Unit 6

Split-dollar insurance plans enable an employer and a select employee to share premium payments toward the purchase of insurance on the employee's life. Generally, the employer contributes to the premium each year an amount equal to the increase in the policy's cash value; the employee pays the balance. At death, the employer is entitled to receive from the proceeds an amount equal to its share of the premium payments (or the cash value, if greater); the employee's beneficiary receives the balance.

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All of the following statements about executive bonus plans are correct EXCEPT: A) the bonus paid to the employee is includable in his gross income. B) at the employee's death, the company receives the death proceeds free of tax. C) the employee is the policyowner. D) they are considered nonqualified plans.

B) at the employee's death, the company receives the death proceeds free of tax. The BENEFICIARY receives the proceeds free of tax. The premiums paid to the employee as a bonus are deductible by the employer, and the amount paid to the employee is reportable as income.

Which of the following statements regarding executive bonus plans is NOT correct? A) The employee uses the bonus to pay the premiums on a life insurance policy covering his life. B) The bonus is included in the employee's gross income. C) An executive bonus plan is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. D) The employer becomes the policyowner of the insurance policy.

D) The employer becomes the policyowner of the insurance policy.

Herb and Felicia have been married for several years and are interested in increasing their life insurance protection as their family grows. Herb is a lawyer with a mid-sized firm. Felicia is a freelance writer of children's books. In planning for the future, when might they expect that their family will have its greatest need for income? A) If Felicia survives Herb and lives to an old age. B) When the children move away from the home. C) If Herb is diagnosed with a terminal illness and subsequently dies from it. D) While the children are in school.

D) While the children are in school.

To determine the amount of life insurance required, the needs approach takes into account the amount of benefits to be received from all of the following sources EXCEPT: A) pension plans. B) personal savings. C) future inheritances. D) Social Security.

C) future inheritances. To determine the amount of life insurance required, the needs approach considers the amount of monthly benefits the family will be receiving from Social Security, the deceased's pension plan, personal savings, and any other source. Future inheritances are not taken into consideration.

An executive bonus plan is a nonqualified employee benefit arrangement in which an employer pays a bonus to an employee, who then: A) contributes it to a deferred compensation plan. B) uses it to pay his share of the premiums under an employer-owned life insurance policy. C) uses it to pay the premiums on a life insurance policy covering his life. D) contributes it to a 401(k) plan.

C) uses it to pay the premiums on a life insurance policy covering his life.

All of the following statements about how a life insurance policy could benefit a qualified charitable organization are correct EXCEPT: A) life insurance proceeds are not part of the insured-donor's estate. B) the policy and its values could be assigned outright to the organization. C) a death benefit used as a charitable gift can be contested by the insured's relatives. D) the organization could be named as the policy's beneficiary.

C) a death benefit used as a charitable gift can be contested by the insured's relatives.

Robert and his employer agree on the purchase of a split-dollar life insurance policy. If it is a traditional plan, each year the employer will contribute to the premium an amount equal to: A) one-half of the premium. B) the increase in the policy's cash value. C) the annual dividend. D) two-thirds of the premium.

B) the increase in the policy's cash value.

With regard to a breadwinner's death, the blackout period generally can be defined as: A) a time when life insurance rarely is needed. B) the period from when the youngest child is grown to the surviving parent's retirement age. C) the period during which children are living at home and dependent. D) the period from the surviving spouse's retirement to death.

B) the period from when the youngest child is grown to the surviving parent's retirement age.

Which of the following statements pertaining to deferred compensation plans is CORRECT? A) A deferred compensation arrangement is a non-qualified plan funded by the employee. B) A deferred compensation arrangement is a non-qualified plan funded by the employer. C) A deferred compensation arrangement is a qualified plan funded by the employee. D) A deferred compensation arrangement is a qualified plan funded by the employer.

A) A deferred compensation arrangement is a non-qualified plan funded by the employee.

Regarding the Life Insurance Surrender Cost Index, a low index figure represents a relatively: A) low policy cost in the event of policy surrender at the end of a designated period. B) high policy cost in the event of policy surrender value at the end of the designated period. C) low cash surrender value at the end of the designated period. D) high cash surrender value at the end of the designated period.

A) low policy cost in the event of policy surrender at the end of a designated period.

Which of the following statements pertaining to key-person life insurance is NOT correct? A) The ABC Company is the beneficiary of the key-person life insurance policies on its president and general sales manager. B) The ABC Company insured the life of its company president for $150,000. The ABC Company is the owner of the key-executive policy. C) The ABC Company purchased a $75,000 permanent life insurance policy on its general sales manager five years ago. This likely was reflected each year in the company's balance sheet as a loss. D) A key employee is any person whose contribution to the success of a business is essential.

C) The ABC Company purchased a $75,000 permanent life insurance policy on its general sales manager five years ago. **With key-person insurance, the business itself is the owner, premium payor, and beneficiary of the policy. As a result, the policy can be considered a company-owned asset, not a loss. This likely was reflected each year in the company's balance sheet as a loss. It's an asset!