Life Insurance Final Exam Review

Corporate Owned Life Insurance (COLI) is an attractive means of financing an employer's obligations under a non-qualified deferred compensation plan for all but one of the following reasons. Which on is inapplicable?

A plan funded with life insurance us exempt from all state and federal regulatory requirements.

Which of the following is not a standard provision in a typical life insurance policy?

A provision permitting the insurer to cancel the policy at any time if the insured individual changes jobs

In order for a participant to avoid current taxation of his benefits under a non-qualified deferred compensation plan, he must not be deemed to have constructive receipt of income under the plan. Constructive receipt can be avoided if certain provisions are included in the design of the plan. Which one of the three following provisions will NOT avoid constructive receipt?

A provision that permits the employee to place his benefits beyond the reach of the employer's creditors if he suspects that the employer is in financial difficulty.

Which of the following could never be treated as a modified endowment contract?

A single-premium policy that was entered into on June 1, 1988

The optional modes of settlement include all of the following except:

Accepts the proceeds as a life annuity for the life of the insured

Under the Insurance Feature of the joint and survivor annuity, the pensioner has no right to:

All of the Above

The GST Tax may be triggered by which of the following events?

All of the above

The process of selecting the best fixed annuity includes

All of the above

A policy that automatically increases the death benefit without evidence of insurability will typically violate the MEC rules.

False

A private annuity is an annuity product offered by an insurance company that is made available only to private individuals meeting certain income and asset requirements

False

Accepting a viatical or life settlement does not reduce the policy death benefit.

False

An individual may be classified as both terminally ill and chronically ill.

False

Because of the way that it is taxed a modified endowment contract is not considered a life insurance policy for tax purposes

False

Compared to alternative plan investment, Life Insurance typically provides lower expenses and higher rates of return.

False

Current assumption whole life is also known as "straight life" or "traditional whole life" insurance.

False

Death benefits from adjustable life are fully includable in the income beneficiary.

False

Gain on the surrender of a life insurance policy is taxed at capital gains rate.

False

Generally, the lower the number of payments, the lower the annual premium will be, consequently, the rate of growth of policy cash values drops.

False

In a 1035 exchange gains are deferred, but losses may be taken at the same time of the exchange.

False

In choosing life insurance policies, match the problem to the product

False

In order to take a deduction for amounts paid under a section 162 plan, the corporation must pay the bonus directly to the insurer providing the coverage.

False

Insurance company ratings have been shown to be too variable and wide-ranging to provide any reliable prediction of long term solvency and financial strength.

False

Key employee life insurance is an insurance policy owned by a business and payable to the insured's beneficiary.

False

Life insurance proceeds payable to a revocable trust are not available for the trustee's disposition until the decedent's will has been probated.

False

Merely naming a charity as the beneficiary of a life insurance policy will result in an income tax deduction for the donor.

False

Morbidity refers to the number of deaths per 1000 in a given time or community

False

Most universal life policies are issued with front-end load charges rather than back-end load charges.

False

Once a grantor transfers assets to a revocable living trust, any income losses, deductions, or credits become taxable to the trust, even if the grantor is the trustee.

False

Once a policy is classified as a modified endowment contract, with certain corrections, it can be later treated as not a modified contract.

False

One of the benefits of placing assets in a revocable trust is that they are protected from the claims of the grantor's creditors during his lifetime.

False

Payment of life insurance premiums for a policy owned by another is not considered a completed gift.

False

Planners are not responsible for the financial stability of life insurance companies they recommend.

False

Premiums on life insurance used to finance a DBO plan can be paid with pre-tax dollars.

False

Special nondiscrimination rules set forth in IRS regulations apply to split dollar life insurance arrangements

False

Split dollar life insurance us a specialized type of life insurance designed to meet specific business needs.

False

Survivorship life pays a death benefit at either the first or second death, depending on the wishes of the policyowner.

False

Term insurance is always the least expensive form of insurance regardless of the duration of needed coverage.

False

The GST Tax applies to transfers to any person more than one generation removed form the transferor

False

The basic policy in a survivorship life plan is always a permanent form of insurance.

