Insurance Chapter 4 Questions

all of the following would be different between qualified and nonqualified retirement plans EXCEPT

1. taxation on accumulation
2. taxation of withdrawals
3. taxations of contributions
4. IRS approval requirements

taxation on accumulation

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 an accident on June 1. which of the following statement best describes what will happen?

1. the insurer will pay a reduce death benefit to the beneficiary
2. the insurer will pay the death benefit minus one month’s premium
3. the insurer will pay nothing because the employee has terminated his group insurance and hasn’t started individual one
4. the 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

which of the following is an example of liquidity in a life insurance contract?

1. the death benefit paid to the beneficiary
2. the flex premium
3. the money in a savings account
4. the cash value available to the policyowner

the cash value available to the policyowner

in a life settlement contract, whom does the life settlement broker represent

1. owner
2. insurer
3. beneficiary
4. life settlement intermediary

owner

in order to quality for conversion from a group life policy to an individual policy of the same coverage, a person must have been insured under the group plan for how many years?

1. 1
2. 3
3. 5
4. 10

5

who is a third-party owner?

1. an insurer who issues a policy for two people
2. an employee in a group policy
3. an irrevocable beneficiary
4. a policyowner who is not the insured

a policyowner who is not the insured

all of the following are business uses of life insurance EXCEPT

1. funding against financial loss caused by the death of a key employee
2. funding business continuation agreements
3. funding against general company financial loss
4. compensating executives

funding against general company financial loss

which of the following is true regarding taxation of accelerated benefits under a life insurance policy?

1. they are tax free to terminally ill insured
2. they are always taxable to chronically ill insured
3. they are always taxed
4. there is a 10% penalty for early distribution of the death benefit

they are tax free to terminally ill insured

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

1. to create regular income payments
2. to liquidate a sum of money over a lifetime
3. to create an estate
4. to liquidate a sum of money over a period of years

…

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

1. endowment
2. multiplicative policy
3. modified endowment contract
4. accelerated policy

modified endowment contract

the minimum number of credits required for partially insured status for social security disability benefits is

1. 4 credits
2. 6 credits
3. 10 credits
4. 40 credits

6 credits

which of the following is NOT true regarding policy loans?

1. an insurer can charge interest on outstanding policy loans
2. a policy loan may be repaid after the policy is surrendered
3. money borrowed from the cash value is taxable
4. policy loans can be repaid at death

money borrowed form the cash value is taxable

to attain currently insured status under social security, an worker must have earned at least how many credits during the last 13 quarters?

1. 4 credits
2. 6 credits
3. 10 credits
4. 40 credits

6 credits

which of the following is incorrect concerning a noncontributory group plan?

1. the employee receive individual policies
2. they help to reduce adverse selection against insurer
3. they require 100% employee participation
4. the employer pays 100% of the premiums

the employees receive individual policies

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

1. hospital bills of the key employee
2. cost of training a replacement
3. loss of personal income
4. workers compensation

cost of training a replacement

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 adminstrator to another and what is the tax consequence of a direct transfer?

1. $8000, no tax consequence
2. $8000, tax on growth only
3. $10,000, tax on growth only
4. $10,000, no tax consequences

$10,000, no tax consequences

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 know as

1. survivor protection
2. life planning
3. survivorship insurance
4. juvenile protection provision

survivor protection

which of the following terms is used to name the nontaxed return of unused premiums?

1. dividend
2. premium return
3. interest
4. surrender

dividend

SIMPLE plans require all of the following EXCEPT

1. employees must receive a minimum of $5000 in annual compensation
2. at least 1000 employees
3. no other qualified plan can be used
4. no more than 100 employees

at least 1000 employees

which of the following is the required number of participants in a contributor group plan?

1. 75%
2. 100%
3. 25%
4. 50%

75%

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

1. sickness in old age
2. premature death
3. disability
4. bad investment choices

bad investment choices

an IRA purchased by a small employer to cover employees is known as a

1. 403(b) plan
2. simplified employee pension plan
3. 401(k) plan
4. defined contribution plan

simplified employee pension plan

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

1. taxable only if it exceeds the amounts paid for premiums by 50%
2. automatically taxable
3. only taxable if the cash value exceeds the amount paid for premiums
4. not considered to be taxable

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

which of the following terms means a result of calculation based on the average number of month the insured is projected to live due to medical history and mortality factors?

