Chapter 7: Taxation on Life Insurance

Question 1

TorF: Premiums for personal life insurancepolicies are paid using post-tax dollars and therefore the proceeds are tax free as long as their taken in a lump sum payout

Answer 1

True

Question 2

What do you call the amount of earnings paid out after the insurance company covers all other costs?

Answer 2

Divisible surplus and Dividends (distributed to policyholders)

Question 3

TorF: Dividends paid out are considered taxable income.

Answer 3

false- these are simply overpaid premiums (which were already taxed) being returned

Question 4

Policy Loans - 3 components

Answer 4

The borrowed money is not taxable.
The insurer will charge interest on loans that have not been repaid.
Loans are repaid or recovered upon policy surrender or maturity.

Question 5

TorF: Upon policy surrender, any cash value greater than the amount of premiums paid in is subject to tax

Answer 5

true

Question 6

What is the tern for tax free income received by the insured if the insured is suffering a terminal illness that is expected to result in death within 2 years?

Answer 6

Accelerated Benefit

Question 7

TorF: Premiums for group life insurance paid by the employee are not tax-deductible, but the employer can deduct premiums it pays as a business expense.

Answer 7

True

Question 8

TorF: Proceeds from a group life policy are taxable if taken in a lump sum.

Answer 8

False - tax free

Question 9

TorF: Proceeds taken in installments will be subject to taxes on the principal portion of the installment

Answer 9

False - only interest is taxable

Question 10

TorF: Life insurance policy premium payments are not tax-deductible as a business expense if the company is using the policy for business purposes; however, the proceeds are tax-free.

Answer 10

True - but if a business purchases group insurance for the benefit of its employees, it is tax deductible

Question 11

Modified Endowment Contracts (MECs) must pass the _______________________.

Answer 11

Seven Pay Test - the premiums paid during the first seven years of the policy may not exceed the total amount of level annual premiums that would pay-up the policy in seven years.

Question 12

TorF: If withdrawals are made prior to the policyowner reaching the age of 59½, the IRS assesses a 10% penalty tax on the interest.

Answer 12

True

Question 13

A policy loan on a whole life policy is:
Select one:
a. Not taxable
b. Taxable
c. Tax-deferred
d. Taxable if not repaid prior to policy maturation

Answer 13

A

Question 14

Erin bought a $100,000 whole life insurance policy. When she is 65 she decides to surrender the policy for its cash value of $60,000. Of the cash value, $50,000 is premiums. How much of Erin’s cash surrender is taxable?
Select one:
a. $10,000
b. $50,000
c. $60,000
d. $100,000

Answer 14

A

Question 15

Who pays tax on personal life insurance given as a gift?
Select one:
a. The insurer
b. The state
c. The gift-giver
d. The gift recipient

Answer 15

C

Question 16

All of the following are reasons the face amount of a life insurance policy may be subject to tax, EXCEPT:

Select one:
a. The policy’s ownership has been transferred to a third party.
b. The designated beneficiary is receiving the face amount in installments.
c. The deceased transferred ownership of the policy within three years prior to death.
d. The policy proceeds are paid out in a lump-sum.

Answer 16

D

Question 17

Which of the following best describes the seven-pay test?
Select one:
a. Premiums paid over a seven-year period cannot exceed the total level annual premiums for a paid-up policy in seven years.
b. Policy cash value cannot exceed cost basis.
c. First seven premium payments cannot exceed cost basis over a ten-year period.
d. First seven annuity premium payments cannot exceed cost basis over a ten-year period.

Answer 17

A

Question 18

Lump sum payments for life insurance are:

Select one:
a. Taxable
b. Not taxable
c. Taxable over the premium payment amounts
d. Taxable if the employer paid the premiums

Answer 18

B

Question 19

Which of the following is generally true regarding premiums for individually-purchased life insurance and annuities?
Select one:
a. They are tax-deductible.
b. They are not tax-deductible.
c. Only life insurance premiums are tax-deductible.
d. Only annuity premiums are tax-deductible.

Answer 19

B

Question 21

Premiums for life insurance are not tax-deductible and death benefits, received in a lump sum, are not taxable. Which of the following is taxable?

