162 plan:
is fully portable by the employee because the policy is the employee's sole property
The advantages of using a revocable life insurance trust include all but which of the following?
it is less costly and simpler than selecting a settlement option
A Section 162 plan is based on an Internal Revenue Code section that:
permits an employer to deduct amounts paid for premiums on life insurance covering selected employees provided that the amount is charged to the covered employee as a bonus (compensation)
The advantages of a split-dollar arrangement include all of the following, EXCEPT
premiums are not tax deductible at any time by either party
Which of the following is one of the key advantages of using life insurance in a qualified plan?
the ability of an employer to provide employees with retirement benefits on more favorable terms than would be available through individually purchased products
Which of the following circumstances, if true, would make a nonqualified deferred compensation plan inadvisable?
the business is not likely to survive the death, disability or retirement of its key employees
In determining the amount of insurance that the employer must purchase to meet its obligation to pay benefits to an employee under a death benefit only (DBO) plan, which of the following factors is not taken into consideration?
the employee's years of service
All of the following statements about the income taxation of an insured death benefit received by a plan participant's beneficiary are accurate EXCEPT:
the entire death benefit received by a plan participant's beneficiary is recovered tax free
A life insurance policy that has been given as a gift can be includible in the donor's gross estate if:
the grantor dies within three years of the transfer
For income tax purposes:
the grantor of a revocable life insurance trust generally reports trust income, losses, deductions, and credits if he is trustee
Which of the following is one of the advantages of a pension maximization strategy?
the life insurance policy provides more planning flexibility as compared with a joint and survivor payout
The advantages of key employee life insurance include all of the following except:
the premiums can be paid with after-tax dollars
What amount is potentially taxable as a gift of a life insurance policy to another individual?
the replacement cost of the policy
A "viatical settlement" is
the sale of a life insurance policy to a third party when the insured has a life threatening disease or illness
The transfer for value rule may not apply to a transfer in which of the following situations?
the sale of a policy by the insured to his spouse
The replacement cost of a life insurance policy is generally equal to the policy's interpolated terminal reserve plus:
the unearned premium
Which of the following rights is generally considered an incident of ownership of life insurance?
to amend a trust that owns a policy on the insured's life
A Section 162 plan is frequently referred to as an "Executive Bonus" plan.
true
Direct gifts may qualify for a GST Tax annual exclusion.
true
Each transferor has a GST Tax exemption that he may allocate to generation-skipping transfers.
true
In an exchange of life insurance contracts, to be a valid 1035 exchange, the insured must be the same on the old and new policy.
true
No deduction is permitted to an employer sponsoring a nonqualified deferred compensation plan until income is taxable to the employee.
true
No income-tax deduction for premium payments is allowed if the taxpayer is a beneficiary under the policy.
true
One of the key elements of a pension maximization plan is that the couple be sufficiently disciplined and secure financially to keep the life insurance in force.
true
Premiums on life insurance in a qualified plan are deductible by the employer as part of its annual contribution for covered employees.
true
The life insurance products used to fund a qualified plan may provide employees with retirement benefits at more favorable terms than individual contracts.
true
The principle advantage of pension maximization is increased planning flexibility.
true
The rule against perpetuities is a state law restriction designed to limit the period during which a trust can withhold property or its income from outright ownership.
true
The transfer of a life insurance policy to the insured removes all prior "taint" under the transfer for value rule.
true
A split dollar life insurance arrangement would be appropriate under all of the following circumstances, EXCEPT:
when the employer wants to be able to provide for the future security of its employees with tax deductible dollars
The tax treatment of survivorship life insurance is the same as other types of life insurance.
true
The most important reason for buying a single premium policy is the desire for maximum tax-deferred or tax-free investment in conjunction with life insurance.
true
A significant advantage of a split dollar plan using survivorship life instead of a single-life policy is that
very low joint and survivor rates are used to measure the pure insurance cost of survivorship life while both insureds are alive, instead of the higher single-life rates
Which of the following statements regarding universal life insurance is NOT true?
-The policy is not susceptible to inadvertently becoming a modified endowment contract.
Insurers offer options that can make joint life particularly attractive. Which of the following options is NOT offered?
A provision for the exchange, under Section 1035, of the joint life policy for a long-term care insurance policy.
Which of the following could never be treated as a modified endowment contract?
A single-premium policy that was entered into on June 1, 1988.
The 'optional modes of settlement' include all of the following except:
Accepts the proceeds as a life annuity for the life of the insured.
