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Insurance > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

Name four items that may be included in a persons estate.

A

Real and personal property, life death benefits, annuity values, retirement funds, and ownership rights in real property.

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2
Q

List some of the taxable distributions from a MEC.

A

Cash value surrender, dividends received, and policy loans

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3
Q

The death benefit received by a beneficiary is received ________________.

A

Tax free

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4
Q

In a non qualified annuity, how is the payout taxed?

A

Only the earnings portion is subject to tax as ordinary income

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5
Q

Any interest earned in dividends left to accumulate with interest would be taxable as ___________.

A

Ordinary income

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6
Q

A negative tax consequence may be created when the cash value policy is _____________.

A

Surrendered

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7
Q

What percentage of income from a qualified plan is typically taxable?

A

100% since qualified plans are normally funded with pre tax funds and have a zero cost basis

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8
Q

Dividends are paid by a ___________ company.

A

Mutual

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9
Q

What is the dollar limit that may be contributed annually to a no qualified annuity?

A

There is no contribution limit

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10
Q

Describe a modified endowment contract.

A

A life insurance policy in which the premiums paid are not in proportion to the death benefit provided.

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11
Q

In a qualified annuity, how is the payout taxed?

A

The entire payout is taxed as ordinary income, since the annuity was funded with pre tax dollars

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12
Q

What type of annuity may be used as a platform for an IRA?

A

A qualified annuity

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13
Q

Is the death benefit of an annuity included in a deceased clients estate?

A

Yes. It becomes part of the estate and any amount over the cost basis may be taxable to the beneficiary.

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14
Q

Are dividend returns on a life insurance policy ever guaranteed?

A

No

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15
Q

T/F: Dividends are treated as a return of overpaid premium, and are not taxable when returned to policyowner.

A

T

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16
Q

Is there a tax consequence to taking out a loan against a policy’s cash value?

A

No, there are no tax consequences

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17
Q

What percentage of the benefit received from a qualified annuity is subject to taxation?

A

100% since the annuity is funded with pre tax dollars

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18
Q

How is the death benefit in a life insurance policy taxed?

A

The death benefit is always received by the beneficiary on a tax free basis

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19
Q

Interest earned is always _______.

A

Taxable

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20
Q

How is non qualified annuity benefit taxed?

A

The benefit is taxed on a LIFO basis

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21
Q

If classified as a MEC, distributions from the policy will be considered ______________.

A

Taxable as income

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22
Q

Estate taxes comprise both ________ and _________ taxes.

A

State; federal

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23
Q

The term MEC is a _______________ of a life insurance contract, according to the IRS.

A

Classifications

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24
Q

Can a policy classified as a MEC ever be classified as a “non-MEC” policy?

A

No, once a MEC, always a MEC

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25
Q

In a no qualified annuity, how is a single distribution taxed?

A

Earnings first. In other words, LIFO

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26
Q

The cash value of a whole life contract usually begins to show a value sometime in the ______ year following issue.

A

Third

27
Q

Which annuity is funded with after tax dollars — qualified or nonqualified?

A

Nonqualified annuity

28
Q

In a MEC policy, premiums paid during the first ___ years of the policy exceeds what’s needed to fund a ___-pay life plan?

A

7; 7

29
Q

Distributions from a MEC are considered premature if taken prior to age ______.

A

59 1/2

30
Q

When paid to a beneficiary, is the death benefit from a MEC classified policy taxable?

A

No. The death benefit is paid on a tax free basis.

31
Q

A qualified annuity allows for _________ contributions and the annuity value grows on a ________ basis.

A

Pre tax; tax deferred

32
Q

Are life insurance death benefits included in the value of the deceased insureds estate?

A

Yes

33
Q

Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What’s Joan’s basis and what’s taxed?

A

Her basis is zero, since the annuity is qualified (funded pretax) and the entire 22,000 is taxed as ordinary income

34
Q

The cost basis of a cash value contract consists of premiums paid for the ________ policy, but not _____.

A

Base; riders

35
Q

Upon policy surrender, any cash value in excess of premiums paid will be taxable as _____________.

A

Ordinary income

36
Q

Distributions from a qualified plan are taxed at ____________ rates.

A

Ordinary income

37
Q

A nonqualified annuity allows for _________ contributions and the annuity value grows on a __________ basis.

A

After tax; tax deferred

38
Q

What is the effect of an outstanding loan if the insured dies?

A

The death benefit will be reduced by the loan amount and any interest owed.

39
Q

Are life insurance death benefits taxable?

A

No. Death benefits are received tax free

40
Q

Premature distributions from a MEC will be subject to ____________ and a ____% IRS penalty.

A

Taxation; 10

41
Q

T/F: Premiums paid for individual life insurance are not deductible.

A

T

42
Q

Which annuity allows for pretax contribution — qualified or nonqualified?

A

Qualified annuity

43
Q

Identify the acronym: MEC

A

Modified Endowment Contract

44
Q

The death benefit provided by a qualified annuity is __________ to the beneficiary.

A

Taxable

45
Q

What rule states that property must be sold within 3 years prior to death to eliminate inclusion in a persons estate?

A

The transfer of value rule

46
Q

Does the cash value of a MEC grows on a tax deferred basis?

A

Yes. As long as money remains inside of the contract, MEC cash value grows tax deferred. However, withdrawals are taxable.

47
Q

T/F: Distributions from a MEC are taxed on a FIFO basis.

A

F; taxes LIFO

48
Q

T/F: Individual life insurance premiums are generally paid with pre tax dollars.

A

F; individual life insurance premiums are generally paid with after tax dollars

49
Q

A client who contributed $100,000 to an annuity does when it is worth $200,000. To hat is her death benefit?

A

$200,000. The death benefit on an annuity is the greater of contributions or the account value at death

50
Q

_____________ is the equity that grows within a whole life policy.

A

Cash value

51
Q

A premature distribution penalty of __% is assessed against annuity withdrawals taken prior to age _____.

A

10; 59 1/2

52
Q

If no beneficiary is listed or alive upon an insureds death, a death benefit will be able to pay to the insureds ____________.

A

Estate

53
Q

The cash value grows within a contract on a ________ basis.

A

Tax deferred

54
Q

What occurs when an insured dies and how policy has an outstanding loan?

A

The loan amount and any interest owed will be subtracted from the death benefit.

55
Q

What technique may be used to roll assets from one annuity to another without taxation?

A

A 1035 exchange

56
Q

Ann invests $15,000 in a nonqualified annuity. At age 64, she withdraws all $22,000. Whats her basis and what’s tax deferred?

A

Ann’s basis is $15,000. The annuity is funded after tax and the $7,000 of earnings would be taxed as ordinary income.

57
Q

A client who contributed $100,000 to an annuity dies when it is worth $50,000. What is the death benefit?

A

$100,000. The death benefit on an annuity is the greater of contributions or the account value at death.

58
Q

What is another name for all of the deceaseds assets?

A

The estate

59
Q

A policy is considered a MEC based on the __-pay test.

A

7

60
Q

To be excluded from a persons estate, a piece of property must be sold within ____ years of death.

A

3

61
Q

What is the typical cost basis for a qualified retirement plan?

A

$0, since qualified plans are typically funded on a pre tax basis

62
Q

Joes policy has a cash value of $30,000 and his premiums were $28,000. If he surrenders the policy, what is taxable?

A

The cash value that exceeds premiums paid for the base policy would be taxable. This amount to $2,000

63
Q

Are variable life insurance loans taxable?

A

No, but interest is charged to the policyholder.

Insurance (10 decks)

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