Chapter Ten Quiz

Question 1

What type of annuity activity will cause immediate taxation of the interest earned?

Answer 1

Surrendering the annuity for cash

Question 2

What is Section 1035 Policy Exchanges?

Answer 2

• Requires an absolute assignment of the existing policy to the replacing company who surrenders the contract and issues a replacement policy
• It is an IRS Code which permits like kind exchanges of property
• It is typically used when exchanging or replacing a less competitive life policy with a more competitive life policy

Question 3

A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called:

Answer 3

1035 exchange

Question 4

Which of the following statements regarding deferred compensation funds:

Answer 4

• They generally provide additional retirement benefits
• They can be made with cash deposits to an annuity
• They can be established by employers

Question 5

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?

Answer 5

Withdrawn amounts are taxed on a last in, first out basis

Question 6

An applicant buys a nonqualified annuity, but dies before the starting date. For which the following beneficiaries would the interest accumulated in the annuity NOT be taxable?

Answer 6

Spouse

Question 7

If taken as a lumps sum, life insurance proceeds to beneficiaries are passed:

Answer 7

Free of federal income taxation

Question 8

Which of the following is an allowable 1035 exchange?

Answer 8

• A life insurance policy is exchanged for an annuity
• An annuity is exchanged for another annuity
• A whole life insurance policy is exchanged for a Universal life insurance policy

Question 9

When a beneficiary receives payments consisting of both principle and interest portions, which parts are taxable as income?

Answer 9

Interest only

Question 10

Which of the following best describes taxation during the accumulation period of an annuity?

Answer 10

Taxes are deferred

Question 11

All of the following are true of the federal tax advantages of a qualified plan:

Answer 11

• Funds accumulate on a tax-deferred basis
• Employee and employer contributions are not counted as income to the employee for income tax purposes
• Employer contributions are tax deductible as ordinary business expense

Question 12

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?

Answer 12

Distributions cannot begin prior to age 73