A common accident provision is a clause that provides for double indemnification if the insured and his or her spouse die in a common accident.
False
A private annuity is an annuity product offered by an insurance company that is made available only to private individuals meeting certain income and asset requirements.
False
A reasonable estimate for long-term growth in earnings might be 3% (inflation rate (5%) minus the average real growth rate of earnings (2%).
False
An advantage of single premium life is that the amount of protection is high in relation to the premium paid.
False
Advantages of ordinary level-premium whole life include all of the following except
Interest on policy loans is generally non deductible
Which one of the items listed below is not an advantage of adjustable life insurance?
Lifetime withdrawals of cash values are exempt from income tax.
Important disadvantages of Joint Life include all of the following EXCEPT:
Ownership issues and tax traps
Which of the following statements is true regarding current-assumption whole life insurance?
Policyowners bear more risk of adverse trends in mortality or expenses than if they own traditional whole life policies.
A conceptually sound approach to valuing key employees should
Recognize that most, if not all, the value of key employe contributions will be recovered over time through change or adapting
In which of the following situations would a level-premium whole life insurance policy be appropriate?
To provide funds for the continuation of a business through a "buy-sell" agreement
A term rider typically provides for a conversion period, during which the rider may be converted into permanent coverage without evidence of insurability.
True
A wavier of premium rider is a form of disability insurance
True
All universal life policies have a guaranteed minimum interest rate.
True
An annuity is the only investment that can guarantee the investor will not outlive his or her income.
True
If an insured individual dies under circumstances that suggest suicide, the presumption is that he did not, and the burden of proof is on the insurer to prove that suicide, in fact, occurred.
True
One of the main advantages of current assumption whole life is that policy elements are 'unbundled'.
True
Variable life is a whole life policy where the policyowners bear all investment risk.
True
Which of the following statements about variable universal and variable life insurance death benefits is NOT true?
Variable Life and Variable Universal Life bear no mortality or expense risk.
The "multiples-of-salary" method of estimating the amount of a family's insurance needs is
a method combining a simple rule of thumb method with elements of income replacement and needs analysis
An increasing premium, level death benefit term policy to age 65 is:
a one-year term policy, renewable to age 65
The flexibility inherent in adjustable life policies raises the possibility that
a policy could become a MEC (modified endowment contract)
The automatic premium loan provision is activated when
a policy premium remains unpaid at the end of the premium payment grace period
One of the advantages of adjustable life is that increases in the face amount do not require evidence of insurability.
false
The longer the period into the future that policy values are projected or illustrated, the more likely that they will be accurate.
false
The most important step in selecting a life insurance company is to assess its customer service strength.
false
The policy illustration for a current-assumption whole life policy provides all the information a consumer needs to evaluate the contract.
false
Under ERISA requirements, an employee covered by a group term life contract must name his spouse as beneficiary, if he is married.
false
Variable life or variable universal life insurance is well-suited to individuals desiring a minimum basic level of coverage.
false
A survivorship rider permits
the purchase of increased coverage on the insured if the life designated in the rider dies before the insured
The most important factors that should be considered in choosing an insurance company include all of the following, except:
the quality of the company's policy illustrations
A modified endowment contract is a life insurance policy that has failed
the seven-pay test
All cash value policies must allow policyholders to borrow cash values from the policy.
true
Advantages of single premium life include all of the following EXCEPT:
The amount of protection is low relative to the premium paid
Which of the following statements is true regarding current-assumption whole life insurance?
The insurer promises to credit at least a minimum guaranteed rate of interest.
One of the critical questions in examining a policy illustration should be how much of the value is guaranteed and how much is projected.
true
One of the disadvantages of level premium whole life insurance is that the premiums may be unaffordable for persons of limited financial resources.
true
A single premium current-assumption life policy generally guarantees all of the following, EXCEPT:
-a fixed level of dividends will be paid throughout the term of the policy
A fixed annuity might be a good choice when
-safety of principal is paramount -a guaranteed interest rate is wanted -a conservative complement to other investment vehicles is desired -all of the above
Current assumption whole life is also known as "straight life" or "traditional whole life" insurance.
False
Death benefits from adjustable life are fully includable in the income of the beneficiary.
False
Planners are not responsible for the financial stability of life insurance companies they recommend.
False
Survivorship life pays a death benefit at either the first or second death, depending on the wishes of the policyowner.
False
The basic policy in a survivorship life plan is always a permanent form of insurance.
