quiz 2

Which of the following statements concerning limited-payment life insurance is not correct?

"Paid-up" means the same as "matures."

Mackey learned that he had contracted a rare disease and is not expected to live more than five years, but is still able to perform all activities of daily living. He has a life insurance policy with a face value of $400,000 that he could sell to a viatical company for $200,000. On the policy, Mackey had paid premiums of $2,000 each year for 15 years, and the cash value is $26,000. What capital gain will Mackey have to report if he sells the policy to the viatical company?

$170,000

Althea is a news reporter with a local station. The news station does not provide disability insurance. She purchases a policy through a local insurance agent that provides a benefit of $3,000 per month. If she is in the 30 percent tax bracket, what will her benefits equal after-tax?

$3,000

Blair, an ER surgeon, buys a disability policy with a base benefit of $6,000 and an SIS offset benefit of $1,200. Blair becomes disabled and eventually receives $1,000 in Social Security disability benefits. How much will she receive from the insurance company after Social Security benefits begin?

$6,200

Tootie, an ER surgeon, buys a disability policy with a base benefit of $6,000 and an SIS offset benefit of $1,200. Tootie becomes disabled and eventually receives $1,000 in Social Security disability benefits. How much will she receive from the insurance company initially?

$7,200

A viatical settlement company purchased a $250,000 policy for $160,000. It paid additional premiums of $7,000 (in total) over the next three years before the insured died. What income must the viatical company report from the policy proceeds in the year of the insured's death?

$83,000 ordinary income.

Which of the following statements concerning group ordinary life insurance is (are) correct? 1. The employer pays for the group term component. 2. The employee and employer may share the cost of the ordinary whole life component. 3. Recent changes in the federal tax laws have increased the attractiveness of this coverage for employees.

1 and 2

Watson, Inc. has four equal partners. All four partners are interested in entering into a buy-sell arrangement. How many life insurance policies would be purchased to properly fund using a crosspurchase agreement?

12 policies.

Which of the following statements concerning a Section 162 bonus plan are correct? 1. The plan must provide benefits on a non-discriminatory basis. 2. The life insurance premiums are deductible by the employer. 3. The employee must pay income tax on the premiums. 4. The life policy is owned by the employer or a trust set up by the employer.

2 and 3.

Which of the following is false regarding a deferred compensation plan that is funded utilizing a rabbi trust? 1. Participants have security against the employer's unwillingness to pay. 2. Rabbi trust provide the participant with security against employer bankruptcy. 3. Rabbi trusts provide tax deferral for participants. 4. Rabbi trusts provide the employer with a current tax deduction.

2 and 4.

Elijah, who is seriously ill, is thinking about entering into a viatical agreement. Which of the following statements concerning a viatical agreement is (are) correct? 1. It is usually created only if the insured has less than 60 days to live. 2. It usually pays the insured something less than the life insurance policy's face amount.

2 only

If a whole life insurance policy is classified as a modified endowment contract (MEC): 1. Its sale will be prohibited by the state insurance commissioner. 2. Its federal income tax treatment will be adversely affected.

2 only.

An individual has decided to purchase life insurance and comes to you as his agent. In order to propose a plan of life insurance to meet his individual needs, your first step would be to:

Conduct a needs analysis.

Cook Electric Company is a small electrical supply company with 25 employees, five of whom are salaried. The company is considering adding a group long-term disability income insurance plan and would like a recommendation. The company wants a plan that will be cost-effective, will not result in additional current income taxes for employees, and will be tax-efficient for the company. Which of the following statements would be appropriate for a recommendation of a plan?

Cook should limit the plan to salaried employees and provide for full integration with Social Security and workers' compensation benefits.

Many disability policies that are provided on a group basis have a split definition. Which of the following describes such a definition?

Disability will be defined based on the duties of the insured for a period of time and then based on any occupation that the insured is qualified for based on experience or training.

All the following statements concerning whole life insurance are correct, EXCEPT:

It lacks cash surrender values.

Which of the following statements concerning the second-to-die policy is not correct?

It pays half the death benefit at the first death and the other half upon the second death.

Caesar, age 33, is married and has a newborn son. Caesar is concerned about providing for his family in the event of his premature death. He is concerned about the long-term affordability of life insurance but is able to budget a fixed amount for a period of time. Which of the following policies would you recommend?