Select one:
a. Interest on life proceeds paid in installments
b. Dividends
c. Accelerated benefits
d. Policy loans

Answer 21

A

Question 21

When a life insurance policy becomes a MEC, what are the tax consequences?
Select one:
a. Interest loses tax-deferred advantage.
b. Premiums are no longer tax-deductible.
c. Premiums do not accrue interest.
d. Withdrawals and policy loans are taxed as ordinary income.

Answer 21

D

Question 22

Susan has a $500,000 permanent life insurance policy. She has paid $200,000 in premiums, and the policy has a cash value of $216,000. If Susan dies, her beneficiary will pay taxes on:
Select one:
a. $0
b. $16,000
c. $284,000
d. $500,000

Answer 22

A

Question 23

How are personal life insurance dividends taxed?
Select one:
a. Interest earned on dividends is considered taxable income.
b. Dividends are considered a return of overcharged premium.
c. Dividends are not taxable because premiums are paid with after-tax dollars.
d. All of the above

Answer 23

D

Question 24

Which of the following statements best describes how cash value in a life insurance policy is taxed?
Select one:
a. Cash value grows tax-free.
b. Cash value does not earn interest and is, therefore, not taxable.
c. If the policy cash value is surrendered, the interest earned on the cash value is taxable as ordinary income.
d. None of the above

Answer 24

C

Question 25

Which of the following is true regarding the taxation of universal life insurance policies?
Select one:
a. Premiums are tax-deductible.
b. All cash value is taxed upon withdrawal.
c. Only withdrawals of premium dollars from the cash value are taxable.
d. Cash value grows tax-deferred, but may be subject to taxation upon withdrawal.

Answer 25

D

Question 26

Which type of life insurance policy allows an employer to deduct premium payments as an ordinary business expense for tax purposes?
Select one:
a. Key employee
b. Split-dollar plan
c. Group life insurance
d. Business continuation agreement

Answer 26

C

Question 27

What is the general rule for taxation of personal life insurance?
Select one:
a. Premiums are paid with after-tax dollars; proceeds received in a lump-sum are received tax-free; proceeds received in installments are taxable only to the extent of interest earned.
b. Premiums are paid with pre-tax dollars; proceeds received in a lump-sum are taxed; proceeds received in installments are not taxed.
c. Premiums are paid with after-tax dollars; proceeds are taxed.
d. Premiums are paid with pre-tax dollars; proceeds are taxable only if received in a lump-sum.

Answer 27

A

Question 28

Two types of Social Security Insured Status’s

Answer 28

Fully insured
Currently insured

Question 29

TorF: Insured status is based on how many quarters of coverage, or credits, a covered worker has earned. One quarter of coverage is equal to $1320. Four can be earned per year.

Answer 29

True

Question 30

Requirements of earning Fully Insured Status?

Answer 30

a covered worker must accrue one quarter of coverage each calendar year after the age of 21 for a total of 40 quarters (about 10 years of work) and a minimum of six quarters, upon the earliest of:

The year prior to reaching age 62;
The year of disability onset; or
The year prior to death.

Question 31

Requirements of earning currently insured status?

Answer 31

a covered worker must accrue at least six quarters of coverage over the past 13 quarters ending with the quarter in which the covered worker:

Died;
Became disabled; or
Became entitled to retirement benefits.

Question 32

What is the SS payroll tax for employees and employers?

Answer 32

6.2% for employees, matching 6.2% for employers; Self Employed must pay 12.4%

Question 33

What is the Medicare Part A payroll tax?

Answer 33

1.45% for employees, another 1.45% for employers; 2.9% for self employed

Question 34

What is the maximum taxable wage for SS purposes?

Answer 34

$128,400 (which amounts to $7960.80 in taxes at 6.2%)

Question 35

TorF: For individuals earning 25,000 to 34,000 in annual income, they will pay income tax on up to 50% of their SS benefits. Over 34,000, that increases to 85%

Answer 35

True

Question 36

TorF: INdividuals earning less than 25,000 (and joint filers earning less than 32,000) dont pay income tax on SS benefits.