1. morbidity
2. life expectancy
3. mortality rate
4. risk exposure

life expectancy

all of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT

1. funds accumulate on a tax-deferred basis
2. employee and employer contributions are not counted as income to the employee for income tax purposes
3. at distribution, all amounts by the employee are tax free
4. employer contributions are tax deductible as ordinary business expense

at distribution, all amounts received by the employee are tax free

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 follow is true?

1. the amount of the distribution is reduced by the amount of a 20% withholding tax
2. no taxes are due since the plan participant is over age 59 1/2
3. there is a 10% early withdrawal penalty
4. the amount distributed is subject to ordinary income tax

…

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

1. split dollar agreement
2. buy-sell agreement
3. profit and loss agreement
4. key person agreement

buy-sell agreement

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

1. viatical broker
2. viator
3. third party
4. contingent

viator

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)

1. key person policy
2. fraternal association
3. aleatory contract
4. executive bonus

executive bonus

in life insurance policies, cash values increases

1. are income taxable immediately
2. are taxed annually
3. are only taxed when owner reaches age 65
4. grow tax deferred

grow tax deferred

an internal revenue code provision that specifically provides for an individual retirement plan for public school teachers is a(n)

1. 403(b) plan (TSA)
2. keogh plan
3. roth IRA
4. sep

403(b) plan (TSA)

an individual has been diagnosed with Alzheimer’s disease. he is insured udner a life insurance policy with the accelerated benefits rider. which of the following is true regarding taxation of the accelerated benefits?

1. principal is tax free, but interest is taxed
2. entire benefit will be received tax free
3. the entire living benefit is considered taxable income
4. portion of the benefit up to a limit is tax free; the rest is taxable income

portion of the benefit up to a limit is tax free; the rest is taxable income

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

1. increasing term
2. whole life
3. term life
4. credit life

whole life

all of the following statements concerning employer sponsored nonqualified retirement plan are true EXCEPT

1. plan is legal method of accumulating money for retirement needs.
2. plan can discriminate as to who may participate
3. plan is not approved to favorable tax treatment by IRS
4. the employer can receive a current tax deduction for any contribution made into a plan

the employer can receive a current tax deduction for any contribution made into a plan

if an insured worker has earned 40 quarters of coverage, the worker’s status under social security disability is

1. permanently insured
2. fully insured
3. partially insured
4. correctly insured

full insured

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

1. experience rating
2. group rate
3. insurer’s scheduled rate
4. attained age

attained age

what is the primary purpose of a 401(k) plan?

1. life insurance
2. retirement
3. education funds
4. to receive dividends over a certain period

retirement

which of the following employees under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated?

1. those who have no history of claims
2. those who have been insured under the plan for at least 5 years
3. those who have worked in the company for at least 3 years
4. those who have dependents

those who have been insured under the plan for at least 5 years

what is the purpose of key person insurance?

1. to insure retirement benefits are available to all key employees
2. to maintain an account that insures the owner of a company remains solvent
3. to lessen the risk of financial loss because o the death of a key employee
4. to provide health insurance to the families of key employees

to lessen the risk of financial loss because o the death of a key employee

an insured has a modified endowment contract. he wants to withdraw some money in order to pay medical bills. which of the following is true?

1. he will not have to pay a penalty, regardless of age
2. he cannot withdraw money from his MEC before age 59 1/2
3. he will have to pay a penalty if he is younger than 59 1/2
4. he will have to pay a penalty regardless of his age

he will have to pay a penalty if he is younger than 59 1/2

which of the following statements concerning buy-sell agreements true?

1. buy-sell agreements pay in the event of a medical emergency
2. buy-sell agreements are normally funded with life insurance policy
3. premiums paid are deductible as a business expense
4. benefits received are consider income taxable

buy-sell agreements are normally funded with life insurance policy

in a direct rollover, how is the money transferred from one plan to the new one?

1. from the original plan to the original custodian
2. from trustee to trustee
3. from trustee to the participant
4. from participant to the new plan

from trustee to trustee

which of the following is NOT an example of a business use of life insurance?

1. buy-sell funding
2. executive bonuses
3. key person
4. worker’s compensation

worker’s compensation

who is the owner and who is the beneficiary on a key person life insurance policy?