Level-premium term.

Which of the following is (are) among the advantages of most single-premium whole life insurance policies? 1. Withdrawals from the policy are taxed on a FIFO basis. 2. Withdrawals from the policy are exempt from the 10% penalty tax.

Neither 1 nor 2

Henry is the owner of a disability income policy he purchased individually. Which of the following statements concerning the federal income tax treatment of this policy is (are) correct? 1. Since the premium payments are a type of medical expense, they are deductible for Henry like his other medical expenses. 2. Since the benefit payments are designed to replace a portion of Henry's lost earned income, they are taxed to Henry like earned income.

Neither 1 nor 2.

In a properly drawn business buy-sell agreement funded by life insurance for a six-person partnership: 1. The cross-purchase approach will be found to be more efficient than the entity approach. 2. The surviving partners are given the option to buy the interest of a deceased partner.

Neither 1 nor 2.

Disability policies have many characteristics and provisions. Which of the following is correct regarding policies that are guaranteed renewable versus non-cancelable?

Non-cancelable prevent the insurance company from cancelling the policy as long as the premiums are paid.

All of the following are reasons that an employer might favor a nonqualified plan over a qualified retirement plan except:

Nonqualified plans typically allow the employer an immediate income tax deduction.

Ryan and Jody are age 68 and 72, respectively, and are married. They have significant assets that will be subject to estate taxes upon the second spouse's death. Which of the following life insurance policies would you recommend?

Second-to-die whole life policy.

Beth is an associate at GWC Attorneys at Law. The firm has a contributory long-term group disability policy. She is required to pay 60 percent of the premiums. If she becomes disabled, her benefits would equal $4,000 per month. Based on this type of plan, which of the following is correct if she were to become disabled?

She will receive a benefit of $4,000, but $1,600 will be taxable.

Cindy Sue has been with CS Designs, Inc. for five years. CS Designs has a deferred compensation plan to provide benefits to key executives only. CS Designs contributed $400,000 into a trust for Cindy Sue's benefit under the company's deferred compensation plan. The plan requires that executives must work for the company for 10 years before any benefits can be obtained from the plan. Cindy Sue has come to you to determine when she will be subject to income tax on the contribution by the employer. Which of the following is correct?

Since Cindy Sue cannot receive the benefits until she has been with the employer for 10 years, the substantial risk of forfeiture doctrine will not require inclusion in income for the current year contributions made by the employer.

Which of the following life insurance policies provides the highest benefit for the lowest premium and is simply a pure death benefit policy?

Term

What is the usual federal income tax treatment of the employer's premium payments under a group long-term disability income insurance plan?

The amount of the premium payments is excluded from the employee's income, regardless of whether the plan is discriminatory.

Which of the following is a major characteristic of group term life insurance?

The coverage is generally issued without evidence of insurability.

Terry has been advised by his insurance agent to purchase a variable universal life insurance policy. He has sought your advice regarding this purchase. All of the following are characteristics of a variable universal policy, except:

The death benefit is guaranteed to be equal to the face value.

Which one of the following statements concerning universal life insurance is false?

The death benefit of a universal life insurance policy cannot change.

Gunther has a disability income policy that pays a monthly benefit of $2,400. Gunther has been disabled for 60 days, but he only received $1,200 from his disability insurance. Which of the following is the probable reason that he only received $1,200?

The elimination period is 45 days.

You have just sold Anne a whole life policy and pointed out to her that, in addition to providing death benefit protection, the policy builds up a cash value. Anne asks you where the cash value comes from. What should you tell her?

The net premium is greater than the mortality costs of the early years.

The blackout period is:

The period of time when the youngest child has reached age 16 and the spouse's Social Security retirement or widow(er) benefits have not started.

Marvin was a radio reporter until he lost his voice box last year due to throat cancer. Now, he works in a newsroom writing and editing news stories. He has contacted you because his insurance company will not pay disability income benefits. What is the most likely explanation for the insurer's refusal to pay benefits?

The policy uses an "any occupation" definition of disability.

Which of the following statements concerning the need for life insurance is correct?

The premature death of a family breadwinner in a single-parent family may cause financial insecurity.

