Life Insurance Quiz 9

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 $1,500 per month $2,550 per month $3,000 per month

a

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 the employer is a closely held corporation that must to compete with larger, publicly held employers for key personnel the key employees of the employer are already receiving the maximum permitted benefits or contributions under the employer's qualified plan the employer wishes to avoid the costs and aggravation of covering most or all employees under a qualified plan

a

No deduction is permitted to an employer sponsoring a nonqualified deferred compensation plan until income is taxable to the employee. True False

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 False

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 False

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 False

true

The principle advantage of pension maximization is increased planning flexibility. True False

true

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. The receipt of insurance proceeds by the corporation requires the corporation to pay the alternative minimum tax. The receipt of insurance proceeds in excess of $250,000 requires the corporation to pay the accumulated earnings tax. Policy proceeds are subject to federal income tax.

a

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 total of all Table 2001 (formerly P.S. 58) costs paid by the participant can be received tax free from the plan death benefit if it is paid from the same insurance contracts that gave rise to these costs. the entire death benefit received by a plan participant's beneficiary is recovered tax free the "pure insurance" element of an insured death benefit (i.e., the amount in excess of the cash surrender value) is income tax free to the participant's beneficiary the sum of all nondeductible contributions toward the plan made by the employee in a contributory plan is tax free to the participant's beneficiary.

b

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 plans are exempt from the actuarial certification requirement, which reduces administrative overhead fully insured plan cash values are not subject to income tax fully insured plans are exempt from the minimum funding standards fully insured plans are permitted a higher initial level of deductible plan contributions than are regular trusteed plans

b

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? the build-up of value inside the policy is income-tax deferred life insurance enables the employer to promise an immediate death benefit with no risk to corporate cash flow a plan funded with life insurance is exempt from all state and federal regulatory requirements life insurance almost always provides the ability to recover costs--including the after-tax cost of the use of corporate dollars

c

Which of the following goals can be achieved by the use of key employee life insurance? Provide adequate retirement funds to the key employee through the buildup of policy cash values. Avoid the corporate alternative minimum tax upon the death of the key employee. Assure shareholders of a public corporation that the price of the stock will not plummet at the death of a president or other senior executive. By use of a policy exchange rider, permit substitution of a new key employee under the original policy without payment of income tax on the gain on the policy.

c

In order for a participant to avoid current taxation of his benefits under a nonqualified deferred compensation plan, he must not be deemed to have constructive receipt of income under the plan. Constructive receipt can be avoided if certain provisions are included in the design of the plan. Which one of the three following provisions will NOT avoid constructive receipt? a provision requiring that compensation must be deferred before it is earned a provision that the employer's promise to pay benefits is completely unsecured a provision that the ultimate payment of benefits is conditioned on passage of a specified period of time or the occurrence of an event beyond the employee's control a provision that permits the employee to place his benefits beyond the reach of the employer's creditors if he suspects that the employer is in financial difficulty

d

Under the insurance feature of the joint & survivor annuity, the pensioner generally has no rights to: accelerate benefit payments if a need occurs choose an alternative or substitute beneficiary wait to select the type of benefit to be paid all of the above

d

Which of the following is one of the advantages of a pension maximization strategy? insurability of the participant is not an issue with a pension maximization strategy the difference between a single life payout and a joint and survivor payout is nearly always sufficient to fund the needed purchase of life insurance the pension maximization strategy is most cost effective if implementation of it is postponed until retirement the life insurance policy provides more planning flexibility as compared with a joint and survivor payout

d

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. True False

false

An employer wishing to provide additional benefits to a select group of employees could do so with a qualified defined contribution plan. True False

false

Premiums paid by the corporation for key employee life insurance are deductible for federal income tax purposes. True False

false

The principal requirement in implementing a pension maximization strategy is compliance with ERISA. True False

false

The sale of a key employee policy to the employee following his retirement or termination will trigger the transfer for value rule. True False

false