False

The employer is taxed on the value of the economic benefit received from the employee's participation in the split-dollar arrangement.

False

The endorsement method of owning life insurance in a split dollar arrangement provides more protection to the employee than does the collateral assignment method of ownership.

False

The increase of a policy's cash value is subject to tax at ordinary income rates.

False

The larger the business is, the greater the need is for key employee life insurance.

False

The longer the period into the future that policy values are projected or illustrated, the more likely that they will be accurate.

False

The most important step in selecting a life insurance company is to asses its customer service strength.

False

The policy illustration for a current-assumption whole life policy provides all the information a consumer needs to evaluate the contract.

False

The price of stock as determined under a buy-sell agreement will automatically fix its value for estate tax purposes.

False

The primary reason for purchasing annuities is tax deferral.

False

The principal requirement in implementing a pension maximization strategy in compliance with ERISA.

False

The proceeds of life insurance are always free from ordinary taxes?

False

The sale of a key employee policy to the employee following his retirement or termination will trigger the transfer for value rule.

False

The transfer of value does not apply to transferees with a valid insurable interest in the life of the insured.

False

The transfer within three years of death rule applies to any life insurance held in an irrevocable trust.

False

The value of future Social Security benefits need to be converted to a present value in order to determine their effect on income replacement.

False

There are no tax problems in using a group term insurance to fund the promises under a buy-sell agreement.

False

There has always been an organized market for life insurance policies.

False

Variable annuities are not considered securities under federal law.

False

Variable life or variable universal life insurance as well-suited to individuals desiring a minimum basic level of coverage.

False

Which of the following is true regarding life insurance valuation?

For a newly issued policy, the fair market value is the cost of the policy

If a term policy is convertible it means the policy:

Gives the policyholder a contractual right to change the term policy for some other type of life insurance policy without evidence of insurability.

For estate tax purposes, Life Insurance

Held by a revocable life insurance trust is includable in the grantor's estate

Life insurance companies with better mortality experience than other companies tend to have

Higher underwriting standards

Which of the following statements is true regarding buy-sell agreements?

If a corporation pays premiums for a policy owned by one shareholder on the life of another shareholder, this payment will likely be considered a dividend.

Financial services professionals should examine policy illustrations with emphasis on:

Policy loans and dividends

Which of the following is an advantage of adjustable life?

Policy owners have flexibility of selecting the schedule of premiums they will pay until they request a change in coverage.

If the annuitant dies after annuity benefit payments have started under a "pure life annuity" settlement option.

The payments cease

Which of the following describes the Statutory reserve?

The value of reserves reported on a life insurance company's financial statement field with the state

Which of the following rights is generally considered an incident of ownership of life insurance?

To amend a trust that owns a policy on the insured's life

If stockholders are subject to restrictions on the sale of stock under a buy-sell agreement, why should the certificate be marked with a legend stating the existence of the restrictions?

To make the restrictions enforceable against a transferee

In which of the following situations would a level-premium whole life insurance policy be appropriate?

To provide funds for the continuation of a business through a "buy-sell" agreement.

A 10% penalty applies to certain distributions from life insurance policies that are treated as modified endowment contracts.

True

A Section 162 plan can be terminated by the employer at any time for any reason.

True

A gift of life insurance from one spouse to another will qualify for the gift tax marital deduction.

True

A section 162 plans is frequently referred to as an "Executive Bonus" plan.

True

A term rider typically provides for a conversion period, during which the rider may be converted into permanent coverage without evidence of insurability.

True

A transfer of group term to an irrevocable trust makes significant estate tax savings possible at minimum gift tax cost.

True

A wavier of premium rider is a form of disability insurance

True

Adjustable life insurance provides the policyholder more flexibility to change the plan of insurance.

True

All cash value policies must allow policyholders to borrow cash values from the policy.

True

As long as cash values are sufficient to cover policy charges, a universal life policy owner may skip premium payments

True

DBO plans can be designed to avoid most of the requirements of ERISA.

True

Direct gifts may qualify for a GST Tax annual exclusion

True

Each transferor has a GST Tax exemption that he may allocate to generation-skipping transfers

True

Estoppel is a legal way of arriving at a fair and just result when one party has misled another, resulting in a loss.

