4.- Taxes, Retirement and other Insurance Concepts

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n)

403(b) Plan (TSA)

Which of the following is not true regarding a non qualified employer retirement plan?

It needs IRS approval

What is the primary purpose of a 401(k) plan?

retirement

Group life insurance is a single policy written to provide coverage to members of a group. Which of the following statements concerning group life is CORRECT?

100% participation of members is required in noncontributory plans. *If the employer pays all of the premium, then all employees must be included

An employee is joining a group insurance plan. In order to avoid having to prove insurability, what must the employee do?

Join during the open enrollment period

All of the following are requirements of eligibility for social security disability income benefits EXCEPT

Being age 65

Which of the following applicants would NOT qualify for a keogh plan?

Someone who works 400 hours per year *A person must have worked at least 1k hours per year to be eligible for a keogh plan

The minimum number of credits required for partially insured status for social security disability benefits is

6 credirs

When an employee terminates coverage under a group insurance policy, coverage continues in force

For 31 days.

In order to qualify for conversion from a group life policy that has been terminated to an individual policy of the same coverage, a person must have been insured under the group plan for how many years?

5 years

When an employee terminates coverage under a group insurance policy, coverage continues in force

For 31 days. An employee has 31 days under the conversion privilege to convert to an individual policy.

In a direct rollover, how is the money transferred from one plan to the new one?

From trustee to trustee

Two attorneys operate their practice as a partnership. They want to start a program through their practice that will provide retirement benefits for themselves and 3 employees. They would likely dhoose

HR-10 (Keogh Plan)

Which of the following is an IRS qualified retirement program for the self-employed?

Keogh

Which of the following would be considered a non qualified retirement plan?

Split dollar plan

Who may contribute to an Keogh HR-10 plan?

self-employed plumber

What is the number of credits required for fully insured status for social security disability benefits?

40

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

In group life policies, a certificate of insurance is given to

Each insured person

An insured has a modified endowment contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true?

He will have to pay a penalty if he is younger than 59 1/2

Which of the following is true of a qualified plan?

It has a tax benefit for both employer and employee.

If a retirement plan or annuity is "qualified", this means

It is approved by the IRS *A qualified retirement is approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax deferred growth

All of the following are characteristics of group life insurance EXCEPT

Premiums are determined by the age, sex and occupation of each individual certificate holder.

Which of the following is the required number of participants in a contributory group plan?

75%

Social security was created to provide all of the following benefits EXCEPT

Unemployment income

Which of the following terms means a result of calculation based on the average number of months the insured is projected to live due to medical history and mortality factors?

life expectancy

Which type of retirement account does not require the owner to start taking distributions at age 72?

Roth IRA

An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to rollover her plan to a Traditional IRA, how much will she receive from one plan administrator to another and what is the tax consequence of a direct transfer?

$10k, no tax consequence

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?

$3,000

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?

Interest only

Which of the following is correct concerning the taxation of premium in a key person life insurance policy?

Premiums are not tax deductible as a business expense

The premiums paid by the employer in a business life insurance policy are

Tax deductible by the employer

Which of the following is NOT true regarding policy loans?

Money borrowed from the cash value is taxable. *Money borrowed from the cash value is not taxable. Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy loans.

To attain insured status under social security, a worker must have earned at least how many credits during the last 13 quarters?

6 credits

Which of the following statements is TRUE concerning whole life insurance?

Lump-sum death benefits are not taxable

SIMPLE Plans require all of the following EXCEPT

At least 1,000 employees. *A SIMPLE plan is available to small businesses that employ not more than 100 employees receiving at least $5k in compensation from the employee during the previous year

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?

Withdrawals are not taxable *Any distributions from MECs are taxable, including withdrawals and policy loans. *The policy loans are taxable distributions, accumulations are tax deferred and distributions before age 59 1/2 incur a 10% penalty on policy gains

If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is

fully insured

All of the following statements are true regarding tax-qualifies annuities EXCEPT

Employer contributions are not tax deductible *Tax qualified annuities must be approved by the IRS and allow for tax deductible employer contributions. All withdrawals are taxed and earning grow tax deferred

Which of the following statements concerning a simplified employee pension plan (SEP) is incorrect?