Why does the straight or pure life-income settlement option provide the life insurance beneficiary with a larger life income than any of the period-certain life-income options?

Those beneficiaries who live only a short time provide funds to sustain the benefits for the fortunate survivors.

Which of the following life insurance policies has a fixed premium, a cash value and a death benefit that can fluctuate based on investment performance?

Variable whole life.

Which of the following provisions may not increase the cost of the policy?

Waiver of premium rider.

Which one of the following statements concerning whole life insurance is false?

Whole life insurance can be participating, which means the insured must participate in self-directed investments for the cash value.

Which of the following is (are) among the advantages of owning variable life insurance instead of a conventional whole life policy? 1. To the extent that the market prices and annual yields of common stocks keep up with inflation, the needs of the policy owner's family are better protected against inflationary increases in living costs. 2. The policy owner and family have the benefits of the same guarantees that traditionally have been associated with whole life plus increased investment diversification provided by the variable life policy.

1 only.

Which of the following statements concerning participating life insurance is (are) correct? 1. Participating policies may pay dividends as a result of better than expected mortality experience or investment earnings, or as a result of lower than expected expenses. 2. Companies selling participating life insurance are so confident of their dividend-paying capacity that many companies are now guaranteeing their dividends.

1 only.

Which of the following statements concerning universal life insurance is (are) correct? 1. The policy's cash value appreciates on the basis of current investment yields, rather than yields available when the policy was issued. 2. The annual increase in the policy's cash value attributable to investment income is not currently included in the policy owner's gross income for tax purposes. 3. The policy owner might elect to pay premiums for five years and then pay no premiums for two years with no decrease in the amount of his or her life insurance coverage.

1, 2, and 3

Which of the following factors are desirable when an employee is seeking deferral of a portion of current compensation by means of an informally funded nonqualified deferred-compensation plan? 1. The employee's tax bracket will be lower after retirement. 2. The employee enjoys a strong personal current financial position. 3. The employer is in a strong financial position. 4. Assets used to fund the plan are irrevocably committed to the employee.

1, 2, and 3.

Which of the following situations indicate(s) the need for life insurance for a closely held business or its owners? 1. The potential death of a valuable key employee. 2. The potential death of an owner whose widow(er) would not be a compatible partner for the surviving owner. 3. The potential death of a minority owner with substantial estate debts, but with no cash.

1, 2, and 3.

Which of the following is true regarding employer contributions to secular trusts for employee-participants of a nonqualified deferred compensation agreement? 1. Participants have security against an employer's unwillingness to pay at termination. 2. Participants have security against an employer's bankruptcy. 3. Secular trusts provide tax deferral for employees until distribution. 4. Secular trusts provide employers with a current income tax deduction.

1, 2, and 4.

Which of the following is needed to calculate the client's human-life value? 1. Average annual earnings to the age of retirement. 2. Estimated annual Social Security benefits after retirement. 3. Costs of self-maintenance. 4. Number of years from the client's present age to the contemplated age of retirement.

1, 3, and 4

When utilizing the needs approach in the determination of the amount of life insurance, which factors should be considered? 1. The family expenses that will remain after the wage earner dies. 2. The value of the wage earner's life in the event he or she dies. 3. The income that can be generated by the surviving spouse. 4. The number of dependents.

1, 3, and 4.

Rick has an 18% nonqualified deferred compensation plan that is funded annually by his employer. Payments are made to a separate trustee of a secular trust who was selected by Rick and his employer. The employer contributions are discontinued at Rick's death, disability, or employment termination. When Rick retires or terminates employment, he will receive the proceeds from the trust. Which of the following is/are correct regarding the deferred compensation plan? 1. The contributions are not currently taxable to Rick because they are subject to a substantial risk of forfeiture. 2. The contributions to the plan are currently subject to payroll taxes. 3. The employer can deduct the contributions to the plan at the time of the contribution.

2 and 3

Rosa bought a life policy in July 1998 with a single premium. Under these circumstances, which of the following statements is (are) correct? 1. Rosa can borrow the amount of the policy's investment income without incurring income tax liability. 2. If Rosa surrenders the policy for its cash surrender value, she is in receipt of taxable income to the extent the policy's cash surrender value exceeds Rosa's cost basis. 3. If Rosa dies after borrowing the policy's cash surrender value, the designated beneficiary will be in receipt of taxable income.