False
The value of future Social Security benefits need not be converted to a present value in order to determine their effect on income replacement.
False
Variable annuities not are considered securities under federal law.
False
Level-premium whole life insurance policies allow policyowners to borrow amounts under the policy. Typical loan provisions include which of the following requirements?
If the policy is terminated the cash surrender value is reduced by any outstanding policy loans and unpaid interest.
The parties to a life insurance contract include all of the following, except
the state in which the insurer does business
Which of the following is a characteristic of a level-premium non-participating whole life insurance policy?
There is a schedule of guaranteed cash values.
Life insurance is essentially an investment vehicle that ensures a desired wealth accumulation by the time of death, regardless when death occurs.
True
Most states require that life insurance contracts contain a grace period of one month, during which the policy remains in force even if the insured dies without having made the premium payment.
True
Term life insurance is ideal for temporary needs, such as paying off funeral, estate, and inheritance taxes.
True
The policy cash value for limited-pay whole life policies typically grows more quickly than for policies with longer payment periods.
True
The principal economic purpose of life insurance is to accumulate capital
True
The unique feature of limited-pay life insurance are predictable cash outlays and accelerated tax-favored cash values.
True
Current-assumption whole life insurance is generally a hybrid of:
traditional whole life and universal life insurance
A term life insurance policy makes no promise to pay anything if the insured lives beyond the specified term
true
Amounts received by a terminally ill insured under an accelerated death benefit provision are excluded from gross income.
true
If a policy is treated as a "MEC," amounts received as loans are subject to income tax to the extent of "gain" in the policy.
true
Most group insurance is issued as yearly renewable term insurance.
true
Most insurance companies do not offer renewable term policies to new applicants after a certain age, which is usually between 60 and 70.
true
Which of the following is not a standard provision in a typical life insurance policy?
a provision permitting the insurer to cancel the policy at any time if the insured individual changes jobs
All of the following items should be considered in relation to a joint life insurance policy EXCEPT:
an "own occupation" definition of disability
If a limited-pay whole life insurance policy is determined to be a "MEC" (Modified Endowment Contract):
distributions, including policy loans, will likely be includable in income
Which of the following items are NOT treated as income-first when distributed from a modified endowment contract?
dividends retained by the insurer to premiums or other consideration for the contract
Insurance company ratings have been shown to be too variable and wide-ranging to provide any reliable prediction of long term solvency and financial strength.
false
Key employee insurance is based on the premise that the cost of replacing a key employee is generally minimal and the full value of the individual to the organization can be recouped through life insurance.
false
Once a policy is classified as a modified endowment contract, with certain corrections, it can be later treated as not a modified endowment contract.
false
If a term policy is convertible it means the policy:
gives the policyholder a contractual right to change the term policy for some other type of life insurance policy without evidence of insurability
Life insurance companies with better mortality experience than other companies tend to have
higher underwriting standards
Which of the following items should not be taken into account when performing a "due care" analysis?
inspecting the company's marketing materials
A survivorship life plan that involves a greater proportion of term insurance than permanent insurance:
is sensitive to changes in yields, or interest rates
Which of the following accurately describes a disadvantage of survivorship life insurance?
it provides no benefits at the first death, unless a special rider is added
One disadvantage of universal life is that policy owners bear more risk of adverse trends in mortality or expenses than if they owned traditional whole life policies.
true
Accelerated death benefit riders permit
payment of all or part of the death benefit before death under certain circumstances
All of the following are primary life insurance planning areas, except:
portfolio value and allocation of assets between debt and equity instruments
The total dollar outlay for life insurance protection is most easily determined for:
single premium whole life insurance
Which of the following types of life insurance requires the greatest amount of annual premium for the same amount of death benefit?
single premium whole life insurance
Which of the following features represents an advantage of an annuity over a mutual fund investment?
tax deferred growth
A waiver-of-premium rider provides
that the basic policy will continue in force if the insured becomes disabled
Which item is NOT a key factor to be weighed in choosing the best variable life or variable universal life policy?
the amount of the cash value guarantees
A limited-pay whole life insurance policy with a short premium paying period (e.g., 10 years) runs the risk of becoming a "MEC" (Modified Endowment Contract) if:
the insured pays the full annual premium and dividends are applied as additional premiums
If the annuitant dies after annuity benefit payments have started under a "pure life annuity" settlement option
the payments cease
For families with young children or couples with a living standard that is relatively high for their income, the amount of insurance needed will be high. As a result,
the priority should be to provide adequate death protection
