Module 4

Question 1

Allowable IRA Deduction Limit Calculation

Answer 1

IRA Contribution Limit x [(Upper Limit - AGI) / Phaseout Range]

Question 2

Roth Conversion Pro Rata Rule

Answer 2

Non-Taxable Percentage of Conversion = Cost Basis / Total IRA Value

Question 3

Parties to an Annuity

Answer 3

1.) The Insurance Company
2.) The Contract Owner
3.) The Annuitant
4.) The Beneficiary

Question 4

Guaranteed Minimum Income Benefit (GMIB)

Answer 4

Guarantees a minimum income to the annuitant, regardless of adverse investment performance.

Question 5

Guaranteed Minimum Accumulation Benefit (GMAB)

Answer 5

Guarantees that there will be a minimum account value at the end of a specified guaranteed date.

Question 6

Guaranteed Minimum Withdrawal Benefit (GMWB)

Answer 6

Guarantees that either a return of principal or payout of a protected amount through systematic withdrawals over a specified time period in years (not covering a life expectancy).

Question 7

Guaranteed Lifetime Withdrawal Benefit (GLWB)

Answer 7

Guarantees the right to withdraw up to the specified percentage each year for life.

Question 8

Exception for Surrender of a Cash Value Policy

Answer 8

If a cash value policy is surrendered, the amount of the cash surrender value that exceeds the total net premiums paid is subject to taxation as ordinary income.
*Rider premiums are not part of the cost basis.

Question 9

Modified Endowment Contract (MEC)

Answer 9

A life insurance contract that meets both the state law definition and the Internal Revenue Code definition of a life insurance contract but fails the so-called seven-pay test.

Question 10

Seven-Pay Test

Answer 10

If the cumulative amount paid under the contract at any time in the first seven years is greater than the seven net level annual premiums that would have been paid under a seven-pay, paid-up contract, then the contract is considered a modified endowment contract.

Question 11

Consequences of a MEC Policy

Answer 11

A life insurance policy that becomes a MEC is no longer considered pure life insurance by the IRS, and if a policyholder wishes to make a withdrawal (or loan) from that modified endowment contract before age 59½, that withdrawal (or loan) will be treated just like a withdrawal from an annuity contract.

Question 12

Taxation of a MEC Policy

Answer 12

Last-In, First-Out (LIFO) – Cost basis is withdrawn last

Question 13

Taxation of an Annuity

Answer 13

Lump sum distributions from an annuity are fully taxable until all earnings have been distributed; this is referred to as last-in, first-out.

Question 14

Taxation of Life Insurance

Answer 14

First-In, First-Out (FIFO)
*Death benefits and cost basis are tax free

Question 15

Permanent Life Insurance Settlement (Payment) Options

Answer 15

1.) Payments of a fixed amount
2.) Payments over a fixed period
3.) Income for life
4.) Interest-only

Question 16

Payments of a Fixed Amount

Answer 16

An owner or beneficiary of a life insurance policy receives a specific fixed payment each month until the insurance proceeds (and the interest paid by the insurance company on the remaining proceeds) are exhausted.

Question 17

Payments over a Fixed Period

Answer 17

This option pays out everything, including all credited interest, over a fixed period of time.

Question 18

Pension Maximization Strategy

Answer 18

Elect the single life payout and invest the difference between the single life payout and the joint life payout in life insurance.

Question 19

Viatical Settlement

Answer 19

A third-party company buys the death benefit of an insurance policy on the life of an insured.

Question 20

Reverse Mortgage

Answer 20

A reverse mortgage converts home equity into a loan that doesn’t have to be repaid until you die or move. The amount available to borrow is based on the value of the home, market interest rates, and the homeowner’s age—the older they are, the more they can borrow. The amount paid from a reverse mortgage can come in the form of a lump sum, monthly payments for as long as the individual resides in the home (tenure payments), a term payment (a certain amount paid out over a specified period of time), or even a line of credit.

Question 21

Working Beyond Full Retirement Age Benefits

Answer 21

1.) Fewer retirement years need to be financed
2.) Additional time to save for retirement
3.) Social Security benefits increase
4.) Employer-paid health care

Question 22

Exclusion Ratio (Annuity Taxation)

Answer 22

Determines the tax-free portion of each distribution and it is based on a fraction where the numerator is the total premium paid and the denominator is the total expected payout from the annuity.

Question 23

IRA Deductibility Phase Out Range (2023)

Answer 23

Single Filers: $73,000 - $83,000
Joint Filers: $116,000 - $136,000

Question 24

Whole Life Policies

Answer 24

Designed to provide for level premiums, a guaranteed death benefit no matter when the insured dies, and guaranteed cash value.