Chapter 4
What are the consequences of withdrawing funds from a traditional IRA prior to the age of 59 1/2?
10% penalty
What is the penalty for excessive contributions to a tradition IRA?
6%
Who is a third-party owner?
A policyowner who is not the insured
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 accelerate benefits?
A portion of the benefit up to a limit is tax free; the rest is taxable income
Who may contribute to an HR-10 plan?
A self-employed individual
Who would be considered a third-party owner?
An individual or an entity who is not the insured
Group life insurance policies are written as what type of insurance?
Annual Renewable Term
Employer contributions made to a qualified plan
Are subject to vesting requirements
All of the following are TRUE of the federal advantages of a qualified plan EXCEPT
At distribution, all amounts received by the employee are tax free
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
Attained age
What does liquidity mean in a life insurance policy?
Availability of cash value
All of the following are requirements of eligibility for social security disability income benefits EXCEPT
Being age 65
All of the following employees may use a 403(b) plan for their retirement EXCEPT
CEO of a private corporation
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Cash value growth is tax deferred
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.
Why are dividends in life insurance policies not taxable?
Dividends are not considered income for tax purposes; they are a return of unused premium.
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
Life insurance may be used to Kay state inheritance taxes and federal estate taxes eliminating the need to sell assists from the estates. What is this called?
Estate conservation
What is the main advantage of converting from group life insurance to individual coverage?
Evidence of insurability is not required
Life insurance death proceeds are
Generally not taxed as income
What type of policy is typically issued without proof of insurability from the insured?
Group Policy
In what form of payment must the contributions to a traditional IRA be made?
In cash (or cash equivalents)
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
What are the most common types of business life insurances?
Key person insurance, buy-sell agreements, and executive bonuses arrangements
If a life insurance policy develops cash value faster than a 7 pay whole life contract, it is?
Modified Endowment Contract
What is the name for an overfunded life insurance policy?
Modified Endowment Contract (MEC)
SIMPLE plans are available to groups of how many employees?
No more than 100
In qualified plans, are employer contributions taxed as income to the employees?
No, employer contributions are not taxed as income to the employees
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
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?
Provide retirement income
What are the three types of social security benefits?
Retirement, disability and survivors
What are the personal uses of life insurance?
Survivor protection, estate creation and conservation, cash accumulation and liquidity
The advantage of qualified plans to employers is
Tax-deductible contributions
Who owns a group life insurance contract?
The employer (also known as the sponsor of the group)
When planning for survivor protection in life insurance, what needs to be considered?
The insured's current assets, liabilities and survivor's needs
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?
The insurer will pay the full death benefit from the group policy to the beneficiary.
If a retirement plan is 'qualified', what does that mean?
The plan has favorable tax treatment
What is the main purpose of the 7-pay test?
To determine if a life insurance policy is a Modified Endowment Contract
In terms of Social Security, what is the interval spanning between the day when the youngest child of a family turns 16 and before the surviving spouse turns age 60 called?
blackout period
Social security benefits are available for a surviving spouse until the youngest child reaches age 16. Benefits are again available for the spouse after reaching age 60. What is the time period called during which the surviving spouse does not receive benefits?
blackout period
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 whose benefit?
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?
life expectancy
In a life settlement contract, whom does the life settlement broker represent?
owner
If an insured terminates membership in group life insurance, to what type of insurance can the insured convert the coverage?
whole life
What are some examples of qualified plans?
IRA, 401(k), HR10 (Keogh), SEP, SIMPLE
What type of policy issues certifications of insurance to the insurers?
Group policy
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