Taxes, Retirement, and Other Insurance Concepts

How many hours does a person need to qualify for a keogh plan

1,000 per yeat

What percentage of a company's employees must take part in a noncontributory group life plan?

100% If the employer pays all of the premium, all employees must be covered to avoid adverse selection.

What is the number of credits required for fully insured status for social security disability benefits

40

an Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n)

403(b) Plan (TSA)

Which of the following is the required number of participants in a contributory group plan?

75%

Whats the official name for the social security program

OASDI Old age Survivors disability insurance

A 403(b) plan, commonly referred to as a TSA, is available to be used by

Teachers and not-for-profit orginizations

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then

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.

What is the name of the insured who enters into a viatical settlement?

Viator Viator means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.

what type of insurance is most commonly used for group plans

annually renewable term

What is Social security

federal program enacted in 1935 that is designed to provide protection for eligible workers and their dependents against financial loss due to death, disability, superannuation (retirement income) and sickness in old age

All of the following are requirements of eligibility for SS

fully insured status (40 quarters of coverage), waiting period of 5 months, inability to perform any gainful work

What are business uses of life insurance

funding of business continuation agreements, compensating executives, and protecting the firm against financial loss resulting from the death or disability of key employees.

What is true of federal tax advantages of a qualified plan

funds accumulate on a tax deferred basis/employer contributions are tax deductible as ordinary business expense/employee and employer contributions are not counted as income to the employee for income tax purposes

An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy? A

if a person has life insurance under a group plan and then leaves the group, he/she may convert group coverage to individual coverage within 31 days of leaving the plan without proof of insurability.

What are characteristics of a group life insurance

individuals covered under the policy receive a certificate of insurance/certificate holders may convert coverage to an individual policy without evidence of insurability/amount of coverage is determined according to nondiscriminatory rules/premiums are determined by the age,sex,and occupation of the entire group

An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer?

$10,000, no tax consequence During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other.

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?

$8000, 30 days Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor.

Which of the following would describe a legal document which would dictate who can buy a deceased partner's share of a business and for what amount?

A Buy-Sell agreement (also referred to as a business continuation agreement) is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.

whats the purpose of key person insurance

A business can suffer a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.

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

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.

Who is a third-party owner?

A policyowner who is not the insured

When would life insurance be tax deductible

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.

A tax-sheltered annuity is a special tax-favored retirement plan available to

Certain groups of employees only

What is 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.

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?

If $100,000 of life insurance proceeds were used in a settlement option paying $13,000 per year for 10 years, $10,000 per year would be income tax free (as principal) and $3,000 per year would be income taxable (as interest).

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy?

Premiums are not tax deductible as a business expense The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.

For a retirement plan to be qualified, it must be designed for the benefit of

Qualified plans are designed for the exclusive benefit of the employees and their beneficiaries.

Which type of retirement account allows contributions to continue beyond age 70½ and does not force distributions to start at age 70½?

Roth IRA

Which of the following describes the tax advantage of a qualified retirement plan?

The earnings in the plan accumulate tax deferred

Which of the following is INCORRECT concerning a noncontributory group plan?

The employees receive individual policies

In a noncontributory group plan

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

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 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.

Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer then makes a matching contribution up to an amount equal to what percent of the employee's annual wages?

Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer can then contribute up to an amount equal to 3% of the employees' annual compensation. Contributions and earnings are both tax-deferred until funds are withdrawn.

When accelerated benefits are paid to chronically ill insured theu

are tax free up to a certain limit. Any amount received in excess of this dollar limit must be included in the insured's gross income.

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 If an employee terminates membership in the insured group, the employee has the right to convert to an individual whole life policy without proving insurability. The insurer will determine what type(s) of policy an employee may convert to, but it must be issued at a standard rate, based on the individual's attained age.

What is true of group life

cost is based on the ration of men and women in the group

When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called a(n)

executive bonus

in the Executive Bonus plan, who is the owner of the policy, and who pays the premium?

executive is the owner and the executive pays the premium Executive buys the policy and pays the premium, and the employer reimburses the executive for cost (or pays a bonus in the amount of the premium). Since the executive is receiving compensation, the amount paid by the employer would be considered taxable income.

what is a simplified employee pension (SEP)

is an employer sponsored IRA. Contributions to the plan are not included in the employee's taxable income for the year, to the extent that they do not exceed the maximums allowed. Distributions from a SEP are taxable as ordinary income when received at retirement.

If a retirement plan or annuity is "qualified," this means

its approved by the IRS

What is true concerning whole life insurance

lum sum death benefits are not taxable

What are requirements for a qualified plan

must be permanent, written and legally binding/must be communicated to all employees/plan must be for the exclusive benefits of the employees and their beneficiaries/gen requirements established by the IRS

If a company has a Simplified Employee Pension plan, what type of plan is it?

qualified plan 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.

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?

