Chapter 4 - Retirement and Other Insurance Concepts

Question 1

What is a Life Settlement

Answer 1

The owner sells an existing life policy to a third party

Question 2

What type of insurance is Group Insurance?

Answer 2

Annually renewable term insurance. In group insurance, the master contract is for the employer, and certificates of insurance are for individual insureds.

Question 3

What is the main advantage of converting from group life insurance to individual coverage?

Answer 3

Evidence of insurability is not required

Question 4

Compare Traditional IRAs to Roth IRAs

Answer 4

Traditional IRAs:
- Contributions are pre-tax dollars and tax deductible
- Distributions are Taxed

Roth IRAs:
- Contributions are after-tax dollars and non-tax deductible
- Distributions are NOT taxed

Question 5

What are 403(b)s?

Answer 5

TSAs (Tax Sheltered Annuity) for nonprofits and public-school systems

Question 6

Are policy loans from the cash value income taxable?

Answer 6

No

Question 7

How are lump-sum cash payment of life policy proceeds taxed?

Answer 7

They aren’t

Question 8

How are installment settlement options of life policies taxed?

Answer 8

The principle is not taxed, the interest earned is

Question 9

How do taxes on contribution vs distribution work?

Answer 9

You are taxed on one or the other, NEVER both

Question 10

What does zero cost basis mean?

Answer 10

0$ from the perspective of the IRS - so contributions that are NOT taxed.

• All zero cost basis investments are taxed when they’re distributed

Question 11

What are the four exceptions to the 59 1/2 distribution rule for annuities?

Answer 11

• Disability
• Catastrophic medical expenses
• Secondary education
• Down-payment on a house ($10K max)

No 10% penalty, still taxable

Question 12

Group life insurance policies are written as what type of insurance?

Answer 12

Annually renewable term

Question 13

What are the four personal uses of life insurance?

Answer 13

• Survivor protection
• Estate creation and conservation
• Cash accumulation
• Liquidity

Question 14

What type of policy is typically issued without proof of insurability from the insured?

Answer 14

Group policy

Question 15

Who would be considered a third-party owner?

Answer 15

An individual or an entity who is not the insured

Question 16

According to the taxation rules of life insurance policies, how are cash value increases taxed?

Answer 16

Tax deferred

Question 17

What are the three types of Social Security benefits?

Answer 17

• Retirement
• Disability
• Survivors

Question 18

What is estate conservation?

Answer 18

Using life insurance to pay taxes owed on inherited assets

Question 19

What type of life insurance does group membership convert to?

Answer 19

Whole life

Question 20

What is the penalty for excessive contributions to a traditional IRA?

Answer 20

6%

Question 21

What is the best reason to purchase life insurance rather than an annuity?

Answer 21

To create an estate

• The death benefit creates an immediate estate should the insured die

Question 22

Key person coverage can be funded by what type of life insurance?

Answer 22

Any type

Question 23

What is a noncontributory group life plan?

Answer 23

Employees are non-contributors. Employers pay 100% of the premium.

Question 24

What is a Cross-Purchase Plan?

Answer 24

Each partner buys insurance on the other partners to cover the cost of the buyout of the deceased partner’s ownership interest

Question 25

How long does an employee have to be covered under a group plan in order to convert to individual insurance?

Answer 25

5 years

Question 26

What is the official name for the Social Security program?

Answer 26

Old Age Survivor's Disability Insurance

Question 27

In order to be eligible for all Social Security Disability income benefits, what status must be achieved?

Answer 27

Fully insured status 40 quarters x 1 credit per quarter = 40 credits

Question 28

Are the premiums for a key-person life insurance policy tax deductible as a business expense?

Answer 28

No

Question 29

With an accelerated benefits rider, what portion of the accelerated benefit is taxable?

Answer 29

The portion up to a policy-defined limit is tax-free; the rest is taxable * Unless terminally ill

Question 30

What are the tax implications of the premiums of a business life insurance policy paid by the employer?

Answer 30

They are tax deductible

Question 31

What percent of participants is required for a contributory group plan?

Answer 31

75%

Question 32

Why does enrolling during the open enrollment period enable the participant to avoid evidence of insurability?

Answer 32

It mitigates the risk of adverse selection where only unhealthy individuals might opt for coverage outside of the open enrollment period

Question 33

Is the key person life insurance benefit taxable?

Answer 33

No

Question 34

In order to qualify for a Keogh plan, what amount of time must an employee work?

Answer 34

Half-time or at least 1000 hours per year