Risk Management and Employee Benefit Quiz 2 Flashcards
Dennis participates in a qualified retirement plan maintained by his employer. The retirement plan includes a life insurance policy with a $100,000 death benefit payable to Dennis’s son, Bob. The cash value of the policy is currently $60,000. During his participation in the plan, Dennis included $25,000 in his gross income, representing the cost of insurance. If Dennis dies today and the $100,000 death benefit is paid to Bob, what amount must Bob include in his gross income?
A) $35,000. B) $0. C) $100,000. D) $60,000.
A
This year, the XYZ Corporation pays premiums of $10,000 on a $500,000 life insurance policy covering one of its executives. During the year, the cash value of the policy increases by $3,000. The beneficiary of the policy is the executive’s estate. Which of the following statements regarding the income tax consequences of this arrangement is CORRECT?
A)
XYZ may deduct $10,000; the executive must include $10,000 in gross income.
B)
XYZ may deduct $10,000; the executive must include $13,000 in gross income.
C)
XYZ may deduct nothing; the executive includes nothing in gross income.
D)
XYZ may deduct $7,000; the executive must include $13,000 in gross income.
A
Keith has an HO-5 homeowners policy on his house. The dwelling is insured for $200,000. His house is nearly destroyed by a tornado and is made uninhabitable for 6 months. Keith moves into his brother’s house, where he lives rent free until his house is repaired. He incurs expenses of $3,000 for meals while his house is under repair. Which of the following statements regarding Keith’s coverage under Coverage D of his HO-5 policy is CORRECT?
A)
Coverage D covers Keith’s meals plus the fair rental value of Keith’s house during the repairs.
B)
Benefits under Coverage D are limited to $1,500 for the first 50% of Keith’s meals.
C)
Coverage D pays no benefits because Keith lived rent free during the repairs.
D)
Benefits under Coverage D are limited to $3,000 for Keith’s meals.
A
Under Coverage D, if the insured does not incur additional living expenses when the dwelling is made uninhabitable, the insured receives a benefit equal to the fair rental value of the property. The additional cost of meals is also covered.
Mr. and Mrs. Concepcion have an HO-6 homeowners policy covering their condo. Their coverage under Coverage C is $100,000. One day while they are at work, their plumbing freezes and their unit is made uninhabitable as a result of water damage. They are forced to move into an apartment for 6 weeks while their unit is repaired. Which of the following statements regarding the Concepcions’ coverage under their HO-6 policy is (are) CORRECT?
- The water damage is not covered under the Concepcions’ HO-6 policy.
- The HO-6 policy provides the Concepcions with loss of use coverage of up to $40,000.
2 only
Justin has an HO-5 homeowners policy. The dwelling is insured for $150,000. He keeps personal property valued at $20,000 in a lake cottage, where he spends his summer weekends. What amount of coverage does Justin have on the personal property he keeps at the lake cottage?
A) $20,000. B) $7,500. C) $10,000. D) $15,000.
B
When personal property is located at another residence of the insured (e.g., a vacation home), the coverage on that property is limited to the greater of $1,000 or 10% of the Coverage C insurance. Because Justin’s dwelling is insured for $150,000, his coverage under Coverage C is $75,000 and the personal property at the cottage is insured for $7,500 ($75,000 × 10%).
Yvonne is a full-time accountant for the DEF Company. DEF has 25 full-time employees and provides a group health plan for its full-time employees. Yvonne and her two children, ages 6 and 9, are covered by the plan. This year, DEF terminates Yvonne’s employment after discovering she has been embezzling company funds. Which of the following statements regarding Yvonne’s eligibility for COBRA continuation coverage is CORRECT?
A)
Yvonne is not eligible for continuation coverage because her employment was terminated for gross misconduct, but her children are eligible for coverage until they reach age 19.
B)
Neither Yvonne nor her children are eligible for continuation coverage because Yvonne’s employment was terminated for gross misconduct.
C)
Yvonne and her children are eligible for continuation coverage for up to 18 months.
D)
Yvonne is not eligible for continuation coverage because her employment was terminated for gross misconduct, but her children are eligible for continuation coverage for up to 29 months.
B
Termination of employment for gross misconduct is not a qualifying event for purposes of COBRA, so neither Yvonne nor her children are eligible for continuation coverage.
Patrick is covered by a split-dollar life insurance plan using the endorsement method. The plan is funded with a whole life insurance policy with a face amount of $750,000 and a cash value of $200,000. Patrick’s employer has paid $150,000 in premiums on the policy. Patrick has named his daughter as residual beneficiary of the policy. Which of the following statements regarding the income tax consequences of this arrangement is CORRECT?
A)
Patrick’s employer has received income tax deductions of $150,000 for the premiums paid to date.
B)
At Patrick’s death, his daughter must include her share of the death benefit in gross income.
C)
At Patrick’s death, the entire $750,000 death benefit is received income tax free.
D)
At Patrick’s death, the employer must include its share of the death benefit in gross income.
C
Both the employer’s share and the employee’s share of the death benefit under a split-dollar life insurance plan are generally received income tax free. The employer receives no tax deduction for any premium payments under the plan.
