Chapter 4: Taxes, Retirement, and Other Insurance Concepts Flashcards
(122 cards)
1
Q
______ contracts may be owned by someone other than the insured. ______ is a legal term used to identify an individual or entity that is not an insured under contract, but that has a legally enforceable right under it. Most policies are written in business situations or for minors.
A
- Third-Party Ownership
2. Third-Party Owner
2
Q
______ allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are needed most, before their death.
A
Viatical Settlements
3
Q
While viatical settlements are not policy options, they are ______ in which the insured sells the death benefit to a(n) ______ at a discounted rate.
A
- Separate Contracts
2. Third Party
4
Q
There are important concepts about viaticals:
- The insureds are referred to as ______.
- Viatical settlement ______ means a person, other than a viator, that enters into a viatical settlement contract.
- Viatical ______ represent the providers.
- Viatical ______ represent the insureds.
A
- Viators
- Provider
- Producers
- Brokers
5
Q
Viators usually receive a(n) ______ of the policy’s face value from the person who purchases the policy. The new owner continues to maintain premium payments and will eventually collect the entire death benefit.
A
Percentage
6
Q
The term ______ refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash.
A
Life Settlement
7
Q
In a(n) ______, the owner sells an existing life policy to a third party.
A
Life Settlement
8
Q
The term ______ refers to any activity relating to the solicitation and sale of a life settlement contract to a third party who has no insurable interest in the insured.
A
Business of Life Settlement
9
Q
The term ______ refers to the holder of the life insurance policy who seeks to enter into a life settlement contract.
A
Owner
10
Q
______ is the person covered under the policy that is considered for sale in a life settlement contract.
A
Insured
11
Q
______ is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean).
A
Life Expectancy
12
Q
______ establishes the terms under which the life settlement provider will pay compensation to the policyowner, in return for the assignment, transfer, sale, or release of any portion of any of the following:
- The death benefit.
- Policy ownership.
- Any beneficial interest.
- Interest in a trust or any other entity that owns the policy.
A
Life Settlement Contract
13
Q
______ is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. These individuals represent only the policyowners, and have a fiduciary duty to the owners to act according to their instructions and in their best interest.
A
Life Settlement Broker
14
Q
______ is a person (other than the owner) who enters into a life settlement contract with the owner.
A
Life Settlement Provider
15
Q
______ is issued to the sponsoring organization, and covers the lives of more than one individual member of that group. It is usually written as ______ insurance.
A
- Group Life Insurance
2. Annually Renewable Term (ART)
16
Q
Two features that distinguish group insurance from individual insurance are:
- Evidence of ______ is usually not required (unless an applicant is enrolling for coverage outside the normal enrollment period).
- Participants (insureds) under the plan do not receive a(n) ______ because they do not own or control the *______.
A
- Insurability
2. Policy
17
Q
Each insured participant under the group plan is issued a(n) ______ evidencing that they have coverage. The actual policy, or ______, is issued to the sponsor of the group, which is often an employer.
A
- Certificate of Insurance
2. Master Policy/Contract
18
Q
Group insurance is written as ______ insurance.
A
Annually Renewable Term (ART)
19
Q
In group insurance, the ______ is for the employer, and ______ are for individual insureds.
A
- Master Contract
2. Certificates of Insurance
20
Q
Some of the characteristics of concern to a group underwriter include the following:
- ______ of the group - The group must be created for a purpose other than to obtain group insurance.
- ______ of the group - The larger the number of people in the group, the more accurate the projections of future loss experience will be.
- ______ of the group - From the underwriting perspective, a group should have a steady turnover.
- ______ of the group - Because group insurance is costly to administer, the underwriter should consider whether or not the group has the financial resources to pay the policy premiums, and whether or not it will be able to renew the coverage.
A
- Purpose or Nature
- Size
- Turnover
- Financial Strength
21
Q
The cost of group coverage is based on the ______ of the group and the ratio of ______. The insurer will also require a minimum number of participants.
A
- Average Age
2. Men to Women
22
Q
If an employee terminates membership in the insured group, the employee has the right to ______ to an individual policy without proving ______ at a standard rate, based on the individual’s attained age.