SEPs are suitable for large companion

Which of the following is the best reason to purchase life insurance rather than annuities?

To create an estate

All of the following benefits are available under social security EXCEPT

welfare benefits

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT

At distribution, all amounts received by the employee are free of taxes. *funds in a qualified plan accumulate on a tax-deferred basis. However, at distribution any amount received by the employee will be treated as ordinary income for tax purposes

In a life settlement contract, whom does the life settlement broker represent?

The owner. *Life Settlement Broker is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners.

All of the following would be different between qualified and non qualified retirement plans EXCEPT

A.- IRS approval requirements **B.- Taxation on accumulation C.- Taxation of withdrawals D.- Taxation of contributions

What does liquidity refer to in a life insurance policy?

Cash values can be borrowed at any time. *Liquidity in life insurance refers to availability of cash to the insured through cash values.

All of the following are true of key person insurance EXCEPT

The plan is funded by permanent insurance only. *Key person coverage may be funded by any type of life insurance

If a company has a simplified employee pension plan, what type of plan is it?

A qualified plan for a small business

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

It is only taxable if the cash value exceeds the amount paid for premiums.

Which of the following best defines the "owner" as it pertains to life settlement contracts?

The policyowner of the life insurance policy

Which of the following is an eligibility requirement for all social security disability income benefits?

Have attained fully insured status

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement option

A 60-year-old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true?

The amount of the distribution is reduced by the amount of a 20% withholding tax.

Which of the following terms is used to name the nontaxed return of unused premiums?

dividend

A key person insurance policy can pay for which of the following?

Costs of training a replacement

What is the main purpose of the seven-pay test?

It determines if the insurance policy is an MEC.

Traditional IRA contributions are

Tax deductible

All of the following are general requirements of a qualified plan EXCEPT

The plan must provide an offset for social security benefits.

Who is a third-party owner?

A policyowner who is not the insured

Who can make a fully deductible contribution to a traditional IRA?

An individual not covered by an employer-sponsored plan who has earned income

A tax-sheltered annuity is a special tax-favored retirement plan available to

Certain groups of employees only *Available to certain groups of employees (nonprofit charitable, educational, religious, and other 501c(3) organizations, including all employee in public education

All of the following would be eligible to establish a Keogh retirement plan EXCEPT

The president and employee of one's family's corporation.

What type of life insurance is most commonly used for group plans?

annually renewable term

All of the following are business uses of life insurance EXCEPT

funding against general company financial loss *Both life and health insurance can be used for a variety of purposes in a business setting, including the funding of business continuation agreements, compensating executives and protecting the firm against financial loss resulting from the death or disability of key employees

All of the following statements are true regarding group insurance EXCEPT

Participants in the policy each receive a policy. *Small groups such as labor unions are eligible for group insurance, the group sponsor is the policyholder, participants in a group insurance plan are issued certificates of insurance

In which of the following instances would the premium be tax deductible?

Premiums paid by an employer on a $30,000 group term life insurance plan for employees

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as

Survivor protection Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.

Which of the following insurance arrangements will be appropriate for a parent buying a life insurance policy in a child where the parent is the policyowner?

Third-party ownership *Contracts that are owned by someone other than the insured are known as third-party ownership. Most policies involving third-party ownership are written in business situations or for minors in which the parent owns the policy.

The president of a manufacturing company has offered one of the company's officers a special individual annuity plan that is unavailable to lower-echelon employees. This plan would be funded with before-tax corporate dollars and it does not meet government approval standards. This annuity plan is

A non qualified annuity plan

All of the following are examples of third-party ownership of a life insurance policy EXCEPT

An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan.

Employer contributions made to a qualified plan

Are subject to vesting requirements

In life insurance policies, cash value increases

Grow tax deferred Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.