Janelle is 65 years old. She has spent most of her life as a housewife and has only 10 quarters of Medicare-covered employment. Her husband, Kenny, is also 65 years old and has over 40 quarters of Medicare-covered employment. Which of the following statements regarding Janelle’s situation is (are) CORRECT?
- Janelle is eligible for Medicare Part A.
- Janelle must pay a monthly premium to enroll in Medicare Part A.
- Janelle must pay a monthly premium to enroll in Medicare Part B.
1 and 3
Statement 1 is correct; Janelle is eligible for Medicare Part A because she is 65 years old. Statement 2 is incorrect; although Janelle has fewer than 40 quarters of covered employment, she does not have to pay a Part A premium because her husband has at least 40 quarters of coverage. Statement 3 is correct; enrollment in Part B requires the payment of a monthly premium.
Margaret is a shareholder in a small corporation. She owns a life insurance policy with a face amount of $300,000 on her own life. The corporation adopts a cross-purchase buy-sell agreement, and as part of that agreement, one of the other shareholders buys Margaret's life insurance policy for $200,000 and names herself as beneficiary. The other shareholder pays $10,000 in premiums on the policy before Margaret dies. When Margaret dies, what amount of the $300,000 death benefit is subject to income tax? A) $100,000. B) $300,000. C) $0. D) $90,000.
D
Although a transfer to a partner of the insured or to a corporation in which the insured is an officer or shareholder is exempt from the transfer-for-value rule, a transfer to a co-shareholder of the insured is not exempt. The co-shareholder’s purchase of the policy from Margaret is subject to the transfer-for-value rule. Therefore, the death benefit is includible in the transferee’s gross income to the extent that the death benefit ($300,000) exceeds the amount paid for the policy ($200,000) plus any subsequent premiums paid ($10,000). In addition, the $90,000 taxable gain may also be subject to the 3.8% Medicare surtax which applies to net investment income of taxpayers with MAGI exceeding a certain threshold.
Mr. and Mrs. Smith were recently divorced. The divorce decree required Mr. Smith to transfer a $250,000 life insurance policy on his life to Mrs. Smith and continue paying the policy premiums. The cash surrender value (CSV) of the policy at the time of the transfer was $100,000. Mrs. Smith named herself as beneficiary of the policy after the transfer. Which of the following statements regarding the income tax consequences of this transfer is (are) CORRECT?
- Mrs. Smith recognizes taxable income as a result of the transfer.
- The $250,000 death benefit will be taxable to Mrs. Smith when Mr. Smith dies.
neither are correct
Susan is confused about an inheritance she is receiving from her late Uncle Vinnie. She decided to make an appointment with her CFP® professional, Henry, to help figure out how to handle all of the paperwork. She has no idea how much money she will be receiving or where the funds are located. Henry organizes the paperwork in two separate piles and discovers that Susan is the sole primary beneficiary of a fixed annuity contract and a whole life insurance policy. The fixed annuity has a basis of $25,000 and a current balance of $50,000, while the whole life insurance policy has a basis of $75,000 and a face amount of $200,000. Which of the following statements regarding Susan’s inheritance of the annuity contract and the life insurance contract is (are) CORRECT?
- Henry should let Susan know that she can choose to receive a tax-free lump sum of $50,000 from the annuity contract because it is a death benefit.
- Henry should let Susan know that she can choose to receive a tax-free lump sum of $200,000 from the life insurance contract because it is a death benefit.
- Henry could tell Susan that if she chooses to annuitize her life insurance benefit amount instead of receiving a lump sum, she would retain the original exclusion ratio even after the basis in the policy has been recovered, assuming that she lives beyond her life expectancy.
- Henry could tell Susan that if she chooses to annuitize her annuity contract benefit amount instead of receiving a lump sum, she would retain the original exclusion ratio even after the basis in the policy has been recovered, assuming that she lives beyond her life expectancy.
2 and 3
Mr. and Mrs. King have an HO-5 homeowners policy with no endorsements. The dwelling is insured for $200,000, and they have a $1,000 deductible under Coverage C. As a result of a fire, the following items of personal property are destroyed:
$500 in paper money. Golf cart valued at $3,000. Rifle valued at $3,000. Fur coat valued at $4,000. What amount will the Kings recover under Coverage C of their homeowners policy?
A) $5,700. B) $4,200. C) $2,500. D) $3,200.
D
The coverage for the paper money is limited to $200. There is no coverage under Coverage C for the golf cart. Coverage for the rifle is limited to $2,500, and coverage for the fur coat is limited to $1,500. The Kings’ covered losses are $4,200 ($200 + $2,500 + $1,500), and their deductible is $1,000.
A client owns a whole life insurance policy. Her total investment in the contract at the beginning of this year was $10,000. During the year, she paid premiums of $1,200 and the policy paid dividends of $300. She left the dividends on deposit with the insurance company, where they earned interest of $12 this year. What amount must the client include in this year’s gross income?
A) $312. B) $12. C) $0. D) $300.
B
Policy dividends are generally not taxable unless they exceed the policyowner’s investment in the policy. If dividends are left on deposit, any interest on the dividends is taxable as ordinary income in the year earned.
There is an annual limit of $___ on the value of the ISOs granted during one year
$100k
If an employer is still in possession of any ISOs as they near retirement, they must exercise them within ___ months from the date of retirement or termination.
3
