Chapter 4 Retirement and other insurance concepts

In a single employer group plan, what is the name of the policy issued to the employer? ACertificate of insurance BEmployer-insurer contract CCertificate of authority DMaster contract

Master Contract In group insurance, the actual policy (master policy/contract) is issued to the sponsor of the group, which is often an employer.

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an ANonqualified annuity. BModified endowment contract. CAccelerated benefit policy. DEndowment.

Modified Endownment Contract Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract.

All of the following would be different between qualified and nonqualified retirement plans EXCEPT ATaxation of withdrawals BTaxation of contributions CIRS approval requirements DTaxation on accumulation

Taxation on accumulation Taxation on accumulation is deferred in both types of plans. The rest of the characteristics would differ.

Death benefits payable to a beneficiary under a life insurance policy are generally AExempt from income taxation if under $10,000. BExempt from income taxation if over $10,000. CNot subject to income taxation by the Federal Government. DSubject to income taxation by the Federal Government.

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.

Which of the following terms is used to name the nontaxed return of unused premiums? AInterest BSurrender CDividend DPremium 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.

Who may contribute to a Keogh (HR-10) plan? ASelf-employed plumber BManager of a store CCorporate executive DPartner with at least 5% ownership

Self-Employed plumber Self-employed persons may contribute to an HR-10 Plan.

Which of the following is INCORRECT concerning a noncontributory group plan? AThe employees receive individual policies. BThey help to reduce adverse selection against the insurer. CThey require 100% employee participation. DThe employer pays 100% of the premiums.

The employees receive individual policies The employer receives a master policy, and employees receive a certificate of insurance.

What is the number of credits required for fully insured status for Social Security disability benefits? A4 B10 C30 D40

40

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT AFunds accumulate on a tax-deferred basis. BEmployee and employer contributions are not counted as income to the employee for income tax purposes. CAt distribution, all amounts received by the employee are tax free. DEmployer contributions are tax deductible as ordinary business expense.

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.

Which of the following is TRUE of a qualified plan? AIt may discriminate in favor of highly paid employees. BIt may allow unlimited contributions. CIt has a tax benefit for both employer and employee. DIt does not need to have a vesting schedule.

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.

An employee is joining a group insurance plan. In order to avoid having to prove insurability, what must the employee do? AJoin during the open enrollment period BProvide medical records to the insurer CSign a statement of continued good health DNothing: proof of insurability is never required in group policies

Join during the open enrollment period If one applies for coverage after the open enrollment period, proof of insurability may be required in order to avoid adverse selection.

All of the following are personal uses of life insurance EXCEPT ABuy-sell agreement. BSurvivor protection. CEstate creation. DCash 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.

Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement? ATerm insurance only BPermanent insurance only CUniversal life insurance only DAny form of life insurance

Any form of life insurance Any form of Life insurance may be used to fund a buy-sell agreement.

All of the following would be eligible to establish a Keogh retirement plan EXCEPT AA hair dresser who operates her business at her house. BThe president and employee of a family corporation. CA sole proprietor of a service station who employs four employees. DA sole proprietor of film development store with no employees.

The president and employee of a family corporation. Keogh plans are for self-employed individuals and their employees.

All of the following would be eligible to establish a Keogh retirement plan EXCEPT AThe president and employee of a family corporation. BA sole proprietor of a service station who employs four employees. CA sole proprietor of film development store with no employees. DA hair dresser who operates her business at her house.

The president and employee of a family corporation. Keogh plans are for self-employed individuals and their employees.

n which of the following instances would the premium be tax deductible? APremiums paid by a mother on her son's policy BPremiums paid by an employer on the life of a key person CPremiums paid by an employer on a $30,000 group term life insurance plan for employees DPremiums 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.

Which of the following best defines the "owner" as it pertains to life settlement contracts? AA fiduciary for the contract BThe insurance provider CThe policyowner of the life insurance policy DA financial entity that sponsors the transaction

The policyowner of the life insurance policy The term owner refers to the owner of the policy who may seek to enter into a 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.

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$50,000 B$18,000 C$15,000 D$3,000

$3,000 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.

The premiums paid by the employer in a business life insurance policy are AAlways taxable to the employee. BNever taxable to the employee. CTax deductible by the employer. DTax deductible by 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.

Which of the following is NOT an example of a business use of Life Insurance? AExecutive Bonuses BKey Person CWorkers Compensation DBuy-sell Funding

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.

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$50,000 B$18,000 C$15,000 D$3,000 Id

$3,000 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.

Which of the following is the best reason to purchase life insurance rather than an annuity? ATo liquidate a sum of money over a period of years BTo create regular income payments CTo liquidate a sum of money over a lifetime DTo create an estate

To create an estate With insurance, the death benefit creates an immediate estate should the insured die.

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE? AWithdrawals are not taxable. BDistributions before age 59 1/2 incur a 10% penalty on policy gains. CPolicy loans are taxable distributions. DAccumulations are tax deferred.

