Life Insurance- Chapter 6

Which portion of an annuity benefit payment will be taxed?

The interest earned on the principal- tax base

When are distributions from an IRA taxed?

When they are received

What is the primary purpose of a 401(k) plan? a. To received dividends over a certain period b. Life insurance distribution c. Retirement d. Education funds

c. Retirement

Traditional IRA contributions are tax deductible based on which of the following? a. Owner's age b. IRA limit c. Owner's income d. How long the plan has been in force

c. Owner's income

An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits? a. The entire living benefit is considered taxable income b. A portion of the benefit up to a limit is tax free; the rest is taxable income c. Principal is tax free, but interest is taxed d. The entire benefit will be received tax free

b. A portion of the benefit up to a limit is tax free; the rest is taxable income

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a a. Rollover b. Settlement option c. Nontaxable exchange d. Nonforfeiture option

b. Settlement option

When must an IRA be completely distributed when a beneficiary is not named? a. December 31 of the year following the year of the owner's death b. Due date of the deceased owner's final tax return including extensions c. December 31 of the year that contains the fifth anniversary of the owner's death d. Due date of beneficiary's tax return including extensions

c. December 31 of the year that contains the fifth anniversary of the owner's death

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a a. Nontaxable exchange b. Nonforfeiture option c. Rollover d. Settlement option

d. Settlement option

Which of the following best describes the tax advantage of a qualified retirement plan? a. Employer contributions are taxed as income to the employee b. The earnings in a qualified plan accumulate tax deferred c. Distributions prior to age 59 1/2 are tax deductible d. Employer contributions are tax deductible, as long as employee earnings are considered taxable income

b. The earnings in a qualified plan accumulate tax deferred

If taken as a lump sum, life insurance proceeds to beneficiaries are passed a. Tax-deductible b. Part tax-free and part taxable c. Without interest d. Free of federal income taxation

d. Free of federal income taxation

In life insurance policies, cash value increases a. Grow tax deferred b. Are income taxable immediately c. Are taxed annually d. Are only taxed when the owner reaches age 65

a. Grow tax deferred

Which of the following is true regarding taxation of dividends in participating policies? a. Dividends are taxable only after a certain amount is accumulated annually b. Dividends are taxable in some life insurance policies and nontaxable in others c. Dividends are considered income for tax purposes d. Dividends are not taxable

d. Dividends are not taxable

When would life insurance death benefits be tax free?

If paid as a lump sum to the beneficiary

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

a. Are subject to vesting requirements

An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true? a. He will have to pay a penalty if he is younger than 59 1/2 b. He will have to pay a penalty regardless of his age c. He will not have to pay a penalty, regardless of his age d. He cannot withdraw money from his MEC before age 59 1/2

a. He will have to pay a penalty if he is younger than 59 1/2

Death benefits payable to a beneficiary under a life insurance policy are generally a. Exempt from income taxation if under $10,000 b. Exempt from income taxation if over $10,000 c. Not subject to income taxation by the Federal Government d. Subject to income taxation by the Federal Government

c. Not subject to income taxation by the Federal Government

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually? a. $13,000 b. $10,000 c. $7,000 d. $3,000

d. $3,000

Death benefits payable to a beneficiary under a life insurance policy are generally a. Not subject to income taxation by the Federal Government b. Subject to income taxation by the Federal Government c. Exempt from taxation if under $10,000 d. Exempt from income taxation if over $10,000

a. Not subject to income taxation by the Federal Government

A 60-year-old participant in a 401(k) plan takes a distribution and rolls it over to an IRA withing 60 days. Which of the following is true? a. The amount distributed is subject 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

b. The amount of the distribution is reduced by the amount of a 20% withholding tax

All of the following are general requirements of a qualified plan EXCEPT a. The plan must be permanent, written and legally binding b. The plan must provide an offset for social security benefits c. The plan must be communicated to all employees d. The plan must be for the exclusive benefits of the employees and their beneficiaries

b. The plan must provide an offset for social security benefits

An employee quits her job where she has a balance of $10,000 in her qualified plan. The balance was paid out directly to the employee in order for her to move the funds to a new account. If she decides to rollover her plan to a Traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover? a. $10,000, 30 days b. $8,000, 30 days c. $8,000, 60 days d. $10,000 60 days

c. $8,000, 60 days

What is the main purpose of the Seven-pay Test? a. It ensured that the policy benefits are paid out in 7 years b. It guarantees the minimum interest c. It determines if the interest policy is a MEC d. It requires level premium payments for 7 years

c. It determines if the interest policy is a MEC