Insurance #4
Which of the following is true regarding taxation of dividends in participating policies? A. Dividends are not taxable. B. Dividends are taxable only after a certain amount is accumulated annually. C. Dividends are taxable in some life insurance policies and nontaxable in others. D. Dividends are considered income for tax purposes.
Dividends are not taxable. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums. The interest earned on the dividends, however, is subject to taxation as ordinary income.
Which of the following would be considered a nonqualified retirement plan? A. 401(k) B. Keogh plan C. Roth IRA D. Split-dollar plan
Split-dollar plan Examples of nonqualified plans are individuals annuities and deferred compensation plans for highly paid executives, split-dollar insurance arrangements, and Section 162 executive bonus plans.
A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then A. The benefit is received tax free B. The benefit is subject to the exclusionary rule C. IRS has no jurisdiction D. he benefit is received as taxable income
The benefit is received tax free. Should a key person die, the benefit is treated as a reimbursement to the business for loss of services from the key person.
Which of the following is an example of liquidity in a life insurance contract? A. The money in a savings account B. The cash value available to the policyowner C. The death benefit paid to the beneficiary D. The flexible premium
The cash value available to the policyowner. Liquidity in life insurance refers to available of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.
Death benefits payable to a beneficiary under a life insurance policy are generally a. exempt from income taxation if over $10K b. not subject to income taxation by the Federal Government c. subject to income taxation by the Feds. Gov d. exempt from income taxation if under $10K
not subject to income taxation by the Federal Government when premiums are paid with after tax dollars, the death benefit is generally not subject to federal income taxation.
In a life settlement contract, whom does the life settlement broker represent? A. the owner B. The insurer C. The beneficiary D. The life settlement intermediary
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 statements concerning the use of life insurance as an EXECUTIVE BONUS are correct EXCEPT A. the policy is owned by the company B. any type of insurance policy may be used C. the employer pays a bonus to a selected employee to fund the policy D. it is considered a non-qualified employee benefit
the policy is owned by the company the policy is owned by the employee
All of the following are personal uses of life insurance EXCEPT A. Buy-sell agreement B. Survivor protection C. Estate creation D. Cash accumulation
Buy-sell agreement Personal uses of life insurance include survivor protection, estate creation, and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.
In which of the following instances would the premium be tax deductible? A. Premiums paid by a mother on her son's policy. B. Premiums paid by an employer on the life of a key person. C. Premiums paid by an employer on a $30,000 group term life insurance plan for employees. D. Premiums paid by an individual on his/her own life insurance.
Premiums paid by an employer on a $30,000 group term life insurance plan for employees. As a general rule, premiums paid for life insurance are not tax deductible. The exception to this rule is when an employer buys group term life insurance for his employees since it is considered a business expense.
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? A. The insurer will pay the death benefit minus one month's premium. B. The insurer will pay nothing because the employee has terminated his group insurance and hasn't started the individual one. C. The insurer will pay the full death benefit from the group policy to the beneficiary. D. The insurer will pay a reduced death benefit to the beneficiary.
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.
Which of the following is NOT true of life settlements? A. They could be sold for an amount greater than the current cash value. B. They involve insurance policies with large face amounts. C. The seller must be terminally ill. D. They could be used for a key person coverage.
The seller must be terminally ill. Wth 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.
When an employee terminates coverage under a group insurance policy, coverage continues in force A. for 60 days B. until the employee can obtain coverage under a new group plan C. until the employee notifies the group insurance provider that coverage conversion policy is issued. D. for 31 days
for 31 days An employee has 31 days under the conversion privilege to convert to an individual policy.
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? a. neither principal nor interest b. principal only c. interest only d. both
interest only if a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.
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. an executive annuity plan B.subject to government standards C. illegal D. a non-qualified annuity plan
non-qualified annuity plan Non-qualified plans are a perfectly legal way for selected employee to receive certain types of benefits. Before-tax corporate dollars can be used for these plans, and they are not subject to government standards. Because of this, however, non-qualified plans contributions are not tax-deductible, unlike with qualified plans.
