Life and Health Chapter 7

A Tax Sheltered Annuity may be established and funded by which of the following?

A not-for-profit community hospital association

All of the following tax-free exchanges of life insurance and annuities are permitted, EXCEPT:

Annuity to life insurance

When may an employer deduct the premiums it pays for an employee's life insurance benefit?

As long as the business does not derive a direct benefit from the policy

A Roth IRA is unique for which of the following reasons?

Contributions are nondeductible and distributions are nontaxable

All of the following are characteristics of a qualified retirement plan, EXCEPT:

Employers in private industry are required to establish pension plans

All of the following statements regarding a Modified Endowment Contract are correct, EXCEPT:

If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status

Which of the following distributions in a life insurance policy is taxable?

Interest paid on a death benefit settlement option

What is "defined" in a defined contribution plan?

The percentage or amount of an employee's deposits to the plan

An insured has paid $1,000 in annual premiums for her permanent life insurance policy for 12 years. Now upon surrendering the policy she is due to receive $15,000 of cash value. How much of this cash value is taxable? a. $3,000 b. $15,000 c. Zero d. $12,000

a. $3,000

When establishing a SIMPLE, what two different types of qualified plans must employers choose between? a. 401(k) or IRA b. Defined benefit or defined contribution c. Keogh or corporate d. SEP or TSA

a. 401(k) or IRA

Nonprofit organizations as qualified by the internal revenue code _________ are also eligible to establish Tax Sheltered Annuities for their employees. a. 501(c)(3) b. 401(a) c. 408(a) d. 505(d)

a. 501(c)(3)

If a life insurance policy does not pass the ___ -pay test, it will be deemed a MEC. a. 7 b. 5 c. 3 d. 10

a. 7

Required Minimum Distributions must begin from Traditional IRAs by April 1st of the year following the year the account owner turns _____. a. 70 1/2 b. 60 c. 65 d. 62

a. 70 1/2

All of the following are true regarding Tax-Sheltered Annuities (TSAs), except: a. Employees can make direct contributions into their account b. Contributions are pre-tax and earnings grow tax deferred c. The accounts are owned by each employee separately and are nonforfeitable d. The account values will be paid upon death, retirement, or termination of the employee

a. Employees can make direct contributions into their account

An Individual Retirement Account (IRA) may be funded with all of the following, except: a. Life Insurance b. Certificates of Deposit (CDs) c. Annuities d. Mutual Funds

a. Life Insurance

In which of the following plans does the company assume all of the investment risk? a. Simplified Employee Pension (SEP) b. Defined benefit c. Defined contribution d. Profit-sharing

b. Defined benefit

Which of the following plans is commonly known as a pension? a. Keogh b. Defined benefit c. 401(k) d. Profit-sharing

b. Defined benefit

Contributions to a nonqualified plan are: a. Tax-deductible up to $50,000 b. Not tax-deductible c. Fully tax-deductible d. Partially tax-deductible

b. Not tax-deductible

The cost recovery rule states: a. The insurer can hold back funds associated with any costs of underwriting, issuing, and maintaining the policy b. That the excess cash value over premiums paid is considered taxable income when withdrawn c. The first dollar out of a permanent life insurance policy is considered taxable income d. Premiums paid in can be refunded at the policyowner's request

b. That the excess cash value over premiums paid is considered taxable income when withdrawn

All of the following are true regarding IRA rollovers, except: a. The IRA owner has 60 days to deposit the funds into a new IRA to avoid taxation b. This transaction will be reported to the IRS c. A 10% withholding is required if the distribution is paid directly to the account owner d. Rollovers are only allowed once every 12 months

c. A 10% withholding is required if the distribution is paid directly to the account owner

How are employer paid premiums on a group life insurance plan treated for tax purposes? a. As a personal expense paid on behalf of the employee b. A barter transaction c. As an ordinary and necessary business expense d. As compensation in lieu of cash

c. As an ordinary and necessary business expense

Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate? a. The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up b. An employer owns a policy on the life of a key employee who dies c. The insured is also the policyowner d. A business partner owns a life insurance policy on the other partner that died

c. The insured is also the policyowner

All of the following are times in which life insurance policy cash values can become taxable, except: a. At policy surrender b. If the policy fails to meet the IRS definition of life insurance c. When a policy loan is taken out d. When the policy is sold

c. When a policy loan is taken out

All of the following are transactions that qualify as a 1035 exchange, except: a. A variable whole life policy into an equity indexed annuity b. An equity indexed life insurance policy into a qualified long-term care policy c. A traditional whole life policy into a qualified long-term care policy d. A fixed annuity into an adjustable life insurance policy

