Chapter 7: Exam

Employer-paid premiums for employee group term life do not constitute taxable income to the employee for coverage up to ___________. A) $40,000 B) $30,000 C) $50,000 D) $25,000

C) $50,000 Employer-paid group life insurance premiums for coverage up to $50,000 are not taxable as income to the employee.

Which is true regarding the taxation of the cash value in a Universal Life Policy prior to withdrawal? A) Tax deferred B) Tax free C) Tax interpolated D) Tax deductible

A) Tax deferred All life insurance cash value accumulations are tax deferred. The primary benefit of Universal Life is the potential of a higher interest crediting rate than the fixed rate in whole life policies.

Clayton is asking his life insurance producer about any potential taxation issues related to his $100,000 personal Whole Life policy. All of the following are TRUE, except: A) The interest that he pays on policy loans is tax-deductible B) Upon surrender of the policy, he will be taxed on any amount by which the cash value exceeds the cost basis (premiums paid) of the contract C) Since his policy is a personal policy, he cannot deduct the premiums he pays for the policy D) Annual increases in the policy's cash value are not taxable at the time they are credited to the policy

A) The interest that he pays on policy loans is tax-deductible The interest on policy loans is not tax-deductible.

Why are dividends not taxable as income when paid out to a participating policyholder? A) They represent a return of a portion of the premium paid B) Because they are often the sole source of a policyholders' income C) They are paid from a non-profit organization D) To create parity with nonparticipating policies under the tax code

A) They represent a return of a portion of the premium paid A participating insurance company's dividend consists of the amount of premium that is returned to the policyowner if the insurance company achieves lower mortality and expense costs than expected.

When funds are transferred from one qualified plan to the trustee of an IRA or another plan, there is a _______ day requirement. A) 60 B) 0 C) 90 D) 30

B) 0 A rollover is a payment made directly to the IRA owner. The owner has 60 days to deposit the check into a new IRA to avoid taxes and penalties. A direct rollover applies when the funds are transferred from one qualified plan to the trustee of an IRA or another plan. There is no 60 day requirement.

Which of the following definitions does not match the term? A) Guaranteed Purchase Option -- Guarantees that on specified dates, ages or occurrences, the insured may purchase additional monthly benefits, if income justifies it, without proof of insurability B) Return of Premium Rider -- A special provision that provides for a refund of the cash value if disability occurs after a certain period C) Cost of Living -- Automatically increases monthly benefits, after the onset of disability, often in relation to increases in the Consumer Price Index D) Waiver of Premium -- In the event total disability continues beyond a specified period, the insurer will waive premiums for the duration of the disability

B) Return of Premium Rider -- A special provision that provides for a refund of the cash value if disability occurs after a certain period The Return of Premium Rider provides for a refund of the entire or some part of the premium (not cash value) based upon favorable claim activity over a specified period.

The life insurance policy cost basis consists of: A) The net amount at risk B) The premiums paid in C) The dividends received D) The cash value of the policy

B) The premiums paid in The premiums paid establish a cost basis in the policy.

All of the following are TRUE regarding non-qualified retirement plans, except: A) Upon withdrawal only the earnings are subject to taxation B) Contributions are not tax deductible C) Contributions are immediately tax deductible D) Earnings can be tax deferred until withdrawn

C) Contributions are immediately tax deductible Because the plan is non-qualified many of the tax benefits are not available, such as tax deductibility of contributions.

In the event that an insured receives a periodic benefit as the result of exercising the Accelerated Death Benefit Rider, what information must the insurer provide to the insured? A) The amount of taxable income that they will be reporting to the IRS B) The life expectancy of the insured on a semi-annual basis C) The amount of the accelerated payment, the remaining death benefit and cash values D) Verification and update of the policy ownership and beneficiary designations

C) The amount of the accelerated payment, the remaining death benefit and cash values The Accelerated Death Benefit Rider advances a terminally ill insured a portion of the death benefit.

Under the Modified Endowment Contract rules the 7-Pay Test is defined as: A) Any life insurance policy that endows in 7 years B) The least amount of premium required to be paid in the first 7 years to maintain the policy to age 70 C) 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 D) The cash value at the end of year 7 exceeds the total premiums paid

C) 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 A MEC occurs at any time within the first seven years of a policy (or of a material change to a policy, such as a death benefit increase or decrease) if the sum of premiums paid exceeds the amount of premiums that would be paid in a 7-pay contract.

P is 75 years old and his required minimum distribution for the year is $10,000. However, P only withdraws $2,000. What is the amount of the resulting tax penalty? A) A $1,000 tax penalty B) A $5,000 tax penalty C) An $8,000 tax penalty D) A $4,000 tax penalty

D) A $4,000 tax penalty Failure to take all of an RMD results in a 50% penalty tax on the amount not distributed. The undistributed amount is $8,000 (10,000 - 2000 = 8000). 50% of $8,000 is $4,000.

Nancy has an IRA and wants to move her funds directly from one financial institution to another while still maintaining the assets within an IRA account. How many times can she do this? A) Once a year B) Once a quarter C) Once every 6 months D) As often as she likes

D) As often as she likes This describes an IRA transfer which can be done as often as she wants.

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: A) First-In, Still There (FIST) B) Dollar Cost Averaging C) Last-In, First-Out (LIFO) D) First-In, First-Out (FIFO)

D) First-In, First-Out (FIFO) FIFO accounting is first-in, first-out, which is why the recovery of amounts up to the cost basis are income tax-free.

Which of the following scenarios will trigger an income tax due? A) Receiving a participating policy's cash dividend B) Taking out a policy loan in an amount greater than the total premiums paid in C) Cancelling the policy during the free look period D) Interest earned on dividends left on deposit with the insurer

D) Interest earned on dividends left on deposit with the insurer While the dividend is free from income tax the interest earned on the dividend is subject to tax.

All of the following are true regarding IRA transfers, except: A) Funds are directly transferred from one financial institution to another B) Transfers are not taxable events C) It is a transaction between the same types of plan, such as two IRA accounts D) They can only take place once a year

D) They can only take place once a year An IRA transfer is the movement of funds between the same type of plan, such as two IRA accounts. The money is transferred directly from one financial institution to another. Transfers are not taxable and can take place as often as desired.