Withdrawals are not taxable Any distributions from MECs are taxable, including withdrawals and policy loans. All of the other statements are true.

All of the following are characteristics of group life insurance EXCEPT ACertificate holders may convert coverage to an individual policy without evidence of insurability. BPremiums are determined by the age, sex and occupation of each individual certificate holder. CAmount of coverage is determined according to nondiscriminatory rules. DIndividuals covered under the policy receive a certificate of insurance.

Premiums are determined by the age, sex and occupation of each individual certificate holder. premiums are determined by the age, sex and occupation of the entire group

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? AAn irrevocable beneficiary BA buy-sell agreement CFamily term rider DThird-party ownership

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.

Which of the following would be considered a nonqualified retirement plan? AKeogh plan BRoth IRA CSplit-dollar plan D401(k)

Split Dollar Plan Examples of nonqualified plans are individual annuities and deferred compensation plans for highly paid executives, split-dollar insurance arrangements, and Section 162 executive bonus plans.

In which of the following instances would the premium be tax deductible? APremiums paid by an employer on the life of a key person BPremiums paid by an employer on a $30,000 group term life insurance plan for employees CPremiums paid by an individual on his/her own life insurance DPremiums paid by a mother on her son's policy Incorrect! 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. Review Content Next Question

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.

The minimum number of credits required for partially insured status for Social Security disability benefits is A4 credits. B6 credits. C10 credits. D40 credits.

6 Credits To be considered partially insured, an individual must have earned 6 credits during the last 13-quarter period.

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? ACoverage cannot be converted when an individual leaves the group. BPremiums are determined by age, occupation, and individual underwriting. C100% participation of members is required in noncontributory plans. DEach member covered receives a policy.

100% participation of members is required in noncontributory plans If the employer pays all of the premium, then all employees must be included.

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? A1 B3 C5 D10

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.

he minimum number of credits required for partially insured status for Social Security disability benefits is A4 credits. B6 credits. C10 credits. D40 credits.

6 Credits The minimum number of credits required for partially insured status for Social Security disability benefits is A4 credits. B6 credits. C10 credits. D40 credits.

Who is a third-party owner? AAn insurer who issues a policy for two people BAn employee in a group policy CAn irrevocable beneficiary DA policyowner who is not the insured

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.

If a company has a Simplified Employee Pension plan, what type of plan is it? AAn undefined contribution plan for large businesses BA qualified plan for a small business CThe same as a 401(k) plan DThe same as an IRA, with the same contribution limits

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 an employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or a specified maximum contribution amount.

In a life settlement contract, whom does the life settlement broker represent? AThe owner BThe insurer CThe beneficiary DThe 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.

Which of the following statements is TRUE concerning whole life insurance? APolicy loans are tax deductible. BLump-sum death benefits are not taxable. CDividend interest is not taxable. DPremiums are tax deductible.

Lump-Sum death benefits are not taxable Dividend interest is taxable; policy loans are not tax deductible, and premiums are not tax deductible.

In a life settlement contract, whom does the life settlement broker represent? AThe beneficiary BThe life settlement intermediary CThe owner DThe insurer

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.

In a life settlement contract, whom does the life settlement broker represent? AThe insurer BThe beneficiary CThe life settlement intermediary DThe owner

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.

Who can make a fully deductible contribution to a traditional IRA? AAnybody; all IRA contributions are fully deductible regardless of income level BSomeone making contributions to an educational IRA CA person whose contributions are funded by a return on investment DAn individual not covered by an employer-sponsored plan who has earned income

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.

Who can make a fully deductible contribution to a traditional IRA? ASomeone making contributions to an educational IRA BA person whose contributions are funded by a return on investment CAn individual not covered by an employer-sponsored plan who has earned income DAnybody; 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.

SIMPLE Plans require all of the following EXCEPT ANo other qualified plan can be used. BNo more than 100 employees. CEmployees must receive a minimum of $5,000 in annual compensation. DAt least 1,000 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.

A tax-sheltered annuity is a special tax-favored retirement plan available to AAnyone. BCertain age groups only. CCertain groups depending on factors such as race, gender, and age. DCertain groups of employees only. Id

Certain groups of employees only A tax-sheltered annuity is a special tax-favored retirement plan available only to certain groups of employees (nonprofit charitable, educational, religious, and other 501c(3) organizations, including all employees in public education).

A key person insurance policy can pay for which of the following? AWorkers compensation BHospital bills of the key employee CCosts of training a replacement DLoss of personal income

Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee.

Which of the following is an example of liquidity in a life insurance contract? AThe death benefit paid to the beneficiary BThe flexible premium CThe money in a savings account DThe cash value available to the policyowner

The cash value available to the policyowner Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

All of the following are business uses of life insurance EXCEPT AFunding against financial loss caused by the death of a key employee. BFunding business continuation agreements. CFunding against company's general financial loss. DCompensating executives.

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.