All of the following are characteristics of group life insurance EXCEPT a. individuals covered under the policy receive a certificate of insurance b. certificate holders may convert coverage to an individual policy without evidence of insurability c. premiums are determined by the age, sex, and occupation of each individual certificate holder d. amount of coverage is determined according to non discriminatory rules
premiums are determined by the age, sex, and occupation of each individual certificate holder premiums re determined by the age, sex, and occupation of the entire group
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 a. survivor protection b. life planning c. survivorship insurance d. juvenile protection provision
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.
Traditional IRA contributions are a. partially tax deductible depending on the income level b. tax deductible c. deducted based on the income level d. never tax deductible
tax deductible the following taxation rules apply to contributions made to traditional IRA plans: tax-deductible contributions for the year of the contribution (based on the person's income); contributions must be made in "cash" in order to be tax deductible; excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA; and tax-deferred earnings are not taxed until withdrawn.
which of the following best defines the "owner" as it pertains to life settlement contracts? a. a financial entity that sponsors the transaction b. a fiduciary for the contract c. the insurance provider d. the policyowner of the life insurance policy
the policyowner of the life insurance policy the term owner refers to the owner of the policy who may seek to enter into life settlement contract. The term does not include an insurance provider, a qualified institutional buyer, a financing entity, a special purpose entity, or a related provider trust.
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?? a. those who have worked in the company for at least 3 years b. those who have dependents c. those who have no history of claims d. those who have been insured under the plan for at least 5 years
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 5 years will be allowed to convert to individual insurance of the same coverage.
What are the consequences of withdrawing funds from a traditional IRA prior to the age of 59 1/2?
10% penalty
Who is a third-party owner? a. an irrevocable beneficiary b. a policyowner who is not the insured c. an insurer who issues a policy for two people d. an employee in a group policy
A policyowner who is not the insured Third-party owner is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it.
Group life insurance policies are written as what type of insurance?
Annually renewable term
SIMPLE Plans require all of the following EXCEPT a. employees must receive a minimum of $5,000 in annual compensation b. at least 1,000 employees c. no other qualified plan can be used d. no more than 100 employees
At least 1,000 employees. A SIMPLE plan is available to small businesses that employ not more than 100 employees receiving at least $5,000 in compensation from the employer during the previous year.
What does liquidity mean in a life insurance policy?
Availability of cash value
What does "liquidity" refer to in a life insurance policy? A. The death benefit replaces the assets that would have accumulated if the insured had not died. B. The policyowner receives dividend checks each year. C. The insured receives payments each month in retirement. D. Cash value can be borrowed at any time.
Cash value can be borrowed at any time. Liquidity in life insurance refers to availability of cash to the insured through cash values.
Which of the following terms is used to name the nontaxed return of unsused premiums? A. interest B. Surrender C. Dividend D. Premium return
Dividend The return of unused premiums is called a dividend. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums.
Life insurance may be used to pay state inheritance taxes and federal estate taxes eliminating the need to sell assets from the estate. What is this called?
Estate conservation
In a direct rollover, how is the money transferred from one plan to the new one? A. From trustee to the participant. B. From the participant to the new plan. C. From the original plan to the original custodian. D. From trustee to trustee.
From trustee to trustee. In a direct rollover, the distribution is made directly from the trustee of the first plan to the trustee or administrator/custodian of the new IRA plan.
What type of policy is typically issued without proof of insurability from the insured?
Group policy
If a retirement plan or annuity is "qualified", this means A. It is approved by the IRS B. It has a penalty for early withdrawal C. It accepts after-tax contributions D. It is noncancellable
It is approved by the IRS A qualified retirement plan is approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth.
In qualified plans, are employer contributions taxed as income to the employees?
No, employer contributions are not taxed as income to the employees
Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? A. Premiums are tax deductible by the key employee B. Premiums are tax deductible as a business expense C. Premiums are taxable to the employee D. Premiums are not tax deductible as a business expense
Premiums are not tax deductible as a business expense The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.
What are the three types of Social Security benefits?
Retirement, disability and survivors
The premiums paid by the employer in a business life insurance policy are a. never taxable to the employee b. tax-deductible by the employer c. tax-deductible by the employee d. always taxable to the employee
Tax deductible by the employer. The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are tax deductible to the employer as a business expense.
