A.D. Banker Ch. 7

G, being undecided on what to do with $100,000 just received on F's policy, decides to leave the proceeds on deposit with the insurer at interest. The rate being paid is 5%. In one year, what amount will be taxable to G?

$5,000

All employer-paid premiums for amounts above $_________ of group life insurance are reported as taxable income to the employee.

$50,000

All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee.

$50,000

E has a $10,000 traditional whole life policy with a $4,000 cash value. Premiums paid to date are $3,500. If the policy lapses with a $4,000 loan outstanding, what amount will be taxable as income to E?

$500

A SIMPLE plan is available to companies that have ______ employees or less.

100

Which of the following could initiate the Accelerated Benefits Provision or Rider of a life policy?

A condition that is terminal

Which of the following statements about Section 1035 transactions is TRUE?

A new application is required when moving into a new life insurance policy

Which of the following persons may contribute to an HR-10 Keogh Plan?

A self-employed musician

If, as the result of an injury or illness, the insured is deemed to be terminal (i.e., expected to die within 1 or 2 years), what rider added to a life insurance policy would advance a portion of the face value?

Accelerated Benefit (Living Need)

If the annuitant dies during the annuity or payout phase, the remaining value in the account will be:

Added to the deceased annuitant's estate for valuation

If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period.

After-tax

Which of the following establishes a cost basis in an annuity?

After-tax contributions

The exception to the rule concerning the non-deductibility of life insurance premiums is:

All employer paid group life insurance premiums

Which of the following IRA transactions is subject to taxation?

An IRA rollover reinvested 75 days after receipt

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence?

Any amount received in excess of its cost basis is taxable as ordinary income

How are employer paid premiums on a group life insurance plan treated for tax purposes?

As an ordinary and necessary business expense

A stay at home father wants to open up an IRA. What is required in order for him to do so?

Be married to a spouse that has earned income

If no __________ is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate.

Beneficiary

A qualified plan pre-mature withdrawal tax penalty can be waived in all of the following circumstances, except:

Buying a first vacation home

Roth IRAs and Traditional IRAs have only one of the following in common. Which one is it?

Catch up contributions for those age 50 or older

All of the following types of qualified plans provide an employee with a retirement benefit based on the value of the employee's account at retirement, except:

Defined Benefit

When an employee receives a fixed and known benefit at retirement, it comes from a(n) __________ plan.

Defined Benefit

In which of the following plans does the company assume all of the investment risk?

Defined benefit

Which of the following plans is commonly known as a pension?

Defined benefit

___________ are not taxable because they are considered a return of excess premium.

Dividends

A qualified pension plan must meet ___________ requirements.

ERISA

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE?

If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

Roth IRAs and Traditional IRAs have only one of the following in common. Which one is it?

If a person owns a traditional IRA and a Roth IRA, the combined contributions to both cannot exceed the annual maximum IRA contribution for one IRA

ERISA sets minimum standards for pension plans primarily in the ______ industry.

Private

Unless an exception applies, life insurance proceeds are income taxable in which of the following circumstances?

When a transfer of ownership takes place while the insured was alive

H has an annuity funded with after-tax contributions. So far, H has placed $10,000 into the policy and it is now worth $25,000. If H cashes out the annuity, what is H's cost basis?

$10,000

An insured has contributed $12,000 in premiums toward a universal life policy. She decides to cancel the policy and take the cash value of $15,000. What are the tax consequences of this distribution?

$12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as ordinary income

A $500,000 policy is sold for $50,000. After the sale, the new owner pays $10,000 in life insurance premiums while the insured is alive. Upon death of the insured, how much of the death benefit is taxable?

$440,000

Unless a direct rollover (transfer) occurs, a ______% withholding is required.

20

With a Profit Sharing Plan contributions must generally be made in at least ________ consecutive years.

3 out of the last 5

All of the following are TRUE regarding non-qualified retirement plans, except:

Contributions are immediately tax deductible

Life insurance policy premiums establish a _________ in the policy for tax purposes.

Cost basis

What is the main purpose that IRC section 1035 was enacted?

To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one

Why would someone 1035 exchange their existing policy?

To seek higher returns, lower costs, and/or increased benefits

All of the following are times in which life insurance policy cash values can become taxable, except:

When a policy loan is taken out

SIMPLE plans are only available to companies that have ______ employees or less, and must be the only type of plan the company has available for the employees.

100

Traditional individual retirement account owner withdraws funds and takes the check to place into a new IRA. How much will the original IRA custodian withhold for taxes?

20%

When establishing a SIMPLE, what two different types of qualified plans must employers choose between?

401(k) or IRA

A public school teacher may contribute part of his or her paycheck income into a ____ plan and defer income taxes on not only the contribution but also the growth in the plan.

403(b)

Sherman is the custodian at an elementary school and participates in its qualified retirement plan. This describes a:

403(b) Tax-Sheltered Annuity

What happens if a traditional IRA account owner fails to start taking required minimum distributions on time or for the proper amount?

50% tax penalty on the excess accumulation

A non-school employer can set up a TSA plan for their employees under which of the following IRC section?

501(c)(3)

If a life insurance policy does not pass the ___ -pay test, it will be deemed a MEC.

7

Required Minimum Distributions must begin from Traditional IRAs by April 1st of the year following the year the account owner turns _____.

70 1/2

What is the age that is used to determine when the owner of a traditional IRA must begin to take Required Minimum Distributions?

70 1/2

Anyone under the age of 70 1/2 who has _________ can open up a Traditional IRA.