A
- Convert
2. Insurability
23
Q
The group life policy can convert to any form of insurance issued by the insurer (usually ______) except for ______. The face amount or death benefit will be equal to the group term face amount but the premium will be ______; the employee usually has a period of ______ after terminating to exercise the conversion option.
A
- Whole Life
- Term Insurance
- Higher
- 31 Days
24
Q
When converting from group life to individual life insurance, ______ is not required.
A
Evidence of Insurability
25
When an employer pays all of the premiums, the plan is referred to as a(n) ______. Under this plan, an insurer will require that 100% of the eligible employees be included in the plan.
Noncontributory Plan
26
When the premiums for group insurance are shared between the employer and employees, the plan is referred to as a(n) ______. Under this plan, an insurer will require that ______ of eligible employees be included in the plan.
1. Contributory Plan
| 2. 75%
27
______ plans have tax advantages.
Qualified
28
Traditional IRAs and Roth IRAs are for individuals with ______.
Earned Income
29
Contributions to a traditional IRA are with ______ dollars while contributions to a Roth IRA are with ______ dollars.
1. Pre-Tax (Tax Deductible)
| 2. After-Tax (NOT Tax Deductible)
30
Traditional IRA distributions are ______ while Roth IRA distributions are ______.
1. Taxable
| 2. NOT Taxable
31
______ or ______ plans make it possible for self-employed persons to be covered under an IRS qualified retirement plan and able to fund their retirement programs with pre-tax dollars as if under a corporate retirement or pension plan.
1. HR-10
| 2. Keogh
32
To be covered under a Keogh retirement plan, the person must be self-employed or a partner working part time or full time who owns at least ______ of the business.
10%
33
A(n) ______ is a type of qualified plan suited for the small employer or for the self-employed. An employee establishes and maintains an individual retirement account to which the employer contributes.
Simplified Employee Pension (SEP)
34
The primary difference between a(n) ______ and a(n) ______ is the much larger amount that can be contributed each year to a(n) ______ (an IRS established annual dollar limit or 25% of the employee's compensation, whichever is less).
1. SEP (Simplified Employee Pension)
2. IRA (Individual Retirement Account)
3. SEP
35
A(n) ______ plan is available to small business that employ no more than 100 employees who receive at least $5,000 in compensation from the employer during the previous year.
SIMPLE (Savings Incentive Match Plan for Employees)
36
Taxation on a SIMPLE (Savings Incentive Match Plan for Employees) plan are ______ on both contributions and earnings until funds are withdrawn.
Deferred
37
______ plans are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees.
Profit-Sharing
38
A(n) ______ plan or a(n) ______ is a qualified plan available to employees of certain nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems.
1. 403(b)
| 2. Tax-Sheltered Annuity (TSA)
39
______ plans are for nonprofits and public-school systems.
403(b)
40
Retirement Plan: ______
Eligibility: Self-employed
Who Contributes: Employer matches employee's contributions
HR-10 or Keogh Plan
41
Retirement Plan: ______
Eligibility: Small employer or self-employed
Who Contributes: Employer only
SEP (Simplified Employee Pension)
42
Retirement Plan: ______
Eligibility: Small employers (no more than 100 employees)
Who Contributes: Employer matches employee's contribution
SIMPLE (Savings Incentive Match Plan for Employees)
43
Retirement Plan: ______
Eligibility: Any employer
Who Contributes: Employer matches employee's contribution
401(k)
44
Retirement Plan: ______
Eligibility: Nonprofit organizations
Who Contributes: Employer and employee
403(b) or Tax-Sheltered Annuity (TSA)
45
Contributions to ______ plans are limited to a maximum amount (established by the IRS).
Qualified
46
Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death; this is known as ______.
Survivor Protection
Personal Insurance Need
47
Life insurance may be used to accumulate specific amounts of ______ for specific needs which guarantees that the ______ will be available when needed.
1. Monies
2. Money
Personal Insurance Need (Cash Accumulation)
48
Some life insurance policies provide ______ to the policyowner since the policy's cash value can be borrowed against at any time and used for immediate needs.
Liquidity
Personal Insurance Need
49
The purchase of life insurance creates an immediate ______ of at least the amount of face value.
