Annuities, Variable Products, and the Federal Tax Considerations CH 6)

Question 1

Annuitant

Answer 1

The one receiving the Annuity and on whose life expectancy the rates are figured.

Question 2

Annuity

Answer 2

1) An amount of money, payable monthly or yearly, which liquidates a financial asset. 2) An agreement by an insurer to make periodic payments that continue during the survival of the annuitant(s) or for a specified period. Annuities are also accumulation vehicles that function much like savings accounts.

Question 3

Beneficiary

Answer 3

A person or entity who may become eligible to receive, or is receiving, benefits under an insurance plan, other than as a participant.

Question 4

Deferred Annuity

Answer 4

An Annuity on which payments to the annuitant are delayed until a specified future date.

Question 5

Fixed Annuity

Answer 5

An annuity whose accumulated proceeds are guaranteed by both the insurer and various state insurance funds.

Question 6

Joint and Survivorship Life Annuity

Answer 6

An annuity calculated on the joint life expectancies of the annuitant and another person (usually a spouse). This annuity will pay out until the death of the last surviving annuitant.

Question 7

Joint Life Annuity

Answer 7

Payments continue to two annuitants for only as long as both live. On the death of either one, payments stop.

Question 8

Loss

Answer 8

An unpredictable reduction in the quality, quantity, or value of something- for example, bodily injury, disease, property damage, physical disappearance of property, incurred expenses, death, etc.

Question 9

Participating Policy

Answer 9

Insurance that pays policy dividends. Issued by a mutual company. Sometimes called par.

Question 10

Period Certain Annuity

Answer 10

A annuity with a payout option in which funds are liquidated over a set period of time.

Question 11

Prospectus

Answer 11

A document that describes in detail characteristics of an investment for the evaluation of potential buyers.

Question 12

Pure Life/Straight Life Annuity

Answer 12

An annuity with a guaranteed payout for the life of the annuitant.

Question 13

Refund Life Annuity

Answer 13

Provides Annuity payments for the annuitant’s lifetime with the guarantee that, in no event, total income will be less than the purchase price of the contract. If the annuitant dies before receiving this amount, the difference is paid to a named beneficiary.

Question 14

Single Premium Annuity

Answer 14

An Annuity purchased with one lump sum payment.

Question 15

Surrender

Answer 15

Withdrawing the cash value of a policy and surrendering the policy to the insurer.

Question 16

Cash Refund Annuity

Answer 16

A life annuity contract providing that, upon the death of the annuitant, the company will pay the difference between the value which was annuitized and the income payments made to a designated beneficiary. This may be done as a continuation of the income payments or in a lump sum.

Question 17

When the annuitant under a life only annuity dies, what is the amount of the property interest in the contract that will be includable in the annuitant’s gross estate?

Answer 17

Zero; Payments under a life only annuity cease at the death of the annuitant. Any remaining value in the contract is surrendered to the insurance company. No amount is includable in the annuitant’s estate for tax purposes.

Question 18

Single premium immediate life annuity with a 10 year period certain will pay:

Answer 18

An income for as long as you live, but in no event less than 10 years. !0 years (120 payments) are guaranteed to be paid out to someone, even if the annuitant dies.

Question 19

At retirement age, an insured surrenders an individual life insurance policy and requests a lump sum distribution of the cash value. When the distribution is received, what will the tax consequences be?

Answer 19

The gain in the policy is taxable as ordinary income

Question 20

What are the tax implications to the beneficiary of a 20-pay life policy with a $300,000 face value with $30,000 in premiums paid and current cash value at $5,000?

Answer 20

Income tax free on $300,000.

As a death benefit to the beneficiary, no income tax is due on the full face amount of the policy.

Question 21

Life Insurance death benefits may be subjected to

Answer 21

Federal estate tax.

Question 22

If a life insurance policy is transferred to another person in exchange for valuable consideration, then the death proceeds may:

Answer 22

Lose their income tax exempt status

Question 23

What is the minimum age when one can withdraw funds from a Health Savings Account (HSA) for non-medical expenses WITHOUT penalty?

Answer 23

65

Question 24

In a key employer disability agreement, in the event of the employee’s total disability,

Answer 24

payments made by the insurer to the employer are tax free.

In a key employee disability agreement, the employer purchases an insurance policy to protect the business from a key employee’s disability and the effect that could have on the business’s cash flow. The employer is the owner, premium payor, and beneficiary on this policy. The premiums are not deductible, so the benefit is income tax-free.

Question 25

Employees who contribute to the employer group medical and dental insurance plan may

Answer 25

deduct a portion of their medical and dental expenses which exceed 10% of their adjusted gross income

Question 26

Disability income benefits received are NOT subject to income taxes if the benefits are paid

Answer 26

under a policy for which the insured paid the premiums.

Question 27

Benefits for an accidental death life insurance benefit are

Answer 27

income tax-free

Question 28

What premium for products can be considered in the total to meet the 10% tax deduction rule?

Answer 28

medical and Long term care

Question 29

Premiums paid by the employer for a group Long Term Care policy for employees i

Answer 29

tax deductible

Question 30

Abe owns a long-term care plan. How is he taxed on the purchase of this personal insurance?

Answer 30

only the portion over 10% AGI (adjusted gross income), when combined with unreimbursed medical expenses, is tax-free, but benefits to a high limit are tax free

Question 31

Business expenses that are tax deductible to the employer do not include

Answer 31

disability buy/sell agreement

Question 32

Annuities cannot be classified based on

Answer 32

the residence of the applicant

Question 33

What annuity option will pay the beneficiary of the annuity the difference between the value of the annuity prior to annuitization, if a single premium immediate annuity, and the total amount of annuity payments received by the annuitant while they were alive?

Answer 33

life with cash refund.

Question 34

An individual has purchased an annuity to provide retirement income. The annuitant is concerned about losing the value of the annuity if he should die soon after starting payments. What annuity option should the annuitant choose to be sure he or his beneficiary receives the total value of the annuity?

Answer 34

a cash refund annuity.

Question 35

Barbara buys an annuity that has a guaranteed rate of interest but could earn higher interest based on the current rates paid by the insurer. Barbara has purchased a

Answer 35

Fixed annuity

Question 36

State and local government employees may defer income for retirement into Section ________ plans.

Answer 36

457.

Section 457 describes the qualified deferred compensation plans available to state and local government workers

Question 37

Sole proprietors may deduct what percentage of personal medical insurance premiums?

Answer 37

Sole proprietors and partners have been able to deduct 100% of personal medical insurance premiums covering themselves and dependents.

Question 38

When can someone with a Roth IRA withdraw gains income tax free before the age of 59 1/2?

Answer 38

A Roth IRA that has been held at least five years may make income tax-free payments in the following situations: the Roth IRA owner is past age 591/2, deceased, disabled, or the funds are used for a first-time home or qualified higher education expenses.