True

If a policy is treated as a "MEC", amounts received as loans are subject to income tax to the extent of "gain" in the policy.

True

If an insured individual dies under circumstances that suggest suicide, the presumption that he did not, and the burden of proof on the insurer to prove that suicide, in fact, occurred.

True

Life Insurance is essentially an investment vehicle that ensures a desired wealth accumulation by the time of death, regardless when death occurs.

True

Life Insurance proceeds is an irrevocable trust that are available to pay federal estate taxes that will be includible in the dependent's gross estate.

True

Life insurance proceeds payable to someone other than the deceased's estate are not a matter of public record.

True

One disadvantage of universal life is that policy owners bear more risk of adverse trends in mortality or expenses than if they owned traditional whole life policies.

True

One of the critical questions in examining a policy illustration should be how much of the value is guaranteed and how much is projected.

True

One of the key elements of a pension maximizations plan is that the couple be sufficiently disciplined and secure financially to keep the life insurance in force.

True

One of the main advantages of current assumption whole life is that policy elements are 'unbundled'.

True

One of the primary purposes of a buy-sell agreement is to create a market or shareholder's stock.

True

Payments under a DBO plan to an employee owning 50% or less of the employer typically will be excludable from his gross estate.

True

Premiums on life Insurance in a qualified plan are deductible by the employer as part of its annual contribution for covered employees.

True

Term life insurance is ideal for temporary needs, such as paying off funeral, estate, and inheritance taxes.

True

The GST Tax is a flat tax at the highest federal estate tax rate.

True

The life insurance products used to fund a qualified plan may provide employees with retirement benefits at more favorable terms than individual contracts.

True

The principal economic purpose of life insurance is to accumulate capital.

True

The principle advantage of pension maximization is increased planning flexibility.

True

The rule against perpetuities is a state law restriction designed to limit the period during which a trust can withhold property or its income from outright ownership.

True

The tax treatment of survivorship life insurance is the same as other types of life insurance.

True

The transfer for value will not apply if there is no consideration for a transfer of life insurance.

True

The value assigned to the policy may depend on the specific facts of the transaction.

True

There is no gain for income tax purposes when a life insurance policy matures at death where that policy was obtained by gift.

True

Variable Life and Variable Universal Life are especially suited for many business insurance situations where flexibility and growth of cash value are attractive features.

True

Variable life is a whole life policy where the policy owners bear all investment risk

True

Viatical settlements are amounts received from a third party who purchases the life insurance policy of an insured.

True

When a life insurance policy is transferred to an irrevocable trust, a gift is made subject to the gift tax.

True

Which of the following statements regarding universal life insurance is true?

Universal life allows policy owners to participate in favorable investment, mortality and expense experience of the company insurance policies.

A gift of life insurance to an irrevocable life insurance trust can make all of the following results possible EXCEPT:

continued control and ownership of the life insurance policy

The easiest policy comparison method to understand and use is the

traditional net cost method

All universal life policies have a guaranteed minimum interest rate.

true

A life insurance policy is owned in the beneficiary's qualified retirement plan. A total of $50,000 was paid in premiums and at the insured's death it had a cash value of $100,000 and a death benefit of $250,000. How much of the death benefit will be subject to income tax?

$100,000

Mr. Jones' pension pays $3,000 a month under the single life annuity option or $2,550 a month under the joint 50% survivor annuity option. Mr. and Mrs. Jones elect the joint and 50% survivor annuity. What is the effective "cost" of the 50% survivor annuity?

$450 per month

An individual owns a life insurance policy with investment in the contract of $35,000 and a cash value of $60,000. He exchanges the policy and will also receive $5,000 in cash in the exchange. How much will the individual recognize on this transaction?

$5,000

A qualified appraisal must be obtained for a taxpayer to claim deduction for a gift of life insurance of

$5,000 or more

An individual owns a life insurance policy that is intended to be exchanged in a 1035 exchange. The individual has paid a total of $75,000 in premiums into the policy and the policy is now worth $100,000. When the exchange is complete, what will the investment in the contract of the new policy be?