Answer 36

True

Question 37

TorF: Joint filers earning between 32K and 44K = up to 50% taxes on SS benefits. Over 44K = up to 85%

Answer 37

True

Question 38

What is the percentage of PIA a person will receive if they retire early at 62 (assuming born before 1937)?

Answer 38

80%

Question 39

What is the maximum retirement age for anyone born in 1960 or later?

Answer 39

67

Question 40

What is the percentage of PIA a person will receive if they retire early at 62?

Answer 40

80%

Question 41

What is the percentage of PIA a person will receive if they retire early at 62 (assuming born after 1960)?

Answer 41

70%

Question 42

What is Duel Benefit Eligibility?

Answer 42

If a person is eligible to receive dual Social Security benefits, he or she will receive the larger amount, but not both.

An example of dual benefit eligibility is a person who is eligible to receive both spousal benefits and retirement benefits.

Question 43

What is the SS Spouse’s benefit?

Answer 43

Monthly payments are made to the retired covered worker’s spouse, age 65 and older, in an amount of 50% of the covered worker’s PIA.

The benefit is decreased for spouses receiving benefits at the earliest age of 62.

Question 44

What is the SS child’s benefit?

Answer 44

Monthly payments are made to the retired covered worker’s unmarried child or grandchild who is under the age of 18 (19 if the child is a full-time high school student) or a child at any age who became disabled before the age of 22 in the amount of 50% of the covered worker’s PIA.

Question 45

What is the SS Earnings Limit Upon Retirement?

Answer 45

Once a covered worker reaches the normal retirement age, they are entitled to receive the full Social Security retirement benefit regardless of whether or not they continue to work.

However, covered workers that begin to receive Social Security retirement benefits prior to their normal retirement age are limited to how much they can earn before their Social Security retirement benefits are reduced.

These limits apply to ages before retirement up until the month that the individual reaches normal retirement age, at which point there are no limits.

Question 46

What is the SS Earnings Test?

Answer 46

A person under full retirement age that begins to receive Social Security retirement benefits while continuing to work is subject to an annual limit of $17,040. If the person reaches full retirement age in the current year, the limit on the earnings for the months before full retirement age is $45,360.

Question 47

What is the waiting period before receiving SS disability income benefits?

Answer 47

5 months

Question 48

At what age do SS disability benefits go away?

Answer 48

When the insured turns 65

Question 49

What are the 3 conditions for SS disability?

Answer 49

The covered worker cannot do the work they did prior to the disability;
The covered worker cannot do other work because of physical or mental conditions; and
The disability has already lasted or will last for at least 12 full months, or the disability is expected to result in death.

Question 50

What are the other Benefits for SS disability?

Answer 50

Disabled worker benefits
Spousal Benefits
Child’s Benefits
Survivors’ Benefits

Question 51

What are Spousal Benefits for SS disability?

Answer 51

Monthly payments are made to the disabled covered worker’s spouse if the spouse is caring for a child under the age of 16, or a disabled child under the age of 22 in the amount of 50% of the worker’s PIA.

Spousal benefits are also payable if the spouse is age 65 in the amount of 50% of the worker’s PIA. For a spouse age 62, the benefits are reduced.

Question 52

What are Child’s Benefits for SS disability?

Answer 52

Monthly payments are made to an unmarried child under age 18 (19 if the child is a full-time high school student), or a child who became disabled before the age of 22 in the amount of 50% of the worker’s PIA.

A disabled covered worker, regardless of age, is eligible to receive full Medicare benefits after the waiting period and two years of receiving Social Security disability benefits – after 29 months. The maximum family benefit also applies to Social Security disability benefits.

Question 53

What are Survivors Benefits of SS disability?

