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Flashcards in Taxation Of Personal Life Deck (21):
1

All of the following are times in which life insurance policy cash values can become taxable, except:
A
When a policy loan is taken out
B
If the policy fails to meet the IRS definition of life insurance
C
When the policy is sold
D
At policy surrender

A
When a policy loan is taken out

2

Clayton is asking his life insurance producer about any potential taxation issues related to his $100,000 personal Whole Life policy. All of the following are TRUE, except:
A
Since his policy is a personal policy, he cannot deduct the premiums he pays for the policy
B
Annual increases in the policy's cash value are not taxable at the time they are credited to the policy
C
Upon surrender of the policy, he will be taxed on any amount by which the cash value exceeds the cost basis (premiums paid) of the contract
D
The interest that he pays on policy loans is tax-deductible

D
The interest that he pays on policy loans is tax-deductible

3

When withdrawing cash from a cash value life insurance policy, the amount of the withdrawal up to the policy's cost basis is tax-free. This tax accounting rule is referred to as:
A
First-In, Still There (FIST)
B
Dollar Cost Averaging
C
Last-In, First-Out (LIFO)
D
First-In, First-Out (FIFO)

D
First-In, First-Out (FIFO)

4

The restrictions on the amount of life insurance that can be held in a qualified plan are known as:
A
Unsuitability
B
Overinsurance
C
Incidental benefits limitation
D
Undue concentration

C
Incidental benefits limitation

5

When a life insurance policy does not pass the ______-pay test, it becomes classified as a MEC.
A
7
B
9
C
10
D
8

A
7

6

Which of the following best defines the 'Cost Recovery Rule'?
A
When a policy is surrendered, the earnings within the policy are accounted for first
B
Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender
C
The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender
D
The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy

C
The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender

7

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE?
A
Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains
B
The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy
C
Taxable distributions include cash value surrenders and policy loans
D
If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

D
If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

8

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________.
A
Income tax-deferred
B
Income tax-free
C
Income tax-deductible
D
Income tax penalty-free

B
Income tax-free

9

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit?
A
Quarterly
B
Annually
C
Semi-annually
D
Monthly

D
Monthly

10

What is the main purpose that IRC section 1035 was enacted?
A
To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one
B
To allow policyowners to obtain features and benefits not available on their existing policies
C
To allow consumers to obtain less expensive life insurance policies
D
To allow consumers to get better performance from a new policy

A
To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one

11

Death benefits are paid to the estate of the policyowner/insured in which of the following situations?
A
The primary beneficiary is the deceased's spouse
B
The beneficiary is the estate
C
The primary beneficiary is a minor
D
The contingent beneficiary has outlived the primary beneficiary

B
The beneficiary is the estate

12

In which of the following circumstances is an annuity's tax-deferral benefit lost?
A
The annuity is owned by a corporation
B
The annuity is owned by someone other than the annuitant
C
The annuity is held beyond age 70 1/2
D
The annuity has a long-term care rider

A
The annuity is owned by a corporation

13

Cash values within an ordinary straight whole life insurance policy _______ over time.
A
Remain constant
B
Increase
C
Decrease
D
Vary

B
Increase

14

Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate?
A
A business partner owns a life insurance policy on the other partner that died
B
An employer owns a policy on the life of a key employee who dies
C
The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up
D
The insured is also the policyowner and at death no beneficiaries are alive

D
The insured is also the policyowner and at death no beneficiaries are alive

15

Any employee-paid group life insurance premiums are __________.
A
Tax-exempt
B
Tax-deductible
C
Tax-deferred
D
Not tax-deductible

D
Not tax-deductible

16

Which of the following would always be considered a Modified Endowment Contract?
A
Straight or Continuous Pay Whole Life
B
Variable Whole Life
C
Limited Pay Whole Life
D
Single Premium Whole Life

D
Single Premium Whole Life

17

From a tax standpoint, what is the benefit of receiving income benefit payments as opposed to cashing out an annuity after it has been held for several decades?
A
A lower tax rate is applied because an income benefit payment option was selected
B
Only the beneficiaries of any residual values pay any income taxes
C
Taxes are deferred until the very last payment
D
Taxes are only due on the amount of tax-deferred earnings in each payment

D
Taxes are only due on the amount of tax-deferred earnings in each payment

18

Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)?
A
Lump sum death benefit paid to the beneficiary
B
Withdrawal of cash value to pay for a daughter's wedding
C
Taking out a policy loan
D
Cash surrender of the policy

A
Lump sum death benefit paid to the beneficiary

19

Life insurance policy premiums establish a _________ in the policy for tax purposes.
A
Cash value
B
Loan
C
Cost basis
D
Dividend

C
Cost basis

20

By what means is a transfer for value made?
A
By requesting a change in the beneficiary designations
B
By a partial withdrawal
C
By way of collateral assignment
D
Through an absolute assignment

D
Through an absolute assignment

21

Which of the following best defines the 'Cost Recovery Rule'?
A
Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender
B
The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender
C
The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy
D
When a policy is surrendered, the earnings within the policy are accounted for first

A
Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender