Life Insurance PA Chapter 6 Test
What is the main purpose of the Seven pay test?
It determines if the insurance policy is MEC
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 portion of the benefit up to a limit is tax free; the rest is taxable income. When accelerated benefits are paid to a chronically ill insured, they are tax free up to a certain limit. Any amount received in excess of this dollar limit must be included in the insured's gross income
Who can make a fully deductible contribution to a traditional IRA?
An individual not covered by an employee sponsored plan who has earned income.
Under the 401k bonus or thrift plan, the employer will contribute.
An undetermined percentage contributed by the em
What are the consequences of withdrawing funds from a traditional IRA prior to the age of 59 1/2?
Answer: 10% penalty
What is the penalty for excessive contributions to a traditional IRA?
Answer: 6%
What is required to qualify an individual to contribute to a traditional IRA?
Answer: Earned income
For a retirement plan to be qualified, it must be designed for whose benefit?
Answer: Employees
Who qualifies for tax-sheltered annuities, or 403(b) plans
Answer: Employees of nonprofit organizations under Section 501(c)(3) and employees of public school systems
What are the income tax benefits of a qualified plan?
Answer: Employer contributions are tax deductible and are not taxed as income to the employee. The earnings accumulate tax deferred.
What qualified plan is suitable for the self-employed?
Answer: HR-10 or Keogh
What are some examples of qualified plans?
Answer: IRA, 401(k), HR-10 (Keogh), SEP, SIMPLE
What type of plan is a 401(k)?
Answer: Qualified profit-sharing plan
If a retirement plan is qualified, what does that mean?
Answer: The plan has favorable tax treatment.
In a direct transfer, the distribution is made directly from the trustee of the first plan to the trustee or administrator/custodian of the new IRA plan.
Certain groups of employees only.(A tax-sheltered annuity is a special tax-favored retirement plan available only to certain groups of employees (nonprofit charitable, educational, religious, and other 501c(3) organizations, including all employees in public education).
When must an IRA be completely distributed when a beneficiary is not named?
December 31 of the year that contains the fifth anniversary of the owner's death. If the owner dies before distributions have begun, the entire interest must be distributed in full on or before December 31 of the calendar year that contains the fifth anniversary of the owner's death, unless the owner named a beneficiary.
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums. The interest earned on the dividends, however, is subject to taxation as ordinary income.
In a direct transfer, how is money transferred from one retirement plan to a traditional IRA?
From trustee to trustee(In a direct transfer, the distribution is made directly from the trustee of the first plan to the trustee or administrator/custodian of the new IRA plan.)
What is similar in a qualified and non qualified retirement plan?
Taxation on accumulation
How are contributions to a tax-sheltered annuity treated with regards to taxation?
They are not included as income for the employee, but are taxable upon distribution. Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawal
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
They are tax free to terminally ill insured. When accelerated benefits are paid under a life insurance policy, they are received tax free by terminally ill insured, and tax free up to a limit for chronically ill insured.
In what form of payment must the contributions to a traditional IRA be made?
Answer: In cash
SIMPLE plans are available to groups of how many employees?
Answer: No more than 100
In qualified plans, are employer contributions taxed as income to the employees?
Answer: No, employer contributions are not taxed as income to the employees.
An employer is sponsoring a qualified retirement plan for its employees where the employer contributes money whenever the business has profit. What is this type of plan called?
Answer: Profit-sharing plan
What is the primary purpose of a 401(k) plan?
Answer: Provide retirement income
Traditional IRA contributions are tax deductible based on
Owner's income
Which are taxable on a whole life insurance
dividend interest is taxable; policy loans are not tax deductible and premiums are not tax deductible
When a beneficiary receives payments consisting of both which parts are taxable as income?
interest only
If a life insurance policy develops cash value faster than a seven day whole life contract
modified endowment contract