In a single employer group plan, what is the name of the policy issued to the employer?

Master contract

The advantage of qualified plans to employers is

Tax-deductible contributions

All of the following are characteristics of a group life insurance plan EXCEPT

There is a requirement to prove insurability on the part of the participants.

Which of the following statements about group life is correct?

The cost of coverage is based on the ratio of men and women in the group.

Which of the following describes the tax advantage of a qualified retirement plan?

The earnings in the plan accumulate tax deferred.

An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?

$3,000 The difference between the premiums paid and the cash value would be taxable. In this example, the difference between the premiums paid ($15,000) and the cash value ($18,000) is $3,000.

All of the following employees may use a 403(b) plan for their retirement EXCEPT

CEO of private corporation.

An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy?

She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan.

An employee quits his job and converts his group policy to an individual policy; the premium for the individual policy will be based on his

Attained age

For a retirement plan to be qualified, it must be designed for whose benefit?

employees

What is the official name for the Social Security program?

Old-Age Survivors Disability Insurance

A corporation is the owner and beneficiary of the key person life policy. If the corporations collects the policy benefit, then

The benefit is received tax free

Which of the following is an example of liquidity in a life insurance contract?

The cash value available to the policyowner. *Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

An employee quits his job on May 15 and doesn't convert his Group Life policy to an individual policy for 2 weeks. He dies in a freak accident on June 1. Which of the following statements best describes what will happen?

The insurer will pay the full death benefit from the group policy to the beneficiary. *The employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy.

What is the name of the insured who enters into a viatical settlement?

Viator. *Viator means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.

Which of the following would describe a legal document which would dictate who can buy a deceased partners share of a business and for what amount?

buy-sell agreement

A 403(b) plan, commonly referred to as a TSA, is available to be used by

teachers and not-for-profit organizations

Which of the following are examples of third-party ownership of a life insurance policy EXCEPT

An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan

If an employee wants to enter the group outside of the open enrollment period, to reduce adverse selection, the insurer may

require evidence of insurability

All of the following statements concerning an employer sponsored non qualified retirement plan are true EXCEPT

**a. The employer can receive a current tax deduction for any contributions made to the plan. b. The plan is a legal method of accumulating money for retirement needs. c. The plan can discriminate as to who may participate. d. The plan is not approved for favorable tax treatment by the IRS.

Which of the following is NOT true of life settlements?

The seller must be terminally ill *With life settlements, unlike with viatical settlements, the seller does not need to be terminally ill. They usually involve life insurance policies with a face amount of $250k or more, "key-person" coverage, corporate owned policies or policies representing excess coverage that is no longer needed and could be sold for an amount greater than the current cash value

Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?

They are tax free to terminally ill insured

Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated?

Those who have been insured under the plan for at least 5 years *If the master contract is terminated, every individual who has been on the plan for at least five years will be allowed to convert to individual insurance of the same coverage

Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement?

Any form of life insurance. *Any form of Life insurance may be used to fund a buy-sell agreement.

Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings?

they are tax deferred until withdrawn

All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT

The policy is owned by the company *The policy is owned by the employee

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.

An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses. What option could the insured utilize?

viatical settlement *A viatical settlement allows an insured with a life threatening condition to sell the existing policy in order to receive benefits when they are most needed. Viators typically receive a percentage of the policy's face value from the person who purchased the policy

Which of the following statements concerning a SEP is INCORRECT

SEP are suitable for large companies

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called?

Profit sharing plan. *A profit sharing plan is one where the employer will contribute monies into an employee's retirement plan when the company shows a profit. The others are all qualified plans, but company profit isn't an issue with them.

An employee is insured under her employers group life plan. If she terminates her group coverage, which of the following statements is INCORRECT?

The insured may choose to convert to term or permanent individual coverage

All of the following are personal uses of life insurance EXCEPT

buy-sell agreement *Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulations and liquidity. A buy-sell agreement is for business uses of life insurance