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

To attain currently insured status under SS, a worker must have have earned at least how many credits during the last 13 quarters

6 credits

What is a collateral assignment

A collateral assignment is the transfer of some or all of the death benefits of the policy to a creditor as security for a loan, but does not give the creditor the rights of ownership. In the event of the insured's death, the creditor would only be able to recover that portion of the policy's proceeds equal to the creditor's remaining interest in the loan.

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 portion of the benefit up to a limit is tax free: the rest is taxable income When accelerated benefits are paid to a chronically ill insured, they are tax free up to a certain limit. Any amount received in excess of this dollar limit must be included in the insured's gross income.

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called?

A profit sharing plan:one where the employer will contribute monies into an employee's retirement plan when the company shows a profit. The others are all qualified plans, but company profit isn't an issue with them.

What is a settlement option

A settlement option is exercised when an immediate annuity is purchased with the face amount at death or with the cash value at surrender.

What is a viatical settlement?

A viatical statement allows an insured with a life-threatening condition to sell the existing policy in order to receive benefits when they are most needed. Viators typically receive a percentage of the policy's face value from the person who purchases the policy.

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is

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.

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?

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

Social security was created to protect against all of the following EXCEPT

Bad investment choices

A key person insurance policy can pay for which of the following?

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

What is the main purpose of the Seven-pay Test?

Determines if the policy is an MEC The Seven-pay Test determines whether an insurance policy is "over-funded" or if it's a Modified Endowment Contract. In other words, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.

Which of the following is true regarding taxation of dividends in participating policies?

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.

When an .employee terminates coverage under a group insurance policy, coverage continues in force

For 31 days under the conversion privilege to convert to an individual policy.

If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is...

Fully insured A worker is fully insured under social security if the worker has accumulated the required number of credits based on his/her age

Life insurance death proceeds are

Generally not taxed as income

In life insurance policies, cash value increases

Grow tax deferred.

Two attorneys at law and operate their practice as a partnership. They want to start a program through their practice that will provide retirement benefits for themselves and three employees. They would likely choose

HR-10 (Keogh Plans) are specifically for self-employed and their employees.

What would be different between qualified and nonqualified plans

IRS approval reqs/taxation of withdrawals/taxation of contributions

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?

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.

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?

Interest only If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

It is only taxable if the cash value exceeds the amount paid for premiums.

An employee is joining a group insurance plan. In order to avoid having to prove insurability, what must the employee do?

Join during the open enrollment period (avoid adverse selection)

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 Life Expectancy is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean).

what is known as 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.

What does "liquidity" refer to in a life insurance policy?

Liquidity in life insurance refers to availability of cash to the insured through cash values.

In a single employer group plan, what is the name of the policy issued to the employer?

Master contract

SIMPLE plans require

NO more than 100 employees/employees must receive a min of $5000 in annual compensation/no other qualified plan can be used

All of the following are personal uses of life insurance

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.

What is true regarding policy loans?

Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy loans.

Who may contribute to an HR-10 plan?

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

Which of the following would be considered a nonqualified retirement plan?

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.

Traditional IRA contributions are

Tax deductible The following taxation rules apply to contributions made to traditional IRA plans: tax-deductible contributions for the year of the contribution (based on the person's income); contributions must be made in "cash" in order to be tax deductible; excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA; and tax-deferred earnings are not taxed until withdrawn.

The advantage of qualified plans to employers is

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.

What part of surrender value would be income taxable

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.

In a life settlement contract, whom does the life settlement broker represent?

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 best defines the "owner" as it pertains to life settlement contracts?

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.

What is true of key person insurance

There is not limitation on the number or key employee plans in force at any one time/the key employee is the insured/the employee is the owner, payor and beneficiary of the policy/key coverage may be funded by any type of life insurance

How are contributions to a tax-sheltered annuity treated with regards to taxation?

They are not included as income for the employee but are taxable upon distribution ! Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawal.

Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings?

They are tax deferred until withdrawn

Which of the following is the best reason to purchase life insurance rather than annuities?

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

Death benefits payable to a beneficiary under a life insurance policy are generally

When premiums are paid with after tax dollars, the death benefit is generally not subject to federal income taxation.

Which of the following types of insurance policies would perform the function of cash accumulation?

Whole life Life insurance is unique from other types of insurance in that it could perform the function of cash accumulation. Cash values are available in whole life policies.

What is NOT true of life settlements

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 statements regarding the taxation of modified endowment contracts is FALSE

Withdrawls are not taxable Any distributions from MEC's are taxable including withdrawals and policy loans

The president of a manufacturing company has offered one of the company's officers a special individual annuity plan that is unavailable to lower-echelon employees. This plan would be funded with before-tax corporate dollars, and it does not meet government approval standards. This annuity plan is

a nonqualified annulty plan Nonqualified plans are a perfectly legal way for selected employees to receive certain types of benefits. Before-tax corporate dollars can be used for these plans, and they are not subject to government standards. Because of this, however, nonqualified plans contributions are not tax-deductible, unlike with qualified plans.

What statements are true regarding the taxation of modified endowment contracts

accumulations are tax deferred/ distributions before age 59 1/2 incur a 10% penalty on policy gains/policy loans are taxable distributions