Chapter 7

Life insurance policy premiums establish a _________ in the policy for tax purposes. A Cash value B Dividend C Cost basis D Loan

Cost basis

A qualified pension plan must meet ___________ requirements. A COBRA B ERISA C SEC D OSHA

ERISA Employee Retirement Income Security Act

When would a life insurance policy loan be subject to income taxation? A When any part of the policy loan is used to pay for the policy's premium B When the outstanding loan is in excess of $10,000 C If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis D When the policy loan is greater than the premiums paid into the policy

If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis

Any employee-paid group life insurance premiums are __________. A Tax-deductible B Not tax-deductible C Tax-exempt D Tax-deferred

Not tax-deductible

Janelle is the beneficiary of a life insurance policy in which the insured has died. What is the only way she can receive the claim amount totally free from income taxes? A Select the 10-year period certain settlement option B Choose the interest income only settlement option C Elect the life only settlement option D Receive the claim amount in a lump sum

Receive the claim amount in a lump sum

Which of the following would always be considered a Modified Endowment Contract? A Variable Whole Life B Straight or Continuous Pay Whole Life C Limited Pay Whole Life D Single Premium Whole Life

Single Premium Whole Life Single Premium Whole Life would always be a MEC as it would always fail the 7-Pay Test.

Which of the following best defines the 'Cost Recovery Rule'? A The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender B Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender C When a policy is surrendered, the earnings within the policy are accounted for first D The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy

Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender

From a tax standpoint, what is the benefit of receiving income benefit payments as opposed to cashing out an annuity after it has been held for several decades? A A lower tax rate is applied because an income benefit payment option was selected B Taxes are only due on the amount of tax-deferred earnings in each payment C Only the beneficiaries of any residual values pay any income taxes D Taxes are deferred until the very last payment

Taxes are only due on the amount of tax-deferred earnings in each payment

If Robert wishes to cash out his annuity at age 70 after having it for over 40 years, what should he know about prior to doing it? A The amount of tax-deferred earnings will now become taxable B He will receive only the principal amount he invested C Because he is 70, he is not subject to income taxes D He will pay a surrender charge

The amount of tax-deferred earnings will now become taxable

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 A business partner owns a life insurance policy on the other partner that died B The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up C An employer owns a policy on the life of a key employee who dies D The insured is also the policyowner and at death no beneficiaries are alive

The insured is also the policyowner and at death no beneficiaries are alive

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

When a policy loan is taken out

When withdrawing cash from a cash value life insurance policy, the amount of the withdrawal up to the policy's cost basis is tax-free. This tax accounting rule is referred to as: A Last-In, First-Out (LIFO) B First-In, First-Out (FIFO) C Dollar Cost Averaging D First-In, Still There (FIST)

First-In, First-Out (FIFO) FIFO accounting is first-in, first-out, which is why the recovery of amounts up to the cost basis are income tax-free

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE? A Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains B The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy C Taxable distributions include cash value surrenders and policy loans D If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

The restrictions on the amount of life insurance that can be held in a qualified plan are known as: A Undue concentration B Unsuitability C Incidental benefits limitation D Overinsurance

Incidental benefits limitation

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________. A Income tax penalty-free B Income tax-deferred C Income tax-deductible D Income tax-free

Income tax-free

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit? A Annually B Quarterly C Monthly D Semi-annually

Monthly

Employer-paid premiums for employee group term life do not constitute taxable income to the employee for coverage up to ___________. A $40,000 B $30,000 C $50,000 D $25,000

$50,000

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence? A Any amount that represents an excess over cost basis that has been held for over 1 year is treated as long-term capital gain with the balance considered short-term capital gain B Any amount received in excess of its cost basis is taxable as ordinary income C The entire amount received is subject to ordinary income tax D The amount received in excess of cost basis is taxed as a long-term capital gain

Any amount received in excess of its cost basis is taxable as ordinary income

Cash values within an ordinary straight whole life insurance policy _______ over time. A Decrease B Remain constant C Vary D Increase

Increase

The restrictions on the amount of life insurance that can be held in a qualified plan are known as: A Incidental benefits limitation B Overinsurance C Undue concentration D Unsuitability

Incidental benefits limitation

If Charlotte wishes to cash out her annuity at age 58 after having it for over 20 years, what should she know about prior to doing it? A She will face income tax consequences and tax penalties B She will have to pay income taxes C She will have to pay tax penalties D She will pay surrender charges for failing to annuitize

She will face income tax consequences and tax penalties

In which of the following circumstances is an annuity's tax-deferral benefit lost? A The annuity is owned by a corporation B The annuity has a long-term care rider C The annuity is held beyond age 70 1/2 D The annuity is owned by someone other than the annuitant

The annuity is owned by a corporation

By what means is a transfer for value made? A By requesting a change in the beneficiary designations B Through an absolute assignment C By a partial withdrawal D By way of collateral assignment

Through an absolute assignment

What is the main purpose that IRC section 1035 was enacted? A To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one B To allow consumers to obtain less expensive life insurance policies C To allow policyowners to obtain features and benefits not available on their existing policies D To allow consumers to get better performance from a new policy

To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one

When a life insurance policy does not pass the ______-pay test, it becomes classified as a MEC. A 7 B 10 C 9 D 8

7

If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period. A Pre-tax B Non-guaranteed C After-tax D Exclusion

After-tax

Clayton is asking his life insurance producer about any potential taxation issues related to his $100,000 personal Whole Life policy. All of the following are TRUE, except: A The interest that he pays on policy loans is tax-deductible B Since his policy is a personal policy, he cannot deduct the premiums he pays for the policy C Upon surrender of the policy, he will be taxed on any amount by which the cash value exceeds the cost basis (premiums paid) of the contract D Annual increases in the policy's cash value are not taxable at the time they are credited to the policy

The interest that he pays on policy loans is tax-deductible