2 only.

Which of the following statement(s) is/are correct regarding buy-sell arrangements? 1. Entity purchase arrangements increase the income tax basis for some survivors upon the death of another owner. 2. Cross-purchase arrangements increase the income tax basis for all survivors upon the death of another owner.

2 only.

How long would someone have to wait to receive Social Security disability benefits if they qualify?

5 months.

Which one of the following statements regarding disability insurance is false?

A residual benefit clause provides the insured with benefits that extend beyond the disability period.

If a formally funded nonqualified deferred-compensation plan is used, the employee may still avoid receipt of taxable income if:

A substantial risk of forfeiture is associated with the arrangement.

Which of the following statements concerning the incontestable clause is correct?

An incontestable clause permits an insurer to contest a policy during the contestable period.

Willis is a university professor who teaches three classes. He developed throat cancer and can no longer lecture. His disability policy is not covering him due to his sickness. What type of policy does he likely have?

Any occupation policy.

Elton is an engineer at RTQ Enterprises. The firm does not offer disability policies to employees. Therefore, Elton is considering purchasing a policy on his own. What percent of his salary will an insurance company typically offer as a benefit?

Approximately 60 percent of his salary.

In 2020, Chip, an accomplished professional race car driver, is to receive a signing bonus for agreeing to drive for Hot-Lap International, a racing team. Hot-Lap agrees to establish a NQDC agreement with Chip to defer the bonus beyond Chip's peak income producing years. Hot-Lap transfers the bonuses to an escrow agent, subject to the risk of forfeiture to team creditors in bankruptcy, who invests the funds in securities acting as a hedge against inflation. The bonus is deferred until 2021 and is then paid to Chip in years 2021-2027. When is the income deductible by the employer and includible by Chip?

Employer Deduction: 2021 - 2027 Employee Deduction: 2021 - 2027

Caden has a disability policy with a 12-month elimination period. He was in a bizarre accident involving a crane falling on a building causing part of the building's exterior wall to fall on his van. He lost the use of both of his legs in the accident. If his policy has a presumptive total disability coverage provision, when will he begin receiving benefits?

He will have to wait the 12 months.

Bruce, a college professor of chemistry, is interested in obtaining disability income insurance since his university does not offer such coverage. In order to keep the cost of coverage down, which of the following recommendations should be made to Bruce? 1. Buy a policy with the "own occupation" definition of total disability. 2. Accept only a policy that will replace 100% of his regular salary. 3. Obtain a policy that pays lifetime benefits.

None of the above.

Which of the following method(s) is/are appropriate to evaluate a person's life insurance needs? 1. The human life approach to evaluate life insurance needs takes into consideration the income replacement needs of a person's survivors including income during the readjustment period, income to widow(er), and educational funds for dependents. 2. The needs approach evaluates the estimated present value of income generated over a person's work-life expectancy that is needed (as adjusted for the expected consumption of the person and for taxes).

None of the above.

Booker, age 35, has a wife and two children. He feels that they are not able to save any of what they earn due to their spending habits. He would like a recommendation for a life insurance program that would help them. What kind of policy would be most appropriate for Booker?

Whole life.

Andrea owns and runs a printing company that is organized as an S corporation. Unfortunately, she has an accident with a printing press and is rendered disabled. She receives $4,000 per month in disability payments. The S corporation had paid the premiums on the policy, but reported the payments on her W-2. How much of the benefit is subject to income tax?

$0

Liam broke his leg skiing earlier this year. Liam collected $10,000 from his short-term disability plan paid for solely by his employer. How much does Liam have to include in his gross income?

$10,000

Marsha, age 35, is a single mother of one daughter, Skyler, age 9. Marsha is a secretary with annual income of $35,000 and a negative net worth. Marsha has two objectives: (1) to protect Skyler in the event of her untimely death and (2) to save for her own retirement. Which of the following life insurance policies should she buy?

A 20-year term insurance policy.

What underwriting requirement do insurers impose when offering the insured a disability income policy with a future increase rider?

Evidence of actual earned income for the insured, adequate to justify larger benefit amounts.