Estate
Personal Insurance Need (Estate Creation)
50
Life insurance proceeds may be used to pay ______ taxes and ______ taxes so that it is not necessary for the beneficiaries to sell off estate assets.
1. Inheritance
2. Federal Estate
Personal Insurance Need (Estate Conservation)
51
The most common use of life insurance by businesses is as a(n) ______, which serves as a protection for employees and their beneficiaries.
Employee Benefit
52
A business can lessen the risk of financial loss due to the premature death of a key employee by the use of ______. With this coverage, the ______ is the insured, and the ______ is the applicant, policyowner, premium payer, and beneficiary.
1. Key Person Insurance
2. Key Employee
3. Business
53
______ are used to contractually establish the intent of someone else to purchase the business upon the insured's death and sets a value (purchase price) on a business. Life insurance is used to ______ this agreement.
1. Buy-Sell Agreements
| 2. Fund
54
______ allow the surviving partner or partners to purchase the deceased partner's share of the business from the deceased's family and may be either a cross-purchase plan or an entity plan.
Partnership Buy-Sell Agreements
55
In a(n) ______ plan each partner involved purchases insurance on the life of each of the other partners.
Cross-Purchase
56
Under the ______ plan, the business itself is obligated to buy out the ownership interest of any deceased or disabled partner.
Entity
57
______ is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. Since the employer treated the premium as a bonus, that amount is ______ to the employer and ______ to the employee.
1. Executive Bonus
2. Tax Deductible
3. Income Taxable
58
Premiums ARE / ARE NOT tax deductible.
Premiums ARE NOT tax deductible.
59
The death benefit is ______ if taken as a lump-sum distribution to a named beneficiary. If the death benefit is paid in installments (other than lump-sum) then principal is ______ and interest is ______.
1. Tax Free
2. Tax Free
3. Taxable
60
Since dividends are a return of unused premiums, they are not considered ______ income. If they are left with the insurer to accumulate interest, that interest is ______.
1. Taxable
| 2. Taxable
61
Under surrender or endowment, any cash value in excess of cost basis (premium payments) is ______ as ordinary income.
Taxable
62
Money borrowed against the cash value of a policy is not income ______; however, the insurance company charges ______ on outstanding loan policies.
1. Taxable
| 2. Interest
63
Policy loans from the cash value ARE / ARE NOT income taxable.
Policy loans from the cash value ARE NOT income taxable.
64
When a policyowner surrenders a policy for cash value, some of the cash value received may be ______ as income if the cash surrender value exceeds the amount of the premiums paid for the policy.
Taxable
65
When accelerated benefits are paid under a life insurance policy to a terminally ill insured, the benefits are received ______. When paid to a chronically ill insured, these benefits are ______ up to a certain limit.
1. Tax Free
| 2. Tax Free
66
Life insurance proceeds paid to a named beneficiary are generally ______ if taken as a lump sum. An exception to this rule would apply if the benefit payment results from a(n) ______, meaning the life insurance policy is sold to another party prior to the insured's death.
1. Free of Federal Income Taxation
| 2. Transfer for Value
67
______ cash payment of life policy proceeds are tax free for the beneficiary.
Lump-Sum
68
With settlement options, when the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is ______ as income.
Taxable
69
In settlement options, the ______ is tax free, but the ______ is taxable.
1. Principal
| 2. Interest
70
Permanent Life Features & Tax Treatment
```
Premiums: ______
Cash value exceeding premiums paid: ______
Policy loans: ______
Policy dividends: ______
Dividend interest: ______
Lump-sum death benefit: ______
```
Permanent Life Feature & Tax Treatment
Premiums: Not tax deductible
Cash value exceeding premiums paid: Taxable at surrender
Policy loans: Not income taxable
Policy dividends: Not taxable
Dividend interest: Taxable in the year earned
Lump-sum death benefit: Not income taxable
71
Taxes must be paid either upon ______ or upon ______, NOT both (if taxed on one end, will not be taxed on the other).
1. Contribution
| 2. Distribution
72
The ______ that can employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are ______ to the employer as a business expense.
