Chapter 7 Exam

A Section 1035 Exchange is permitted in each of the following transactions, except: A - An annuity is exchanged for a Whole Life Policy B - A Variable Universal Life Policy is exchanged for an Equity-Indexed Annuity C - A Whole Life Policy is exchanged for a Universal Life Policy D - An annuity contract is exchanged for another annuity contract

A - An annuity is exchanged for a Whole Life Policy IRC section 1035 does not authorize the exchange of an annuity policy for any kind of life insurance policy.

If a policyowner of a life insurance policy accidently pays in premiums in excess of the MEC guidelines, the insurer can refund the excess within ______ days of the end of the contract year. A - 10 B - 45 C - 60 D - 30

C - 60 Any excess premium can be refunded by the insurer within 60 days after the end of the contract year.

All of the following statements about Group Life Insurance are true, except: A - Employees are taxed on any premiums paid on insurance in excess of $50,000 B - Employer paid premiums are tax deductible C - Employees receive a tax deduction for employer paid premiums D - Employee paid premiums are not tax deductible

C - Employees receive a tax deduction for employer paid premiums Employer, not employee, paid premiums are tax deductible. Only when the insurance benefit exceeds $50,000 does the employee have to report it as taxable income.

If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________. A - MEC B - Commodity C - Savings account D - Annuity

A - MEC When a life insurance policy does not pass the 7-pay test, it will be deemed a MEC.

Death benefits are paid to the estate of the policyowner/insured in which of the following situations? A - The contingent beneficiary has outlived the primary beneficiary B - The beneficiary is the estate C - The primary beneficiary is a minor D - The primary beneficiary is the deceased's spouse

B - The beneficiary is the estate If the beneficiary is listed as the estate, then upon death of the insured that is where the funds will end up.

If Robert wishes to cash out his annuity at age 70 after having it for over 40 years, what should he know about prior to doing it? A - He will pay a surrender charge B - The amount of tax-deferred earnings will now become taxable C - He will receive only the principal amount he invested D - Because he is 70, he is not subject to income taxes

B - The amount of tax-deferred earnings will now become taxable Cashing out an annuity exposes the tax-deferred earnings to income taxation.

Which of the following is the reason why premiums paid on personal life insurance are not deductible? A - They are considered to produce a guaranteed source of income B - They are considered a personal expense C - It makes the deductibility of employer-paid premiums more attractive D - They rarely exceed 10% of a taxpayer's AGI

B - They are considered a personal expense For individuals, premiums are considered a personal expense and are not deductible. They are paid with after-tax dollars. This establishes a cost basis in the policy for tax purposes.

The exclusion ratio states that once the entire cost basis has been recovered from a non-qualified annuity income benefit payout then any further payments are __________. A - Fully taxable since the excess payments must represent only earnings B - Taxed at the favorable annuity continuation income rates C - Still tax favored for annuitants over the age of 70 D - Taxed as capital gain but only 50% of the gain is applied

A - Fully taxable since the excess payments must represent only earnings Once the entire cost basis is recovered than any remaining payments are fully taxable as ordinary income.

ERISA sets minimum standards for pension plans primarily in the ______ industry. A - Public and Private B - Quasi-government C - Private D - Public

C - Private ERISA focuses in on the private industry pension plans.

Under the Modified Endowment Contract rules the 7-Pay Test is defined as: A - The least amount of premium required to be paid in the first 7 years to maintain the policy to age 70 B - Any life insurance policy that endows in 7 years 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.

All of the following are transactions that qualify as a 1035 exchange, except: A - A traditional whole life policy into a universal life policy B - An equity indexed annuity into a variable universal life insurance policy C - A variable annuity into a fixed annuity D - An equity indexed annuity into a variable annuity

B - An equity indexed annuity into a variable universal life insurance policy Annuities cannot be 1035 exchanged into a life insurance policy.

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE? A - Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains B - If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment C - The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy D - Taxable distributions include cash value surrenders and policy loans

B - If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment Any funds distributed are subject to a last-in, first-out (LIFO) tax treatment, meaning gains will be taxed before principal.

Life insurance will be considered 'incidental' to a qualified plan if the insurance amount is not more than ________ times the expected monthly benefit amount. A - 150 B - 250 C - 200 D - 100

D - 100 Generally, life insurance will be considered 'incidental' to a qualified plan if no more than 50% of the contributions are used to pay insurance premiums, and the insurance amount is not more than 100 times the expected monthly benefit amount.

Generally, the ________ is the amount of premiums paid into the policy less any dividends or withdrawals previously taken. A - Cash value B - Loan amount C - Net premium D - Cost basis

D - Cost basis Generally, the cost basis is the amount of premiums paid into the policy, less any dividends or withdrawals previously taken.

If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the ________. A - End of the calendar year B - Latest premium payment was received C - End of the tax year D - End of the contract year

D - End of the contract year If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the end of the contract year.