Who owns a group life insurance contract?
The employer (also known as the sponsor of the group)
Social Security was created to provide all of the following benefits EXCEPT A. Retirement income B. Unemployment income C. Survivor's benefits D. Disability income
Unemployment income Social Security is designed to provide protection against financial loss due to old age, disability, or death. It also provides income during retirement.
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? A. Nonpayment of premium B. Change of beneficiary C. Viatical settlement D. Estate liquidation
Viatical settlement A viatical statement 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 purchases the policy.
Who would be considered a third-party owner?
an individual or an entity who is not the insured
All of the following are requirements of eligibility for Social Security disability income benefits EXCEPT a. fully insured status b. waiting period of 5 months c. being age 65 d. inability to perform any gainful work
being age 65 The term fully insured refers to someone who has earned 40 quarters of coverage (the equivalent of 10 yrs of work), and is therefore entitled to receive Social Security retirement, Medicare, and survivor benefits. The waiting, or elimination period for Social Security disability benefits is 5 months.
What type of policy is typically issued without proof of insurability from the insured?
group policy
What type of policy issues certificates of insurance to the insureds?
group policy
In life insurance policies, cash value increases A. are only taxed when the owner reaches age 65 B. grow tax deferred C. are income taxable immediately D. are taxed annually
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.
Which of the following is an eligibility requirement for all Social Security Disability Income benefits? a. have permanent kidney failure b. be at least age 50 c. have attained fully insured status d. be disable for at least 1 year
have attained fully insured status although social security offers many benefits, such as retirement, survivors and Medicare , only those who have attained fully insured status are eligible for Disability Income benefits. Contributing to Social Security for 40 quarters (10 years) attains fully insured status.
In what form of payment must the contributions to a traditional IRA be made?
in cash (or cash equivalents)
Which of the following is NOT true regarding a non-qualified retirement plan? A. earnings grow tax deferred B. it needs IRS approval C. Contributions are not currently tax deductible D. It can discriminate in benefits and selecting participants
it needs IRS approval non-qualified retirement plans do not meet the IRS requirements for favorable tax treatment of deductions and contributions; therefore, they do not need to be approved by IRS.
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an a. endowment b. nonqualified annuity c. modified endowment contract d. accelerated benefit policy
modified endowment contract any cash value life insurance policy that develops cash value faster than a seven-day whole life contract is called ^^
SIMPLE plans are available to groups of how many employees?
no more than 100
Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?
no, lump-sum benefits are received tax free.
What is the official name for the Social Security program? A. old age survivors disability insurance B. social insurance program C. defined benefit retirement insurance D. qualified pension
old age survivors disability insurance Social Security is formally called Old Age Survivors Disability Insurance - OASDI
What is the primary purpose of 401(k) plan?
provide retirement income
All of the following employees may use a 403(b) plan for their retirement EXCEPT a. a school bus driver b. a part-time classroom aide c. the vice president of a charitable organization d. the CEO of a private corporation
the CEO of a private corporation not all public employees are eligible for 403(b) plans, or tax-sheltered annuities, only employees of public education (local, state, or federal), as well as employees of charitable organizations.
Which of the following is INCORRECT concerning a noncontributory group plan? a. they help to reduce adverse selection against the insurer b. they require 100% employee participation c. the employer pays 100% of the premiums d. the employees receive individual policies
the employees receive individual policies the employer receives a master policy, and employees receive a certificate of insurance
When planning for survivor protection in life insurance, what needs to be considered?
the insured's current assets, liabilities, and survivor's needs
If a retirement plan is qualified, what does that mean?
the plan has favorable tax treatment.
Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings? a. taxes must be paid in full b. employer's matching contributions are taxed c. 75% of employee's contributions are taxed d. they are tax deferred until withdrawn
they are tax deferred until withdrawn taxation is deferred on both contributions and earnings until funds are withdrawn.
All benefits are available under Social Security EXCEPT a. old-age and retirement benefits b. disability benefits c. death benefits d. welfare benefits
welfare SS is an entitlement program, not welfare program
When would life insurance policy proceeds be included in the insured's taxable estate?
when there is an incident of ownership at the time of death.