1. Premiums
| 2. Tax Deductible
73
Any time a business is the named beneficiary of a life insurance policy, or has a beneficial interest in the policy, and premiums that the business pays for such insurance are not ______.
Tax Deductible
Examples include Key-employee insurance, stock redemption or entity purchase purchase agreements, and split-dollar insurance.
74
The ______ of a business owned life insurance policy or an employer provided policy accumulates on a tax-deferred basis and is taxed in the same manner as an individually owned policy.
Cash Value
75
______ are not taxable to a business. Unlike an individual taxpayer, a corporation may deduct interest on a life insurance loan for loans up to $50,000.
Policy Loans
76
______ paid under a business owned or an employer provided life insurance policy are received income tax free by the beneficiary (in the same manner as in individually owned policies.)
Policy Death Benefits
77
To determine if an insurance policy is overfunded as a tax-shelter, the IRS established what is known as the ______. Any life insurance policy that fails this test is classified as a(n) ______, and loses the standard tax benefits of a life insurance contract.
1. 7-Pay Test
| 2. Modified Endowment Contract (MEC)
78
In a(n) ______, the cumulative premiums paid during the first ______ of the policy exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.
1. Modified Endowment Contract (MEC)
| 2. 7 Years
79
Once a policy fails the ______ and becomes a(n) ______, it remains a(n) ______.
1. 7-Pay Test
2. Modified Endowment Contract (MEC)
3. Modified Endowment Contract (MEC)
80
A(n) ______ is an overfunded life insurance policy = failed the ______.
1. Modified Endowment Contract (MEC)
| 2. 7-Pay Test
81
Once a(n) ______, always a(n) ______.
Modified Endowment Contract (MEC)
82
All life insurance policies are subject to the ______, and any time there is a material change to the policy (such as an increase in the death benefit), a new ______ is required.
7-Pay Test
83
The following are taxation rules that apply to ______ cash value:
1. Tax-deferred accumulations.
2. Any distributions are taxable, including withdrawals and policy loans.
3. Distributions are taxed on a LIFO basis, known as "interest-first" rule.
4. Distributions before age 59 1/2 are subject to a 10% penalty.
Modified Endowment Contract (MEC)
84
Tax Considerations for Life Insurance & Annuities
```
Premiums: ______
Death Benefit: ______
Cash Value Increases: ______
Cash Value Gains: ______
Dividends: ______
Accumulations: ______
Policy Loans: ______
Surrenders: ______
Partial Surrenders: ______
Settlement Options: ______
Estate Tax: ______
```
Tax Considerations for Life Insurance & Annuities
Premiums: Not deductible (personal expense)
Death Benefit: Not income taxable (except for interest)
Cash Value Increases: Not taxable (as long as policy in force)
Cash Value Gains: Taxed at surrender
Dividends: Not taxable (return of unused premium; however, interest is taxable)
Accumulations: Interest taxable
Policy Loans: Not income taxable
Surrenders: Surrender Value - Past Premium = Amount Taxable
Partial Surrenders: FIFO for life insurance, LIFO for annuities
Settlement Options: Interest only if death benefit is spread evenly over income period.
Estate Tax: Included for estate tax purposes if insured owns the policy.
85
Social Security uses the ______ system to determine whether or not an individual is qualified for Social Security benefits. The type and amount of benefits are determined by the amount of ______ or ______ a worker has earned.
1. Quarter of Coverage (QC)
| 2. Credits or QCs
86
The term ______ refers to someone who has earned ______ of coverage (the equivalent of 10 years of work), and is therefore entitled to receive Social Security retirement, premium-free Medicare Part A, and survivor benefits. If an individual is entitled to premium-free Medicare Part A, they are automatically eligible for Medicare Part B, but must pay a(n) ______.
1. Fully Insured
2. 40 Quarters
3. Monthly Premium
87
An individual can attain a(n) ______ status (or partially insured) by Social Security, and by that qualify for certain benefits if he or she has earned ______ (or quarters of coverage) during the 13-quarter period ending with the quarter in which the insured:
1. Dies
2. Becomes entitled to disability insurance benefits
3. Becomes entitled to old-age insurance benefits
1. Currently Insured
| 2. 6 Credits
88
Examples of ______ include key person and partnership insurance, as well as a policy written on the life of a spouse or minor child.