Answer 53

When a fully insured dies, the survivors’ benefits depend on the average lifetime earnings of the deceased. The benefits can be paid as follows:

A lump sum death benefit of $255 (payable to spouse or children)
Widow or widower of insured – full benefits at 65 or older, or reduced benefits as early as 60
Widow/widower of any age if taking care of the insured’s child or children under the age of 16 or a disabled child
When the youngest child becomes of age, the benefits stop and won’t resume until the surviving parent reaches age 60. The period during which the surviving spouse doesn’t receive benefits from Social Security is called the blackout period.
Unmarried children under 18 (if attending elementary or secondary school full time)
Dependent parents age 62 or older

Question 54

Social Security quarters of coverage earned are based on ________ quarters worked, and ________ be earned consecutively.
Select one:
a. Consecutive; must
b. Consecutive; can
c. Cumulative; cannot
d. Cumulative; do not need to

Answer 54

D

Question 55

Which of the following is false regarding eligibility for Social Security disability benefits?
Select one:
a. The covered worker must be unable to do the work they did prior to the disability.
b. The covered worker must not be able to do other work.
c. The disability must have lasted or will last for at least 6 full months or be expected to end in death.
d. All of the above

Answer 55

C

Question 56

Joe becomes totally disabled. How much will Social Security pay Joe’s wife, who relies on child support payments from Joe, to care for their 12-year twins?
Select one:
a. 1/4 Joe’s PIA
b. 1/2 Joe’s PIA
c. 3/4 Joe’s PIA
d. Joe’s PIA

Answer 56

B

Question 57

What is the basis for Social Security retirement benefits?
Select one:
a. Status of dependency
b. Age
c. Primary insurance amount (PIA)
d. Quarters of credit

Answer 57

C

Question 58

Social Security is also referred to as:
Select one:
a. Medicare
b. Medicaid
c. OASDI
d. Disability income insurance

Answer 58

C

Question 59

Kenny is self employed. He owns a book bindery. Which statement accurately describes his Social Security tax obligation?
Select one:
a. Kenny must pay the employer and employee’s tax portions.
b. Kenny will only pay the employee’s tax portion.
c. Kenny will only pay the employer’s tax portion.
d. Kenny will not pay any Social Security tax because he is self-employed.

Answer 59

A

Question 60

A covered worker must be ______ insured to receive Social Security retirement benefits.
Select one:
a. Currently
b. Fully
c. Disability
d. Disability and currently

Answer 60

B

Question 61

How are Social Security benefits determined?
Select one:
a. How long a covered worker has worked throughout their life
b. How many dependents a covered worker has
c. What type of retirement plan a person has
d. How many years a person has been covered by Medicaid

Answer 61

A

Question 62

After the 5-month waiting period, Social Security disability benefits are payable to the disabled covered worker in the amount of:

Select one:
a. 1/4 their PIA
b. 1/2 their PIA
c. 3/4 their PIA
d. Their total PIA

Answer 62

D

Question 63

Which of the following employees would not be covered by Social Security?

Select one:
a. A person hired by the Federal government in 1980
b. A priest that has taken a vow of poverty
c. A self-employed, homeless street musician
d. All of the above

Answer 63

D

Question 64

How long is the reduction in Social Security retirement benefits effective for a person who retires early?
Select one:
a. 2 years
b. 5 years
c. Until age 70
d. All throughout retirement

Answer 64

D

Question 65

Luka is eligible to receive both spousal and retirement benefits. Which of the following is true?
Select one:
a. Luka will receive the spousal benefit only.
b. Luka will receive the retirement benefit only.
c. Luka will receive both the spousal and the retirement benefits.
d. Luka will receive the larger of the two benefits.

Answer 65

D

Question 66

What is the full Social Security retirement age for a person born after 1960?
Select one:
a. 62
b. 65
c. 67
d. 70

Answer 66

C

Question 67

In order to obtain fully insured status, a covered worker must accrue one quarter of coverage each calendar year after the age of 21 for a total of 40 quarters and minimum of six quarters, upon the earliest of:
Select one:
a. The year prior to reaching age 62
b. The year of disability onset
c. The year prior to death
d. All of the above

Answer 67

D

Question 68

Which of the following correctly describes Social Security survivors benefits for a covered worker who is fully insured?
Select one:
a. Monthly payments to the widow equal to the deceased spouse’s PIA if the widow is age 65 or above
b. Lump-sum death benefit paid to the widow and eligible children of the deceased covered worker
c. Monthly payments to a dependent parent age 62 and above
d. All of the above

Answer 68

D