If an insured terminates membership in group life insurance, to what type of insurance can the insured convert the coverage?
whole life
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another, and what is the tax consequence of a direct transfer? A. $8,000, no tax consequence B. $8,000, tax on growth only C. $10,000, tax on growth only D. $10,000, no tax consequence
$10,000, no tax consequence During an IRA direct transfer (direct rollover), the full amount gets reinvested from one plan to the other.
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? A. $50K B. $18K C. $15K D. $3K
$3K 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.
What percentage of a company's employees must take part in a noncontributory group life plan? A. 0% B. 25% C. 75% D. 100%
100% If the employer pays all of the premium, all employees must be covered to avoid adverse selection.
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? A. 100% participation of members is required in noncontributory plans B. each member covered receives a policy C. Coverage cannot be converted when an individual leaves the group D. premiums are determined by age, occupation, and individual underwriting.
100% participation of members is required in noncontributory plans If the employer pays all of the premiums, then all employees must be included.
Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer then makes a matching contribution up to an amount equal to what percent of the employee's annual wages? a. 10 b. 3 c. 5 d. 7
3 Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer can then contribute up to an amount equal to 3% of the employees' annual compensation. Contributions and earnings are both tax-deferred until funds are withdrawn.
What is the number of credits required for fully insured status for Social Security disability benefits? A. 4 B. 10 C. 30 D. 40
40 The term "fully insured" refers to someone who has earned 40 quarters of coverage (10 years of work times 4 maximum annual credits.)
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? A. 1 B. 3 C. 5 D. 10
5 If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.
The minimum number of credits required for partially insured status for Social Security disability benefits is a. 4 credits b. 6 credits c. 10 credits d. 40 credits
6 credits To be considered partially insured, an individual must have earned 6 credits during the last 13 quarter period.
What is the penalty for excessive contributions to a traditional IRA?
6%
Which of the following is the required number of participants in a contributory group plan? a. 100% b. 25% c. 50% d. 75%
75% Under a contributory group plan, an insurer will require that 75% of eligible employees be included in the plan.
What is the name for an overfunded life insurance policy?
A Modified Endowment Contract (MEC)
If a company has a Simplified Employee Pension plan, what type of plan is it? A. the same as an IRA, with the same contribution limits B. An undefined contribution plan for large businesses C. A qualified plan for a small business D. The same as a 401(k) plan
A qualified plan for a small business. A SEP is a type of qualified plan suited for the small employer or for self-employed. A SEP is an employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or a specified maximum contribution amount.
Who may contribute to an HR-10 plan ?
A self-employed individual
Employer contributions made to a qualified plan A. are subject to vesting requirements B. may discriminate in favor of highly paid employees C. are after-tax contributions D. are taxed annually as salary
Are subject to vesting requirements Qualified plans must have a vesting requirement.
All of the following are examples of third-party ownership of a life insurance policy EXCEPT? A. When an insured purchased a new home, the insured made an absolute assignment of a life insurance policy to the mortgage company. B. An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan. C. An insured couple purchases a life insurance policy insuring the life of their grandson. D. A company purchases a life insurance policy on their manager, who is an important part of the operation.
B. An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan. A collateral assignment is the transfer of some or all of the death benefits of the policy to a creditor as security for a loan, but does not give the creditor the rights of ownership. In the event of the insured's death, the creditor would only be able to recover that portion of the policy's proceeds equal to the creditor's remaining interest in the loan.
A life insurance policy used to fund an agreement that contractually establishes the intent of someone to purchase a business upon the insured business owner's death is a A. Key person policy B. Split-dollar plan C. Stock redemption plan D. Buy-sell agreement
Buy-sell agreement Buy-sell agreements are used to contractually establish the intent of someone else to purchase the business upon the insured's death, and to set a value (purchase price) on a business. Life insurance is used to fund the buy-sell agreement. Any type of life insurance may be purchased to provide the necessary funds for the agreement. Insurance can be used to either fully or partially fund the buy-sell agreement.