$75,000

A client died in 2015 and $4,000,000 in policy proceeds were payable to a trust that can sprinkle income or spray principal to the client's son or grandson. Assuming that the $4,000,000 was taxed at %40 in the client's federal estate and that those taxes were paid by the trust, what additional GST tax would be payable if the trustee immediately distributes the balance to the grandson?

$916,000

A client died in 2015 and $4,000,000 in policy proceeds were payable directly to his grandson. Assuming that the $4,000,000 was taxed at %40 in the client's federal estate and that the $4,000,000 bore the estate tax, what additional GST tax is payable on the policy proceeds?

$960,000

The "multiples-of-salary" method of estimating the amount of a family's insurance needs is

A method combining a simple rule of thumb method with elements of income replacement and needs analysis

An increasing premium, level death benefit term policy to age 65 is:

A one-year policy, renewable to age 65

The transfer for value rule does not apply to a transfer to:

A partnership in which the insured is a partner.

A policy that originally is not a modified endowment contract will be subject to re-testing if there is a "material change" in the contract. Which of the following would likely be a material change?

An exchange of one policy for another policy in a 1035 exchange

A single premium life insurance policy issued before June 21, 1988 is :grandfathered," that is not subject to the MEC (Modified Endowment Contract) tax rules. However, it can lose this tax status if there is:

An exchange of the policy for another policy

For which of the following is use of single premium whole life insurance LEAST appropriate?

As a good short-term tax-deferred investment

Which of the following goals can be achieved by the use of key employee life insurance?

Assure shareholders of a public corporation that the price of the stock will not plummet at the death of a president or other senior executives.

Which of the following factors is a requirement of triggering the transfer for value rule?

Consideration

Which of the following items are NOT treated as income-first when distributed from a modified endowment contract?

Dividends retained by the insurer to premiums or other considerations for the contract.

All of these recent changes in qualified plan pension law have made non-qualifying deferred compensation plans more attractive, EXCEPT:

Easier nondiscrimination rules place fewer restraints on employer's discretion.

Most Viatical settlement payments are:

Excluded from income because they are deemed to be paid by reason of the death of the insured.

A "Salary Reduction" plan is a nonelective plan that is used to provide a specified deferred amount in addition to any other compensation or benefits provided to the employees.

False

A DBO plan is typically designed to benefit all or most of the employees of an employer, in order to meet the requirements for qualified plans.

False

A beneficiary designation that specifies a class of individuals rather than setting forth their names will be invalid and may cause the policy to lapse.

False

A common accident provision is a clause that provides for double indemnification if the insured and his or her spouse die in a common accident.

False

A gift of a donor's entire interest in a life insurance policy will be treated as a gift of appreciated capital gain property.

False

level-premium whole life insurance policies allow policy owners to borrow amounts under the policy. Typical loan provisions include which of the following requirements?

If the policy is terminated the cash surrender value is reduced by any outstanding policy loans and unpaid interest.

Which of the following items should not be taken into account when performing a "due care" analysis?

Inspecting the company's marketing materials

The disadvantage of using a revocable life insurance trust include all but which of the following?

Insurance proceeds would be available to a testamentary trust before they would be available for a revocable trust.

Adjustable Life is not a goof choice for life insurance when

Interest on policy loans can be deducted

Advantages of ordinary level-premium whole life include all of the following except.

Interest on policy loans is generally non deductible.

The three principle factors in premium calculations are:

Interests rates, agent commissions, and mortality

A survivorship life plan that involves a greater proportion of term insurance than permanent insurance.

Is sensitive to changes in yields, or interest rates.

The advantages of using a revocable life insurance trust include all but which of the following?

It is less costly and simpler than selecting a settlement option.

Which of the following statements is true regarding the "classic" split dollar plan?

It is rarely seen in practice today.

The two policy comparison methods that compute the rates of return, or the price of protection, for all years, or any subset of years the policies may be in force were developed by:

Joseph Belth

Mutual life insurance companies have all of the following advantages except:

No conflict of interest between shareholders and policyholders

Advantages of using life insurance funding in a buy-sell agreement include all of the following EXCEPT:

Premiums to keep the coverage in effect are deductible as a business expense

Disadvantages of term insurance all of the following EXCEPT:

Proceeds are not part of a probated estate unless the estate is a named beneficiary.

