Insurance Flashcards
What are the 3 Standard Life Insurance Non-Forfeiture (termination) Options
- Extended Term
- Reduced Paid-Up
- Cash Surrender
While some insurance companies may offer annuitization it is not one of the three standard non-forfeiture options.
Which universal life option includes the cash value plus the face amount in the death benefit?
Option B includes cash value plus the face amount in the death benefit.
COBRA: Summary of Qualifying Events, Qualified Beneficiaries, and Continuation Coverage
COBRA generally applies to group health plans sponsored by employers with a minimum of how many employees?
COBRA generally requires that group health plans sponsored by employers with 20 or more employees in the prior year offer employees and their families the opportunity for a temporary extension of health coverage (called continuation coverage) in certain instances where coverage under the plan would otherwise end.
Permitted Insurance Policy 1035 Exchanges
LEAQ!
What is a Modified Endowment Contract (MEC)?
A cash value life insurance policy that fails the 7-pay test and changes the tax treatment for cash distributions while the insured is alive to FIFO, earnings taxed first.
MECs were created to prevent the use of life insurance as a tax-free income investment vehicle.
What is the 7-pay test?
A test applied at the inception of the policy and again if there is a material change, to determine MEC status
It assesses whether premiums paid exceed allowed limits.
What triggers the 7-pay test?
At the inception of the policy and if the policy experiences a material change
Material changes include a change in the death benefit or substantial addition of flexible payments.
What is the tax treatment for distributions and loans from a MEC?
LIFO (Last In, First Out) tax treatment regardless of the age of the policy
This means that withdrawals are subject to taxation on earnings first.
What happens if total premiums exceed net level premiums during the 7-year testing period?
The policy is classified as a MEC
Distributions become taxed at LIFO status, earnings first.
The net level premium is calculated to determine the maximum allowable premiums.
What is the penalty for loans or withdrawals from a MEC if the taxpayer is under age 59-1/2?
A 10% penalty applies
This penalty is in addition to regular income tax on the distribution.
What does ‘Once a MEC, always a MEC’ mean?
Once a policy is classified as a MEC, it retains that status permanently
This means that the tax implications continue for the life of the policy.
Fill in the blank: A cash value life insurance policy is considered a Modified Endowment Contract (MEC) if it fails the _______.
7-pay test
True or False: The 7-pay test can only be applied once during the life of a policy.
False
The test is applied at inception and again after any material changes.
Which of the following provides the largest benefit to the insured’s beneficiaries if the insured should die shortly after making the election?
a - Automatic Premium Loan
b - Reduced Paid-Up
c - Cash Surrender
d - Extended Term
The extended term option maintains the original face amount of the policy. Each of the other choices results in a death benefit lower than the original face amount.
Under a Personal Auto Policy (PAP), split limits of $50,000 / $100,000 / $5,000, the insurer pays a maximum of $50,000 per person or for all bodily injuries?
What does the $5,000 cover?
Under split limits of $50,000 / $100,000 / $5,000, the insurer pays a maximum of $50,000 to any one bodily injury and a maximum of $100,000 for all bodily injuries combined in any one accident, regardless of the number of injured people.
The $5,000 covers Property Damage.
An annuity, five years certain guarantees that the annuity will be paid out for five years. If the annuitant dies before the five-year period, their (BLANK) will continue to receive the remaining payments.
An annuity, five years certain guarantees that the annuity will be paid out for five years. If the annuitant dies before the five-year period, their successor beneficiary will continue to receive the remaining payments.
Which life insurance nonforfeiture option allows the policy owner to continue to make policy loans?
Reduced paid up status maintains cash value which is available for policy loans but any loans at death are deducted from the reduced paid-up death benefit.
Cash Surrender and Extended-Term nonforfeiture options have no cash value, therefore cannot make policy loans.
Dividends on participating life insurance policies may be:
Dividends on participating life insurance policies may be:
- taken in cash.
- used to pay a portion of the next premium.
- left to accumulate interest.
- used to purchase single-premium, paid-up additions.
- used to purchase one-year term insurance (fifth dividend option).
Loss resulting from contact with an animal is covered under what auto insurance coverage?
This coverage is sometimes referred to as “Comprehensive.” Typically, a deductible applies.
An auto damage loss resulting from contact with an animal is covered under Personal Auto Policy (PAP) Coverage D.2., Other than Collision Loss.
This coverage is sometimes referred to as “Comprehensive.” Comprehensive pays for covered claims to the vehicle caused by “other than collision”. Typically, a deductible applies.
A viatical settlement is a method for an insured to receive tax-free funds in the sale of their life insurance policy to a viatical settlement company. What two qualifying conditions must be met?
The insured must meet the definitions of terminally ill or chronically ill.
If someone (single - sole owner) has a bank account and an IRA at the same bank, how much FDIC coverage do they have?
$500,000
They have two insured ownership categories: single and retirement. The savings, CD, and sole proprietor checking are aggregated with maximum coverage of $250,000. The IRAs are aggregated with maximum coverage of $250,000. Money market mutual funds are not covered by FDIC.
‘Annuity Certain’ is a subcategory within which annuity feature?
‘Annuity Certain’ is a subcategory within the ‘Forms of Payment’ feature of annuities.
‘Annuity Certain’ can refer to either a Fixed Period or Fixed Payment.
Which annuitization method provides the highest monthly income to the annuitant?
Life only provides the highest monthly income to the annuitant, but the payments end when the annuitant dies, even if 100% of basis has not yet been recovered.
FDIC stands for _______________________.
Federal Deposit Insurance Corporation
Gains distributed from a non-qualified annuity are taxed as ordinary income. How that income is recognized is based on the annuity payout method: withdrawals or annuitization.
How are withdrawals and annuitization taxed differently?
How basis is recovered tax-free depends on whether the distribution is a withdrawal or if the contract is annuitized.
* Withdrawals: LIFO
* Annuitization: Exclusion allowance is applied from each payment until the basis is recovered.
* Before 8/14/1982 however, withdrawals = FIFO!
Exclusion Ratio = Investment in Contract / (Annual Payment x Life Expectancy)
Who is responsible to assure homeowners insurance dwelling coverage is maintained at an adequate level?
The Homeowner
An insurance company may advise coverage amounts but ultimately it is the homeowner’s responsibility to maintain adequate insurance coverage.