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 ASurvivorship insurance. BJuvenile protection provision. CSurvivor protection. DLife planning.

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.

In a direct transfer, how is money transferred from one retirement plan to a traditional IRA? AFrom the participant to the new plan BFrom the original plan to the original custodian CFrom trustee to trustee DFrom trustee to the participant

From trustee to trustee In a direct transfer, the distribution is made directly from the trustee of the first plan to the trustee or administrator/custodian of the new IRA plan.

An employee is joining a group insurance plan. In order to avoid having to prove insurability, what must the employee do? AJoin during the open enrollment period BProvide medical records to the insurer CSign a statement of continued good health DNothing: proof of insurability is never required in group policies Id

Join during the open enrollment period oin during the open enrollment period

Which of the following is NOT true regarding policy loans? APolicy loans can be repaid at death. BAn insurer can charge interest on outstanding policy loans. CA policy loan may be repaid after the policy is surrendered. DMoney borrowed from the cash value is taxable.

Money borrowed from the cash value is taxable. Money borrowed from the cash value is not taxable. Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy loans.

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? AThe amount of the distribution is reduced by the amount of a 20% withholding tax. BNo taxes are due since the plan participant is over age 59 1/2. CThere is a 10% early withdrawal penalty. DThe amount distributed is subject to ordinary income tax.

The amount of the distribution is reduced by the amount of a 20% withholding tax Distributions from 401(k) plans 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. Since this client actually took a distribution (instead of making a trustee-to-trustee roll over), the distribution is subject to 20% withholding tax.

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then AThe benefit is received tax free. BThe benefit is subject to the exclusionary rule. CIRS has no jurisdiction. DThe 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 that key person.

Which of the following statements concerning buy-sell agreements is true? ABenefits received are considered income taxable. BBuy-sell agreements pay in the event of a medical emergency. CBuy-sell agreements are normally funded with a life insurance policy. DPremiums paid are deductible as a business expense.

Buy-Sell agreements are normally funded with a life insurance policy A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.

Which of the following statements concerning buy-sell agreements is true? APremiums paid are deductible as a business expense. BBenefits received are considered income taxable. CBuy-sell agreements pay in the event of a medical emergency. DBuy-sell agreements are normally funded with a life insurance policy.

Buy-sell agreements are normally funded with a life insurance policy. A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.

Which of the following is true regarding taxation of dividends in participating policies? ADividends are not taxable. BDividends are taxable only after a certain amount is accumulated annually. CDividends are taxable in some life insurance policies and nontaxable in others. DDividends 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 applicants would NOT qualify for a Keogh Plan? ASomeone who has been employed for more than 12 months BSomeone who is over 25 years of age CSomeone who works for a self-employed individual DSomeone who works 400 hours per year

Someone who works 400 hours per year A person must have worked at least 1,000 hours per year to be eligible for a Keogh Plan.

The advantage of qualified plans to employers is ATaxable contributions. BTax-deductible contributions. CTax-free earnings. DNo lump-sum payments.

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 favorable tax treatment.

All of the following statements concerning an employer sponsored nonqualified retirement plan are true EXCEPT AThe employer can receive a current tax deduction for any contributions made to the plan. BThe plan is a legal method of accumulating money for retirement needs. CThe plan can discriminate as to who may participate. DThe plan is not approved for favorable tax treatment by the IRS.

The employer can receive a current tax deduction for any contributions made to the plan Employers do not receive a current tax deduction for any contributions made to a nonqualified plan. The plans are legal; however, they do not qualify for any favorable tax treatment under the IRS rules.

All of the following statements concerning an employer sponsored nonqualified retirement plan are true EXCEPT AThe plan is a legal method of accumulating money for retirement needs. BThe plan can discriminate as to who may participate. CThe plan is not approved for favorable tax treatment by the IRS. DThe employer can receive a current tax deduction for any contributions made to the plan.

The employer can receive a current tax deduction for any contributions made to the plan. Employers do not receive a current tax deduction for any contributions made to a nonqualified plan. The plans are legal; however, they do not qualify for any favorable tax treatment under the IRS rules.

Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? AThe key employee is the owner and beneficiary. BThe key employee is the owner and the employer is the beneficiary. CThe employer is the owner and beneficiary. DThe 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 (the employer) is the applicant, owner, premium payer, and beneficiary.

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? AThe insurer will pay a reduced death benefit to the beneficiary. BThe insurer will pay the death benefit minus one month's premium. CThe insurer will pay nothing because the employee has terminated his group insurance and hasn't started the individual one. DThe insurer will pay the full death benefit from the group policy 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? AThey could be used for a key person coverage. BThey could be sold for an amount greater than the current cash value. CThey involve insurance policies with large face amounts. DThe seller must be terminally ill.

The seller must be terminally ill With 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 $250,000 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.

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? AThose who have no history of claims BThose who have been insured under the plan for at least 5 years CThose who have worked in the company for at least 3 years DThose who have dependents

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.