Earned Income

All of the following are characteristics of a 403(b) plan, except:

Employees can make direct payments into the retirement fund

All of the following statements about Group Life Insurance are true, except:

Employees receive a tax deduction for employer paid premiums

All of the following are true regarding ERISA qualified plans, except:

Employers must establish a pension plan

When an annuitant annuitizes their annuity that has a cost basis in it, the amount of the income benefit payment subject to tax is determined by using the:

Exclusion ratio

ERISA is a ________ law.

Federal

When withdrawing cash from a cash value life insurance policy, the amount of the withdrawal up to the policy's cost basis is tax-free. This tax accounting rule is referred to as:

First-In, First-Out (FIFO)

Which of the following best defines the 'Cost Recovery Rule'?

Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender

The only time a policy loan is taxable is in which of the following situations?

Having the policy lapse with a loan outstanding in excess of cost basis

When would a life insurance policy loan be subject to income taxation?

If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis

In a SIMPLE plan, employer contributions vest:

Immediately at 100%

The Modified Endowment Contract (MEC) rules were put into place because:

Individuals were overfunding life insurance policies and using them as tax-free investment vehicles instead of a way to protect survivors against the financial cost of one's death

If no beneficiary is living at the time of the insured's death, the benefit will automatically be paid __________.

Into the insured's estate

Which of the following was the original plan for the unincorporated sole proprietor and their eligible employees?

KEOGH Plans or HR-10

Which of these is a qualified plan designed specifically for unincorporated self-employed individuals?

Keogh Plan

An Individual Retirement Account (IRA) may be funded with all of the following, except:

Life Insurance

All of the following are unique features of a Roth IRA compared to a traditional IRA, except:

Life insurance is an approved funding vehicle

If money is paid to change the ownership on a policy covering an insured who is not terminally ill, this is referred to as a(n) __________.

Life settlement

Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)?

Lump sum death benefit paid to the beneficiary

Under ERISA qualified plans must meet all of the following requirements, except:

May discriminate in favor of highly compensated employees

ERISA requires that those who establish qualified plans must meet certain ___________standards.

Minimum

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit?

Monthly

For an individually purchased life insurance policy, the premiums are considered a __________.

Nondeductible personal expense

All of the following transactions qualify for IRC Section 1035 exchange tax treatment, except:

Nonqualified tax deferred annuities may be exchanged for life insurance policies

F has a $100,000 face amount term life policy for which F paid $10,000 in premium to date. F dies and the benefit is paid out to G, the beneficiary. What amount of the death benefit received is taxable as income to G?

Nothing

How often may a person perform a rollover from one IRA to another?

Once a year

H owns a nonqualified variable annuity that has a separate account invested in the stock market. If H withdraws funds from the annuity, the earnings on the withdrawal will be taxed as:

Ordinary income

If a taxable event occurs regarding the cash value of a permanent life insurance policy, in virtually every case, the taxable amount is taxed as:

Ordinary income

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit must pay income tax on any gain from the policy at _________ tax rates.

Ordinary income

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit:

Pays income tax on any gains at his or her own income tax rate

All of the following are the benefits of having an employer sponsored retirement plan be ERISA qualified, except:

Plan withdrawals are tax free

All of the following regarding policy loans are true, except:

Policy loans are taxable if the policy remains in effect and the amount borrowed exceeds the premiums paid

All of the following are characteristics of a 401(k) plan, except:

Post retirement distributions are made federal income tax free

A life insurance 1035 exchange can only be completed after:

Proof of insurability has been provided and accepted

ERISA requires which of the following?

Qualified plans must meet certain minimum standards

What is the name of the plan that is very popular with self-employed individuals and uses employer funded IRA's for their employees?

SEP

KEOGH plans have been largely replaced by ________ plans, which have the same contribution limits, but much less paperwork.

SEP IRA

All of the following are eligible to participate in a HR-10 Keogh Plan, except:

Silent partner

Chad and Sue have successfully owned and operated their bakery for 10 years and have decided to plan for their retirement. They are not incorporated and have no full-time employees, and want a qualified plan to maximize the tax advantages while at the same time not bog them down with paperwork. Which of the following plans would be their best option?

Simplified Employee Pension (SEP)

Concerning eligibility for a 403(b) retirement plan, which of the following would not qualify?

Student athlete receiving a scholarship and a stipend

If an annuitant withdraws funds from their annuity prior to age 59 1/2 what is the tax consequence?

Tax and 10% penalty tax on the withdrawal that represents earnings

Which is true regarding the taxation of the cash value in a Universal Life Policy prior to withdrawal?

Tax deferred

A permanent policy is surrendered for its cash value, and that sum is greater than the amount of premiums paid in. How is the excess taxed?

Taxed as ordinary income

Joe had $500,000 of life insurance at work. He has an additional $40,000 life insurance policy the company purchased on all employees. His wife is the primary beneficiary and their four children are contingent beneficiaries. Upon Joe's death, what are the tax consequences to his beneficiaries?

The $540,000 lump sum proceeds will be received income tax-free

Under the Modified Endowment Contract rules the 7-Pay Test is defined as:

The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit

What portion of an employee's pension plan withdrawal is subject to tax?

The entire withdrawal

H is employed by a company that provides group life insurance. How much of the employer-paid premiums for H's $150,000 coverage, if any, is going to be reported as taxable income to H?

The premium paid for $100,000

The life insurance policy cost basis consists of:

The premiums paid in

If a corporation owns an annuity, what is the tax ramifications?

There is no tax deferral benefit on any earnings

Why are dividends not taxable as income when paid out to a participating policyholder?

They represent a return of a portion of the premium paid