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Cash value growth is tax deferred
A key person insurance policy can pay for which of the following? A. Costs of training a replacement B. Loss of personal income C. Workers compensation D. Hospital bills of the key employee
Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee
A partnership buy-sell agreement in which each partner purchases insurance on the life of each of the other partners is called A. Stock redemption plan B. Cross-purchase plan C. Key person plan D. Split-dollar plan
Cross-purchase plan In a Cross-Purchase Plan each partner involved purchases insurance on the life of each of the other partners. With a cross-purchase plan, each partner is the owner, premium-payor, and beneficiary of the life insurance on the lives of the other partners. The amount of the life insurance is equal to each partner's share of the purchase price of the deceased partner's interest in the business.
What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?
Death benefits are generally not subject to income taxes.
In the Executive Bonus plan, who is the owner of the policy, and who pays the premium? A. Company is the owner, but the executive pays the premium B. Board of directors is the owner, and the board of directors pays the premium C. Company is the owner, and the company pays the premium D. Executive is the owner, and the executive pays the premium
Executive is the owner, and the executive pays the premium Executive buys the policy and pays the premium, and the employer reimburses the executive for cost (or pays a bonus in the amount of the premium). Since the executive is receiving compensation, the amount paid by the employer would be considered taxable income.
What are the characteristics of the group that underwriters will consider before issuing a group life policy?
Group's purpose, size, financial strength and turnover
What qualified plan is suitable for the self-employed?
HR-10 or Keogh
What are some examples of qualified plans?
IRA, 401(k), HR10 (Keogh), SEP, SIMPLE
If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?
Interest only
Which of the following is an IRS qualified retirement program for the self-employed? a. 401(k) b. Keogh c. Split Dollar d. Buy and Sell Agreement
Keogh The Keogh or HR-10 plan allow self-employed individuals to establish tax favored retirement plans for themselves and their eligible employees.
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? A. Mortality rate B. Risk exposure C. Morbidity D. Life expectancy
Life Expectancy -is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean).
What are the personal uses of life insurance?
Survivor protection, estate creation and conservation, cash accumulation and liquidity
Which of the following describes the tax advantage of a qualified retirement plan? A. Distributions prior to age 59 1/2 are tax deductible. B. Employer contributions are deductible as a business expense when the employee receives benefits. C. Employer contributions are not taxed when paid out to the employee. D. The earnings in the plan accumulate tax deferred.
The earnings in the plan accumulate tax deferred. Contributions are tax deferred, and earnings on the money in the plan accrue on a tax-deferred basis.
Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? A. The key employee is the owner and beneficiary B. The key employee is the owner and the employer is the beneficiary C. The employer is the owner and beneficiary D. The employer is the owner and the key employee is the beneficiary
The employer is the owner and beneficiary With the key-person coverage, the business (employer) is the applicant, owner, premium payer, and beneficiary
An employee is insured under her employer's group life plan. If she terminates her group coverage, which of the following statements is INCORRECT? A. The insured may choose to convert to term or permanent individual coverage. B. The insured would not need to prove insurability for a conversion policy. C. The insured may convert coverage to an individual policy within 31 days. D. The premium for individual coverage will be based upon the insured's attained age.
The insured may choose to convert to term or permanent individual coverage. When group coverage is converted to an individual policy, the insurer will determine the type of coverage, usually permanent insurance.
All of the following are general requirements of a qualified plan EXCEPT A. The plan must provide an offset for social security benefits. B. The plan must be communicated to all employees. C. The plan must be for the exclusive benefits of the employees and their beneficiaries. D. The plan must be permanent, written, and legally binding.
The plan must provide an offset for social security benefits. Plans must meet the general requirements established by IRS.
Which of the following insurance arrangements will be appropriate for a parent buying a life insurance policy on a child where the parent is the policyowner? A. Third-party B. An irrevocable beneficiary C. A buy-sell agreement D. Family term rider
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.
What is the purpose of key person insurance? A. To insure retirement benefits are available to all key employees B. To maintain an account that insures the owner of a company remains solvent C. To lessen the risk of financial loss because of the death of a key employee D. To provide health insurance to the families of the key employees
To lessen the risk of financial loss because of the death of a key employee A business can suffer a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.
What is the name of the insured who enters into a viatical settlement? A. Viator B. Third party C. Contingent D. Viatical broker
Viator Viator means the owner of life insurance policy who enters into or seeks to enter into a viatical settlement contract.