The most common type of group life insurance is:

Group term life.

Olivia, age 52, purchased a life insurance policy on her own life. All the necessary legal elements of a contract including, (1) offer and acceptance, (2) consideration, (3) competent parties, and (4) legal purpose were met. However, Olivia lied that her age was 42 on the insurance application, and is receiving a premium commensurate with that age. Olivia died two years later in an automobile accident. Her certified death certificate indicated that she was 54 at the time of her death, and that she was 52 when she purchased the policy. Which of the following statement(s) is/are correct regarding this scenario?

Her beneficiary will receive a reduced death benefit to reflect her actual age.

Which of the following is the most favorable definition of total disability in a disability insurance policy for the insured?

Own occupation.

Which of the following life insurance policies contains a cash-value savings component that reaches the face value of the policy at age 100 -120?

Whole life.

Desi is 30 years old and recently began a job with a salary of $60,000. He is single but has been dating Lucy for three years. He expects to marry her within the next five years. Desi lives with his parents. What is the amount of life insurance that Desi currently needs?

$0

Hal designates his daughter as beneficiary of his life insurance death proceeds in the amount of $10,000. The beneficiary elects to receive the death proceeds under the fixed-period option over a ten-year period. What part of each annual payment will the beneficiary receive free of federal income taxes?

$1,000

Which of the following statements concerning life insurance policy riders is (are) correct? 1. The waiver-of-premium provision essentially provides a limited amount of disability income for the insured policy owner. 2. The accidental death (double indemnity) provision provides for an increased death benefit if death results from an accident. 3. The guaranteed insurability option permits the insured policy owner, at stated intervals, to purchase specified amounts of additional life insurance, but only if evidence of insurability can be provided.

1 and 2

Burton has a disability income policy that pays $4,000 per month for total disability. Burton's normal earnings are $6,000 per month. He is now back to work after a period of total disability, but he is able to work only on a part-time basis at a salary of $4,000 per month. In this situation, which of the following statements are correct? 1. If Burton's disability income insurance included a partial disability benefit, he would collect $2,000 per month from it. 2. If Burton's disability income policy included a residual disability benefit, he would collect $1,333 per month from it. 3. If Burton's disability income policy contained a recurrent disability clause, he would collect $4,000 per month from it.

1 and 2.

In which of the following types of life insurance products are the funds supporting the contract invested as part of the insurer's general account? 1. Universal life insurance. 2. Variable annuities. 3. Whole life insurance. 4. Variable universal life insurance.

1 and 3

The Arthur Reynolds Company (ARCO) is a medium-sized machine tool company. The Company has three key executives whose retention by the Company is important to the Company's future growth and expansion of operations. The board of directors is considering several special employee benefit plans that could be implemented to make continued service with ARCO attractive for the three executives. Which of the following statements concerning benefit plans being considered by the ARCO board of directors is (are) correct? 1. Three $100,000 ordinary life insurance policies would provide capital accumulation and estate liquidity for each of the three families. 2. The attitude of ARCO's board of directors toward portability of any benefit plan established would likely parallel that of the three executives. 3. Evidence of insurability is usually required for small group carve-out plans.

1 and 3.

Assume ARCO's board elects to offer their three executives a split-dollar plan with a $100,000 policy owned by ARCO on each of the three executives. Under these assumptions, which of the following statements is (are) true? 1. The executive will be taxed on the Table 2001 cost as additional compensation if the executive pays no portion of the annual premium. 2. The employer must pay all of the premiums under a split-dollar plan. 3. The executive will have to pay interest (or be taxed on this amount) on the outstanding loan balance associated with any premiums paid by the employer. 4. The executive will be taxed on all premiums paid by the employer in the year paid.

1 only.

Betty owns a $150,000 whole life participating insurance policy that she purchased ten years ago. She has paid premiums of $4,000 each year since she bought the policy, and the current cash surrender value is $60,000. Betty has received $10,000 in paid dividends since the policy inception. Which of the following statement(s) is/are correct regarding Betty's policy? 1. If Betty surrenders the policy now, she will have a taxable gain of $30,000 taxed as ordinary income. 2. The dividends that were paid on Betty's policy were subject to ordinary income tax treatment.

1 only.