Third-Party Policyownership
89
______ are more common now due to the growth of self-funded plans.
Third-Party Administrators (TPAs)
90
A person who seeks to sell his or her life insurance policy in a viatical settlement is known as a(n) ______.
Viator
91
A(n) ______ is an agreement where a terminally ill insured (a ______) sells his or her life insurance policy to an investor for less than its amount face value, but for more than its cash value.
1. Viatical Settlement
| 2. Viator
92
______ contracts are between the life insurance policyowner and a third party.
Life Settlement
93
______ transactions result from existing life insurance policies.
Life Settlement
94
Group policies are usually less ______ than individual.
Expensive
95
A person cannot form a(n) ______ just to buy insurance.
Group
96
Group insurance is usually written as ______ policies.
Annually Renewable Term
97
A(n) ______ (usually the employer) receives the master policy.
Group Sponsor
98
Group participants (insureds) receive ______ as evidence of coverage.
Certificates of Insurance
99
______, which is based upon past claims, is most often used in group insurance.
Experience Rating
100
When an individual terminates employment, conversion from a group life policy to an individual policy is permitted for ______ regardless of health.
31 Days
101
In a(n) ______ life plan employees pay part of the premium and ______ of those eligible must participate.
1. Contributory Group
| 2. 75%
102
In a(n) ______ life plan the employer pays the premium in full and ______ of those eligible must participate.
1. Noncontributory Group
| 2. 100%
103
______ have early withdrawal penalties. The IRS levies a(n) ______ penalty for cash surrenders, full or partial, on annuities, IRAs, 401(k)s, TSAs, and Keogh plans prior to age ______, unless the insured has died or becomes disabled.
1. Qualified Plans
2. 10%
3. 59 1/2
104
In regard to a(n) ______, anyone with earned income may contribute up to 100% of earned income or the current contribution limit, whichever is less.
Individual Retirement Account (IRA
105
Small firms often use ______ as tax qualified plans for employees.
SEP (Simplified Employee Pension) IRA (Individual Retirement Account)
106
Distributions from qualified plans may be ______ into an IRA (no dollar amount limit).
Rolled Over
107
IRAs may be funded with ______, but NOT with whole life policies.
Annuities
108
______ are available to self-employed sole proprietors, partners, and their employees; they are NOT available to corporate officers.
Keogh or HR-10 Plans
109
Tax-sheltered annuities (TSAs) are also called ______.
403(b) Plans
110
403(b) plans are also called ______
Tax-Sheltered Annuities (TSA)
111
Amounts contributed to ______ are limited by the IRS.
Qualified Plans
112
Deferred compensation is an example of a(n) ______.
Nonqualified Plan
113
The ______ includes coverage for old age (______, survivor benefits, disability income, and health insurance (______); however, does not include Medicaid coverage.
1. Old Age, Survivors, Disability, and Health Insurance Act (OASDHI)
2. Social Security
3. Medicare
114
To have fully insured status under Social Security for disability benefits, a worker must have contributed to Social Security for at least ______ (______ years).
1. 40 Quarters
| 2. 10 Years
115
On cash surrender, amounts paid in excess of ______ paid are taxable.
Premiums
116
______ paid to beneficiaries are tax free on all life insurance.
Death Benefits
117
Unpaid death benefits continue to earn ______ for the beneficiary. The ______ is taxable.
Interest
118
A(n) ______ eliminates the withholding tax requirement.
Trustee-to-Trustee Rollover
119
There is no 10% IRS penalty for ______ an annuity prior to age 59 1/2. The penalty only applies to ______.
1. Annuitizing
| 2. Cash Surrenders
120
______ paid for individual life insurance are not tax-deductible; however, the ______ are not taxable.
1. Premiums
| 2. Proceeds
121
Cash value life policies that fail the ______ are classified as ______ for the life of the contract.
1. 7-Pay Test
| 2. Modified Endowment Contracts (MECs)
122
Modified endowment contracts (MECs) have a(n) ______ for premature distributions.
10% Penalty