What is the name of the insured who enters into a viatical settlement? A. Third party B. Contingent C. Viatical broker D. 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 types of insurance policies would perform the function of cash accumulation? A. Term life B. Credit life C. Increasing term D. Whole life
Whole life Life insurance is unique from other types of insurance in that it could perform the function of cash accumulation. Cash values are available in whole life policies.
Which of the following is NOT an example of a business use of Life Insurance? A. buy-sell funding B. executive bonuses C. key person D. Workers compensation
Workers compensation workers compensation is a benefit payable when a worker is injured by a work-related injury, regardless of fault or negligence. It is not considered a business use of insurance.
If company has a Simplified Employee Pension plan, what type of plan is it? A. a qualified plan for a small business B. the same as a 401(k) plan C. the same as an IRA, with the same contribution limits D. An undefined contribution plan for large businesses
a qualified plan for a small business A Simplified Employee Pension (SEP) is a type of qualified plan suited for the small employer or for self-employed. A SEP is a employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or specified maximum contribution amount.
Who can make a fully deductible contribution to a traditional IRA? a. someone making contributions to an educational IRA. b. a person whose contributions are funded by a return on investment. c. an individual not covered by an employer-sponsored plan who has earned income. d. anybody: all IRA contributions are fully deductible regardless of income level.
an individual not covered by an employer-sponsored plan who has earned income. Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.
All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT a. employer contributions are tax deductibles as ordinary business expense b. funds accumulate on a tax-deferred basis c. employee and employer contributions are not counted as income to the employee for income tax purposes d. at distribution, all amounts received by the employee are tax free
at distribution, all amounts received by the employee are tax free 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.
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 a. experience rating b. group rate c. the insurer's scheduled rate d. attained age
attained age if an employee terminates membership in the insured group, the employee has the right to convert to an individual whole life policy without proving insurability. The insurer will determine what type(s) of policy an employee may convert to, but it must be issued at a standard rate, based on the individual's attained age.
Why are dividends in life insurance policies not taxable?
dividends are not considered income for tax purposes; they are a return of unused premium.
What is required to qualify an individual to contribute to a traditional IRA?
earned income
For a retirement plan to be qualified, it must be designed for the benefit of a. key employee b. employer c. IRS d. employees
employees
For a retirement plan to be qualified, it must be designed for whose benefit?
employees
Who qualifies for tax-sheltered annuities, or 403(b) plans?
employees of nonprofit organizations under Section 501(c)(3) and employees of public school systems
What is the main advantage of converting from group life insurance to individual coverage?
evidence of insurability is not required
When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called a(n) a. aleatory contract b. executive bonus c. key person policy d. fraternal association
executive bonus
If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is... a. correctly insured b. permanently insured c. fully insured d. partially insured
fully insured a worker is fully insured under Social Security if the worker has accumulated the required number of credits based on his/her age.
All of the following are business uses of life insurance EXCEPT A. compensating executives B. funding against financial loss caused by the death of a key employee C. funding business continuation agreements D. funding against company's general financial loss
funding against company's general 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.
What is the main purpose of the Seven-pay test? a. it guarantees the minimum interest b. it determines if the insurance policy is a MEC c. it requires level premium payments for 7 years d. it ensures that the policy benefits are paid out in 7 years
it determines if the insurance policy is a MEC The seven-pay test determines whether an insurance policy is "over-funded" or if it's Modified Endowment contract. In other words, the cumulative premiums paid during the first 7 years of a policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.
Which of the following is TRUE of a qualified plan? a. it has a tax benefit for both employer and employee b. it does not need to have a vesting schedule c. it may discriminate in favor of highly paid employees d. it may allow unlimited contributions
it has a tax benefit for both employer and employee a qualified plan is approved by the IRS, which then gives both the employer and employee benefits in deductibility of contributions and tax deferral of growth.
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? a. it is taxable only if it exceeds the amounts paid for premiums by 50% b. it is automatically taxable c. it is only taxable if the cash value exceeds the amount paid for premiums d. it is not considered to be taxable
it is only taxable if the cash value exceeds the amount paid for premiums The cash value of a surrendered policy is only considered to be taxable as income if the cash value exceeds the amount of premiums paid for the policy.