1. the key employee is the owner and the employer is the beneficiary
2. the employer is the owner and beneficiary
3. the employer is the owner and the key employee is the beneficiary
4. the key employee is the owner and beneficiary

the employer is the owner and beneficiary

all of the following are true of key person insurance EXCEPT

1. the key employee is the insured
2. the plan is funded by permanent insurance only
3. there is no limitation on the number of key employee plans in force at nay one time
4. the employer is the owner, payor and beneficiary of the policy

the plan is funded by permanent insurance only

all of the following are requirements of eligibility for social security disability income benefits EXCEPT

1. fully insured status
2. waiting period of 5 months
3. being age 65
4. inability to perform any gainful work

being age 65

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

1. fiduciary for the contract
2. insurance provider
3. policyowner of the life insurance policy
4. financial entity tat sponsors the transaction

policyowner of the life insurance policy

all of the following statements are true regarding tax-qualified annuities EXCEPT

1. tax accumulation is deferred
2. they must be approved by the IRS
3. withdraws are taxed
4. employer contributions are no tax deductible

employer contributions are not tax deductible

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

1. the benefit is received tax free
2. the benefit is subject to the exclusionary rule
3. IRS has no jurisdiction
4. the benefit is received as taxable income

the benefit is received tax free

which of the following is NOT true of life settlements?

1. seller must be terminally ill
2. could be used for a key person coverage
3. could be sold for an amount greater than the current cash value
4. involve insurance policies with large face amounts

seller must be terminally ill

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

1. key employee
2. employer
3. IRS
4. employees

employees

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?

1. a buy-sell agreement
2. family term rider
3. third-party ownership
4. an irrevocable beneficiary

third-party ownership

all of the following would be eligible to establish a keogh retirement plan EXCEPT

1. the president and employee of a family corporation
2. a sole proprietor of a service station who employs four employees
3. a sole proprietor of a film development store with no employees
4. a hair dresser who operates her business at her house

the president and employee of a family corporation

employer contributions made to qualified plan

1. may discriminate in favor of highly paid employee
2. are after-tax contributions
3. are taxed annually as salary
4. are subject to vesting requirements

are subject to vesting requirements

if an immediate annuity is purchased with the face amount at death or with cash value at surrender, this would be considered a

1. nonforfeiture option
2. rollover
3. settlement option
4. nontaxable exchange

settlement option

an insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. the insured knows that his financial state will worsen even more with the upcoming medical expenses. what option could the insured utilize?

1. estate liquidation
2. nonpayment of premium
3. change of beneficiary
4. viatical settlement

viatical settlement

all of the following are characteristic of group life insurance EXCEPT

1. amount of coverage is determined according to nondiscriminatory rules
2. individuals covered under the policy receive a certificate of insurance
3. certificate holders may convert coverage to an individual policy without evidence of insurability
4. premiums are determined by the age, sex, and occupation of each individual certificate holder

premiums are determined by the age, sex, and occupation of each individual certificate holder

what is the main purpose of the seven-pay test?

1. it guarantees interest minimum
2. it determines if the insurance policy is an MEC
3. it requires level premium payments for 7 years
4. it ensures that the policy benefits are paid out in 7 years

it determines if the insurance policy is an MEC

what is the official name for the social security program?

1. old age survivors disability insurance
2. social insurance program
3. defined benefit retirement insurance
4. qualified pension plan

old age survivors disability insurance

who can make a fully deductible contribution to a traditional IRA?

1. a person whose contributions are funded by a return on investment
2. an individual not covered by an employer-sponsored plan who has earned income
3. anybody: all IRA contributions are fully deductible regardless of income level
4. someone making contributions to an educational IRA

an individual not covered by an employer-sponsored plan who has earned income

all of the following are general requirements of a qualified plan EXCEPT

1. plan must be permanent, written and legally binding
2. plan must provide an offset for social security benefits
3. plan must be communicated to all employees
4. plan must be for the exclusive benefits of the employees and their beneficiaries

plan must provide an offset for social security benefits

which of the following is TRUE of a qualified plan?

1. has a tax benefit for both employer and employee
2. does not need to have a vesting schedule
3. may discriminate in favor of highly paid employees
4. may allow unlimited contributions

has a tax benefit for both employer and employee

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

1. postal employees
2. self-employed persons
3. teachers and not-for-profit organizations
4. government workers

teachers and not-for-profit organizations

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

1. multiplicative policy
2. modified endowment contract
3. accelerated policy
4. endowment

modified endowment contract