Federal Tax Considerations and Retirement Plans Flashcards
C paid $20,000 in premiums into a $100,000 universal life insurance policy. The accumulated cash value was $35,000 when C received a cash withdrawal of $30,000. How much of the cash withdrawal was taxable?
A
$30,000
B
$0
C
$10,000
D
$20,000
C - $10,000
Which of the following distributions in a life insurance policy is taxable?
A
Cash dividend from a participating policy
B
Policy loans
C
Withdrawal of cost basis
D
Interest paid on a death benefit settlement option
D
Interest paid on a death benefit settlement option
when paid in a lump sum, not taxable. if a settlement option is chosen for a death benefit payout, it can be taxable
Which of the following statements is correct regarding an employer’s ability to deduct the premiums it pays for an employee’s life insurance benefit?
A
Premiums can be deductible if the business does not receive more than 50% of the death benefit
B
Employers can always deduct the premiums it pays for an employee’s life insurance benefit
C
Premiums are deductible as long as the business does not derive a direct benefit from the policy
D
An employer cannot ever deduct premiums it pays for an employee’s life insurance benefit
C
Premiums are deductible as long as the business does not derive a direct benefit from the policy
All of the following statements regarding a Modified Endowment Contract are correct, EXCEPT:
A
Distributions received from a MEC are subject to a LIFO tax treatment
B
A policy that fails the 7-pay test will be deemed a MEC
C
If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status
D
Distributions on gains withdrawn from a MEC prior to age 59 1/2 are subject to a 10% penalty in addition to taxation
C
If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status
A policy that does not pass the 7-Pay Test will be deemed a Modified Endowment Contract for the life of the contract. A policy can avoid being deemed a MEC if the policyowner receives a refund of excess premiums by the insurer within 60 days of the end of the contract year.
All of the following are characteristics of a qualified retirement plan, EXCEPT:
A
Employee contributions are either pre-tax or tax deductible
B
Employer contributions are immediately tax deductible to the employer
C
The penalty for premature distributions may be waived for death, disability, qualified education costs, medical expenses and first -time homebuyers
D
Employers in private industry are required to establish pension plans
D
Employers in private industry are required to establish pension plans
Regarding an accelerated death benefit, a physician must give a prognosis of ___ months or less life expectancy for the named insured.
A
18
B
24
C
6
D
12
B
24
Which of the following could initiate the Accelerated Benefits Provision or Rider of a life policy?
A
A total disability not reducing life expectancy
B
A condition that is terminal
C
A presumptive disability
D
Inability to perform some activities of daily living
B
A condition that is terminal
All of the following statements about Group Life Insurance are true, except:
A
Employees are taxed on any premiums paid on insurance in excess of $50,000
B
Employer paid premiums are tax deductible
C
Employee paid premiums are not tax deductible
D
Employees receive a tax deduction for employer paid premiums
D Employees receive a tax deduction for employer paid premiums
Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured’s estate?
A
The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up
B
The insured is also the policyowner
C
A business partner owns a life insurance policy on the other partner that died
D
An employer owns a policy on the life of a key employee who dies
B
The insured is also the policyowner
Joe had $500,000 of life insurance at work. He has an additional $40,000 life insurance policy the company purchased on all employees. His wife is the primary beneficiary and their four children are contingent beneficiaries. Upon Joe’s death, what are the tax consequences to his beneficiaries?
A
All premiums paid may be deducted from the face value before taxation
B
$460,000 is income taxable to the recipient
C
The $540,000 lump sum proceeds will be received income tax-free
D
The $40,000 will be taxed since the premium was tax-deductible by the employer
C
The $540,000 lump sum proceeds will be received income tax-free
When would a life insurance policy loan be subject to income taxation?
A
If the policy lapses when there is a policy loan outstanding which is in excess of the policy’s cost basis
B
When the policy loan is greater than the premiums paid into the policy
C
When any part of the policy loan is used to pay for the policy’s premium
D
When the outstanding loan is in excess of $10,000
A -If the policy lapses when there is a policy loan outstanding which is in excess of the policy’s cost basis
Why are dividends not taxable as income when paid out to a participating policyholder?
A
To create parity with nonparticipating policies under the tax code
B
Because they are often the sole source of a policyholders’ income
C
They represent a return of a portion of the premium paid
D
They are paid from a non-profit organization
C
They represent a return of a portion of the premium paid
All of the following are TRUE regarding qualified plans, except:
A
Plans can discriminate in favor of highly compensated employees
B
Employer contributions are immediately tax-deductible
C
Employer contributions are not taxable to the employee until withdrawn
D
Distributions taken prior to age 59 1/2 are subject to tax and a tax penalty
A
Plans can discriminate in favor of highly compensated employees
Contributions to a nonqualified retirement plan are:
A
Not tax-deductible
B
Partially tax-deductible
C
Fully tax-deductible
D
Tax-deductible up to $50,000
A
Not tax-deductible
Clayton is asking his life insurance producer about any potential taxation issues related to his $100,000 personal Whole Life policy. All of the following are TRUE, except:
A
Annual increases in the policy’s cash value are not taxable at the time they are credited to the policy
B
Since his policy is a personal policy, he cannot deduct the premiums he pays for the policy
C
Upon surrender of the policy, he will be taxed on any amount by which the cash value exceeds the cost basis (premiums paid) of the contract
D
The interest that he pays on policy loans is tax-deductible
D
The interest that he pays on policy loans is tax-deductible
*The interest on policy loans is not tax-deductible.
