Life Insurance Policy Provisions Qualified Plans and Federal Tax Considerations for Life Insurance and Annuities

1. An employee quits her job where she has a balance of $10,000 in her qual- ified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer? A$8,000, tax on growth only B$10,000, tax on growth only C$10,000, no tax consequence D$8,000, no tax consequence: c During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other. 2. What is the penalty for IRA distributions that are below the required mini- mum for the year? A10% B25% C50% D60%: c If there are no distributions at the required age, or if the distributions are not large enough, the penalty is 50% of the shortfall from the required annual amount. 3. If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a ANonforfeiture option. BRollover. CSettlement option. DNontaxable exchange.: c A settlement option is exercised when an immediate annuity is purchased with the face amount at death or with the cash value at surrender. 4. Which concept is associated with "exclusion ratio"? AHow exclusion riders affect an insurance premium BPolicy provisions CAnnuity payments DDividend distribution: c A portion of an annuity payment is taxable, while another portion is not.The return of the principal paid in is nontaxable.The portion that is taxable is the actual amount of payment, less the expected return of the principal paid in. This relationship is called the "exclusion ratio." 5. What type of annuity activity will cause immediate taxation of the interest earned? AChanging a settlement option BFailing to make a planned contribution CSurrendering the annuity for cash DUsing the contract as collateral for a loan: c One-sum cash surrenders give rise to immediate taxation of the interest earned. 6. If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? AIt is only taxable if the cash value exceeds the amount paid for premiums. BIt is not considered to be taxable. CIt is taxable only if it exceeds the amounts paid for premiums by 50%. DIt is automatically taxable.: a The cash value of a surrendered policy is only considered to be taxable as income if the cash value exceeds the amount of premiums paid for the policy. 7. What method is used to determine the taxable portion of each annuity payment? AThe exclusion ratio BThe excise ratio CThe annuity to age ratio DThe marginal tax formula: a The ratio of the total investment in that contract to the expected return is developed to determine the portion of the annuity payment that will be taxable and nontaxable. 8. Who can make a fully deductible contribution to a traditional IRA? AA person whose contributions are funded by a return on investment BAn individual not covered by an employer-sponsored plan who has earned income CAnybody; all IRA contributions are fully deductible regardless of income level DSomeone making contributions to an educational IRA: b Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level. 9. All of the following statements are true regarding taxqualified annuities EXCEPT AWithdrawals are taxed. BEmployer contributions are not tax deductible. CAnnuity earnings are tax deferred. DThey must be approved by the IRS.: b Tax-qualified annuities must be approved by the IRS and allow for tax deductible employer contributions. All withdrawals are taxed and earnings grow tax deferred.