d. A fixed annuity into an adjustable life insurance policy

Which of the following establishes a cost basis in an annuity? a. Tax deferred gains b. Pre-tax contributions c. Tax deferred interest d. After-tax contributions

d. After tax contributions

The Modified Endowment Contract (MEC) rules were put into place because: a. The federal government needed a new source of tax revenue b. Life insurance companies needed to become more competitive with other financial institutions c. Too many consumers were being sold life insurance when they thought they were buying annuities d. 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

d. 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

Which of these is a qualified plan designed specifically for unincorporated self-employed individuals? a. Tax-Deferred Annuity b. 403(b) Plan c. IRA d. Keogh Plan

d. Keogh Plan

Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)? a. Taking out a policy loan b. Withdrawal of cash value to pay for a daughter's wedding c. Cash surrender of the policy d. Lump sum death benefit paid to the beneficiary

d. Lump sum death benefit paid to the beneficiary

Which is true regarding the taxation of the cash value in a Universal Life Policy prior to withdrawal? a. Tax free b. Tax interpolated c. Tax deductible d. Tax deferred

d. Tax deferred

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? a. $440,000 b. $450,000 c. $500,000 d. $60,000

a. $440,000

All of the following are characteristics of a 401(k) plan, except: a. Employers must match employee contributions b. Employees can elect to defer some of their salary into the plan on a pre-tax basis c. Typical investment choices for 401(k)s include mutual funds d. Earnings on the investments grow tax deferred

a. Employers must match employee contributions

In which of the following situations will the annuity's value be included in the deceased annuitant's estate? a. If the annuitant dies during the annuity or payout phase with any remaining value b. If the annuitant dies just after cashing in check number 180 from a 15-year period certain payout that was funded with $100,000 c. If the annuitant dies while receiving income from a life only settlement option d. If the annuitant dies in year 11 when receiving a life and 10 year period certain payout from a variable annuity

a. If the annuitant dies during the annuity or payout phase with any remaining value

During the accumulation phase of an annuity, if the contract owner dies and the annuitant is someone other than the owner, the value of the annuity is: a. Included in the owner's estate for valuation b. 100% taxable to the beneficiary c. Included in the beneficiary's estate for immediate estate taxation d. Paid out income tax-free to the beneficiary

a. Included in the owner's estate for valuation

Any employee-paid group life insurance premiums are __________. a. Not tax-deductible b. Tax-exempt c. Tax-deductible d. Tax-deferred

a. Not tax-deductible

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: a. Ordinary income b. Short-term capital gain c. Long-term capital gain d. Tax preference item

a. 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? a. The $540,000 lump sum proceeds will be received income tax-free b. The $40,000 will be taxed since the premium was tax-deductible by the employer c. All premiums paid may be deducted from the face value before taxation d. $460,000 is income taxable to the recipient

a. the $540,000 lump sum proceeds will be received income tax-free

If funds are prematurely withdrawn from a Modified Endowment Contract (MEC) they are subject to a _____% penalty on any gains. a. 15 b. 10 c. 6 d. 20

b. 10

With a Profit Sharing Plan contributions must generally be made in at least ________ consecutive years. a. 2 out of the last 6 b. 3 out of the last 5 c. 3 out of the last 7 d. 1 out of the last 5

b. 3 out of the last 5

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? a. Disability Rider b. Accelerated Benefit (Living Need) c. Return of Cash Value Rider d. Viatical Rider

b. Accelerated Benefit (Living Need)

If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes. a. Federal Income b. Federal Estate c. State Income d. Probate

b. Federal Estate

Cash values within an ordinary straight whole life insurance policy _______ over time. a. Remain constant b. Increase c. Decrease d. Vary

b. Increase

If dividends are left on deposit with an insurer to earn interest: a. The dividend is taxable, but the interest is tax-free b. The dividend is tax-free, but the interest is taxable c. The dividend is taxable as well as the interest d. The interest is tax-free as well as the dividend

b. The dividend is tax-free, but the interest is taxable

Which of the following IRA transactions is subject to taxation? a. A direct rollover of an IRA to another IRA b. An IRA rollover reinvested 75 days after receipt c. An IRA to IRA transfer d. A Qualified Distribution from a Roth IRA

b. an IRA rollover reinvested 75 days after receipt

Regarding an accelerated death benefit, a physician must give a prognosis of ___ months or less life expectancy for the named insured. a. 18 b. 6 c. 24 d. 12

c. 24

An IRA catch up contribution can be made by any person age ______ or older. a. 60 b. 65 c. 50 d. 62

