Missed Questions Flashcards
When will the proceeds from a life insurance policy be subject to income tax?
A. When a client gifts his policy to his ex-spouse
B. When a client gifts her policy to her daughter.
C. When a client sells his policy to a viatical company.
D. When a client buys a policy under which she is the insured from her employer’s qualified plan
C
Sale to a viatical company is a transfer for value that will subject the beneficiary to income tax on the proceeds. Answers A and B are gifts. Gifts are not transfers for value. When the client dies, the death benefit paid to the viatical company will be subject to income tax above basis.
Which of the following life insurance policies would NOT be treated as a MEC for federal income tax purposes?
A. The life insurance purchased a single premium policy in 1998.
B. The insurance purchased a level premium policy of $2,000 but by the fourth year has paid in $10,000.
C. The insured purchased a single premium policy in 2004 but then exchanged it for a level premium policy.
D. The insured purchased a single premium policy in 1986.
D.
Single premium policies purchased before 1988 are not affected by the MEC rules unless they are materially changed. The other policies are MEC’s. MEC’s remain so even when they are exchanged for another type of life insurance contract.
Which of the following statements accurately describes a MEC?
I. It meets the requirements of a life insurance contract
II. It was entered into on or after June 21, 1988.
III. It fails to meet the seven pay test
IV. It meets the guideline premium and corridor test or cash value accumulation test.
A. I, IV
B. II, III
C. I, II, III
D. II, III, IV
E. All of the above
C
When are dividends being paid by a MEC taxable?
I. They are received in cash
II. They are used to reduce premiums
III. They are used to purchase paid-up additions
IV. They are kept with company and accumulate interest
V. They are used to pay off a policy loan
A. Dividends from participating policies are never taxable because they represent return of basis
B. All of the above
C. I, II, V
D. III, IV
E. II, V
C
Participating policy dividends from MEC’s become subject to current year income tax when they are
1. received in cash
2. reduce upcoming premiums
3. pay back policy loans
Barry suffers from a work-related injury (lung disease caused by asbestos). He is awarded $1m as compensatory damages. The settlement is awarded in the form of a single premium immediate annuity. How is this payout taxed?
A. 100% taxable
B. 100% excludable
C. The $1m is excludable. Any income is includable
D. The $1m is includable. Any income is excludable
B.
When a single premium annuity is purchased by the party obligated to make the damage payments, the entire amount of each periodic payment is excludable by the taxpayer receiving the payments.
Which of the following problems qualifies for compensatory damages?
A. Auto accident
B. Headaches
C. Age discrimination
D. Stomach disorders
C
Vague physical symptoms such as insomnia, headaches, or stomach disorders are not considered physical injury or sickness. The auto accident itself does not qualify for compensatory damages. However, medical expenses and lost wages resulting from the accident may.
Alvin is employed by Chipmunk, Inc. The company provides a group disability (salary continuation) plan that pays Alvin $5,000 per month if he is disabled. The company pays 50% of the premium, and Alvin pays the other 50% after-tax from salary deductions. If Alvin is disabled, how are the benefits taxed?
A. The $5,000 benefit is tax-free.
B. $2,500 is tax-free, and $2,500 is taxable.
C. The $5,000 benefit is fully taxable.
D. Split premium plans are no longer available.
B.
How long is the waiting period for Social Security disability benefits?
A. No waiting period if the disability is severe
B. 5-month waiting period
C. 6-month waiting period
D. 12-month waiting period
B
Benefits payable at the beginning of the 6th month. Reflects a 5 month waiting period
Tom, a key employee of Action, Inc., participates in a discriminatory group life insurance plan for key employees.
Tom is age 40. The employer provides $500,000 of group term life insurance.
Table 1 rate = $ .10 per $1,000 per month
Actual premium = $ .09 per $1,000 per month
He actually contributes $ .08 per $1,000 per month.
How much is Tom’s economic benefit per year for the group term life
A. $ 60
B. $108
C. $120
D. $480
C.
The key employees economic benefit (income) is the difference between the Table 1 rate ($.10) and the contribution he made toward the insurance ($.08). A key employee, like Tom in a discriminatory plan must include the higher of the actual cost or table 1 cost. In addition, the key employee may not exclude the first $50,000 of coverage.
0.02 x 12 x 500 = 120
Which of the following group type insurance policies do not offer a conversion feature?
I. Life
II. Health
III. Short-term disability
IV. Long-term disability
III, IV
Money deducted from an employee’s pay into an FSA is subject to which of the following?
I. Withholding taxes
II. No withholding taxes
III. FICA tax
IV. No FICA tax
A. I, III
B. I, IV
C. II, III
D. II, IV
D
Wally’s employer offers an FSA program. What benefits can Wally pay for with non-taxable FSA distributions?
I. Qualified medical insurance deductibles and medical expenses that have been claimed but not covered by the health insurance policy
II. Qualified dental insurance deductibles and dental expenses that have been claimed but not covered by
the health insurance policy
III. Long-term care insurance premiums
IV. Dependent care benefits up to $5,000
A. I, II, III
B. I, II, IV
C. I, II
D. III, IV
B. I, II, IV
No health insurance premiums, including LTC premiums may be paid by Wally through an FSA. While an employer may provide group or other long term care insurance it may not do so through hits FSA.
Which of the following statements concerning Medicare part A benefits is correct?
A. To be eligible, the insured must be at least 65
B. Home health care visits are covered during Part D.
C. Hospice care is specifically excluded.
D. Benefits are subject to both a deductible and co-payments provisions for inpatient hospital care.
D.
Hospice is covered under Part A. Disabled workers are covered under the age of 65.
Trina Traveler purchased a level premium term policy under which she is the named insured. After returning from a long vacation, she notices a lapse notice on the term policy from her insurance carrier. What can she do to keep the policy in place?
A. Send in the premium and see if the carrier will accept it. (explain she was out of country)
B. Exercise her guaranteed renewable option
C. Contest the notice
D. Submit the policy reinstatement form
E. Exercise her guaranteed purchase option provision
D.
She can reinstate the policy. She will have to pay any premiums in arrears, but will maintain the premium of the original policy.
Jerry and Millie Helper are married. They are both in their 60s and will need $1,000,000 to pay federal estate taxes. Jerry has high blood pressure and is overweight and has just been told by his doctor he is borderline diabetic. From the following list, choose the best life insurance policy considering Jerry’s and Millie’s situation.
A. Adjustable life on Millie
B. Level Term on Millie
C. First to die on Jerry and Millie using variable universal
D. Survivorship life on a universal policy
E. Whole life on Millie
D
Because the protection is for estate tax liability, survivorship life makes the most sense. Survivorship life means second to die. the premium for the survivorship policy would normally be less than a premium on insurance for Millie alone. Jerry does not appear to be totally uninsurable. His life expectancy will lower to second to die premium.