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
only the portion in excess of the premium paid
What is the primary purpose of a 401(k) plan? a. life insurance distribution b. retirement c. education funds d. to receive dividends over a certain period
retirement profit-sharing plans are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees. A 401(k) qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also somehow match the employee's contribution, whether it is dollar or on a percentage basis.
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? A. she will be covered under the group plan, but will have to pay an individual policy premium B. she can only convert her coverage without proof of insurability if she has the master policy C. she must apply for a new policy, which requires her provide proof of insurability D. she can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan
she can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan
Traditional IRA contributions are a. never tax deductible b. partially tax deductible depending on the income level c. tax deductible d. deducted based on the income level
tax deductible The following taxation rules apply to contributions made to traditional IRA plans: tax-deductible contributions for the year of the contribution (based on the person's income); contributions must be made in "cash" in order to be tax deductible; excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA; and tax-deferred earnings are not taxed until withdrawn.
The advantage of qualified plans to employers is a. tax-free earnings b. no lump-sum payments c. taxable contributions d. tax-deductible contributions
tax-deductible contributions Qualified plans have these tax advantages: - employer contributions are tax deductible and are not taxed as income to the employee - the earnings in the plan accumulate tax deferred - lump-sum distributions to employees are eligible for a favorable tax treatment.
All of the following would be different between qualified and non-qualified retirement plans EXCEPT a. taxation on accumulation b. taxation of withdrawals c. taxation of contributions d. IRS approval requirements
taxation on accumulation Taxation on accumulation is deferred in both types of plans. The rest of the characteristics would differ.
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? a. the amount distributed is subjected to ordinary income tax. b. the amount of the distribution is reduced by the amount of a 20% withholding tax c. no taxes are due since the plan participant is over age 59 1/2 d. there is a 10% early withdrawal penalty.
the amount of the distribution is reduced by the amount of a 20% withholding tax Distributions from 401(k) are taxable as ordinary income in the year of the distribution. However, if the distribution is rolled over to a Traditional IRA, taxes are deferred until the required minimum IRA distributions begin (which is generally no longer than age 70 1/2). Since this client actually took a distribution (instead of making a trustee-to-trustee roll over), the distribution is subject to 20% withholding tax.
All of the following are true of key person insurance EXCEPT a. the key employee is the insured b. the plan is funded by permanent insurance only c. there is no limitation on the number of key employee plans in force at any one time d. the employer is the owner, payor and beneficiary of the policy.
the plan is funded by permanent insurance only Key Person coverage may be funded by any type of life insurance.
How are contributions to a tax-sheltered annuity treated with regards to taxation? a. they are taxed as income for the employee, but are tax-free upon withdrawal b. they are not included as income for the employee but are taxable upon distribution c. they are never taxed d. they are taxed as income for the employee
they are not included as income for the employee but are taxable upon distribution Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawal.
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy? a. they are always taxable to chronically ill insured b. they are always taxed c. there is a 10% penalty for early distribution of the death benefit d. they are tax free to terminally ill insured
they are tax free to terminally ill insured When accelerated benefits are paid under a life insurance policy, they are received tax free by terminally ill insured, and tax free up to a limit for chronically ill insured.
Which of the following is the best reason to purchase life insurance rather than annuities? A. to liquidate a sum of money over a lifetime B. to create an estate C. to liquidate a sum of money over a period of years D. to create regular income payments
to create an estate With insurance, the death benefit creates an immediate estate should be insured die.
What is the main purpose of the 7-pay test ?
to determine if a life insurance policy is a Modified Endowment Contract
Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE? a. policy loans are taxable distributions b. accumulations are tax deferred c. withdrawals are not taxable d. distributions before age 59 1/2 incur a 10% penalty on policy gains.
withdrawals are not taxable ANY distributions from MECs are taxable, including withdrawals and policy loans. All of the other statements are true.
Which of the following is not an example of a business use of life insurance a. key person b. workers compensation c. buy-sell funding d. executive bonuses
workers compensation Workers compensation is a benefit payable when a worker is injured by a work-related injury, regardless of fault or negligence. It is not considered a business use of insurance.