c. 50

Distributions from a Modified Endowment Contract (MEC) made on or after age _____ are not subject to any tax penalties. a. 65 b. 70 1/2 c. 59 1/2 d. 62

c. 59 1/2

Anyone under the age of ______ who has earned income may open an IRA. a. 59 1/2 b. 62 c. 70 1/2 d. 65

c. 70 1/2

All of the following are TRUE regarding non-qualified retirement plans, except: a. Upon withdrawal only the earnings are subject to taxation b. Earnings can be tax deferred until withdrawn c. Contributions are immediately tax deductible d. Contributions are not tax deductible

c. Contributions are immediately tax deductible

When an employee receives a fixed and known benefit at retirement, it comes from a(n) __________ plan. a. Profit-Sharing b. SEP-IRA c. Defined Benefit d. Defined Contribution

c. Defined Benefit

An annuity held within a traditional IRA ____________. a. Makes the tax-deferral aspect of the annuity tax-free b. Allows for withdrawals prior to age 59 1/2 without any tax penalty c. Does not provide any additional tax-deferral benefit d. Generates tax credits upon withdrawal

c. Does not provide any additional tax-deferral benefit

If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC). a. Annuity b. Endowment contract c. Life insurance policy d. Viatical settlement

c. Life insurance policy

All of the following are defined contribution plans, except: a. Profit-sharing b. 403(b) c. Pension d. 401(k)

c. Pension

All of the following are characteristics of a 401(k) plan, except: a. Employer contributions are not taxed in the year they are made b. Balances grow tax deferred c. Post retirement distributions are made federal income tax free d. Employee contributions are made pre-tax

c. Post retirement distributions are made federal income tax free

The cost basis of a life insurance policy is __________. a. Cash values in excess of premiums paid b. Cash values plus any outstanding policy loans c. Premiums paid less dividends or withdrawals d. Dividends left on deposit at interest plus the policy's cash values

c. Premiums paid less dividends or withdrawals

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? a. Defined Benefit Pension Plan b. Tax-Sheltered Annuity (TSA) c. Simplified Employee Pension (SEP) d. HR-10 (Keogh) Plan

c. Simplified Employee Pension (SEP)

Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified. a. Taxable b. Taxable to the extent it exceeds 7.5% of AGI c. Tax free d. Tax free up to $50,000

c. Tax free

The cost recovery rule states: a. Premiums paid in can be refunded at the policyowner's request b. The first dollar out of a permanent life insurance policy is considered taxable income c. That the excess cash value over premiums paid is considered taxable income when withdrawn d. The insurer can hold back funds associated with any costs of underwriting, issuing, and maintaining the policy

c. That the excess cash value over premiums paid is considered taxable income when withdrawn

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 quarter b. Once every 6 months c. Once a year d. As often as she likes

d. As often as she likes

If no __________ is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate. a. Spouse b. Insured c. Relative d.Beneficiary

d. Beneficiary

All of the following are ways in which the 10% additional tax can be waived, except: a. First-time homebuyers b. Disability c. Qualified education costs d. Buying a new car

d. Buying a new car

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? a. $50,000 b. $100,000 c. $90,000 d. Nothing

d. Nothing

All of the following are the benefits of having an employer sponsored retirement plan be ERISA qualified, except: a. Employer contributions are not taxable to the employee until withdrawn b. Earnings on contributions grow tax deferred c. Employer contributions are immediately tax deductible d. Plan withdrawals are tax free

d. Plan withdrawals are tax free

All of the following are TRUE regarding qualified plans, except: a. Employer contributions are immediately tax-deductible b. Employer contributions are not taxable to the employee until withdrawn c. Distributions taken prior to age 59 1/2 are subject to tax and a tax penalty d. Plans can discriminate in favor of highly compensated employees

d. Plans can discriminate in favor of highly compensated employees

All of the following are eligible to participate in a HR-10 Keogh Plan, except: a. Secretary b. Sales person c. Manager d. Silent partner

d. Silent partner

Concerning eligibility for a 403(b) retirement plan, which of the following would not qualify? a. School teacher b. School janitor c. School principal d. Student athlete receiving a scholarship and a stipend

d. Student athlete receiving a scholarship and a stipend

The life insurance policy cost basis consists of: a. The net amount at risk b. The dividends received c. The cash value of the policy d. The premiums paid in

d. The premiums paid in

If a corporation owns an annuity, what is the tax ramifications? a. The premiums are tax deductible as an ordinary and necessary business expense b. Any withdrawals are taxed at the favorable corporate tax rate c. Since the corporation is a non-natural person there is no tax penalty for early withdrawal d. There is no tax deferral benefit on any earnings

d. There is no tax deferral benefit on any earnings