An owner of an insurance policy on the life of another person dies. What is includible in the deceased owner's estate?

Replacement cost of the life insurance policy.

which of the following statements are true regarding viatical settlements?

The buyer will have ordinary income upon the receipt of death benefits

Which of the following features is a characteristic of key employee life insurance?

The corporation pays the premium on the policy

Which of the following circumstances would be most likely to cause the value of the survivor benefit under a death benefit only (DBO) plan to be included in the estate of a deceased covered employee?

The covered employee is a controlling stockholder

Which of the following is one of the advantages of a pension maximization strategy?

The life insurance policy provides more planning flexibility as compared with a joint survivor payout.

In the example above, a transfer to which of the following persons might be subject to the GST tax?

The donor's grandson

In determining the amount of insurance that the employer must purchase to meet its obligation to pay benefits to an employee under a death benefit only (DBO) plan, which of the following factor's is not taken into consideration?

The employee's years of service

The advantages of death only insurance includes all of the following EXCEPT:

The entire corporate payment to the beneficiary is subject to income tax

A life insurance policy that has been given as a gift can be includible in the donor's gross estate if:

The grantor dies within three years of the transfer

For income tax Purposes:

The grantor of a revocable life insurance trust generally reports trust income, losses, deductions, and credits if he is trustee.

Which of the following is NOT a requirement to have death proceeds from employer-owned life policies issued after August 2006 received income-tax free?

The insured must pay the premiums.

Which of the following statements regarding universal life insurance is NOT true?

The policy is not susceptible to inadvertently becoming a modified endowment contract.

A life settlement may be entered into for any of the following reasons EXCEPT:

The policy owner is in need of cash to pay medical expenses

For families with young children or couples with a living standard that is relatively high for their income, the amount of insurance needed will be high. As a result,

The priority should be to provide adequate death protection

What amount is potentially taxable as a gift of a life insurance policy to another individual?

The replacement cost of the policy

A "Viatical Statement" is

The sale of a life insurance policy to a third party when the inured has a life threatening disease or illness

Which of the following statements regarding the tax implications of key employee life insurance is correct?

The sale of key employee insurance to the insured employee is exempt from the transfer for value rule.

The replacement cost of a life insurance policy is generally equal to the policy's interpolated terminal reserve plus:

The unearned premium

Which of the following statements about variable universal and variable life insurance death benefits is NOT true?

Variable Life and Universal Life bear no mortality or expense risk.

A split dollar life insurance arrangement would be appropriate under all of the following circumstances, EXCEPT:

When the employer wants to be able to provide for the future security of its employees with tax deductible dollars.

Which of the following statements accurately describes one of the characteristics of a Section 162 plan?

at no time does the employer have any incident of ownership in the policy

A section 162 plan is biased on an internal Revenue Code section that:

permits an employer to deduct amounts paid for premiums on life insurance covering selected employees provided that the amount is insurance covering selected employees provided that the amount is charged to the covered employee as a bonus (compensation)

The advantage of a split-dollar arrangements include all of the following EXCEPT:

premiums are not tax deductible at any time by either party

Which of the following statements is true regarding the legal aspects of a life insurance contract?

states require certain provisions on the contract to safeguard the interests of the policy owner and beneficiary

Which item is NOT a key factor to be weighed in choosing the best variable life or variable universal life policy?

the amount of the cash value guarantees

Which of the following circumstances, if true, would make a non-qualified deferred compensation plan inadvisable?

the business is not likely to survive the death, disability, or retirement of its key employees.

A survivorship rider permits

the purchase of increased coverage on the insured if the life designated in the rider dies before the insured

A key feature of variable life insurance is

there is no guaranteed minimum cash value

A significant advantage of a split dollar plan using survivorship life instead of a single-life policy is that.

very low joint and survivor rates are used to measure the pure insurance cost of survivorship life while both insureds are alive, instead of the higher single-life rates.