Certification Exam | Chapters 7, 10, 13,
14 ,15
Who pays tax on personal life insurance given as a gift?
Select one:
a. The insurer
b. The state
c. The gift-giver
d. The gift recipient - Answer Life insurance given as a gift may be subject to a federal
gift tax, which is paid by the giver of the gift.
The correct answer is: The gift-giver
All of the following statements about key person life insurance are true, EXCEPT:
Select one:
a. A business is the owner, premium payor, and beneficiary of the policy.
b. The key employee must agree to the coverage.
c. The coverage is intended to cover the cost of hiring and training a replacement
employee.
d. Premiums are tax-deductible as a business expense. - Answer Premiums for key
person life insurance are not tax-deductible.
The correct answer is: Premiums are tax-deductible as a business expense.
Which of the following best describes the seven-pay test?
Select one:
a. Premiums paid over a seven-year period cannot exceed the total level annual
premiums for a paid-up policy in seven years.
b. Policy cash value cannot exceed cost basis.
c. First seven premium payments cannot exceed cost basis over a ten-year period.
d. First seven annuity premium payments cannot exceed cost basis over a ten-year
period. - Answer The seven-pay test assures that life insurance policies meet the legal
definition of life insurance and do not become MECs.
The correct answer is: Premiums paid over a seven-year period cannot exceed the total
level annual premiums for a paid-up policy in seven years.
How are personal life insurance dividends taxed?
Select one:
a. Interest earned on dividends is considered taxable income.
b. Dividends are considered a return of overcharged premium.
c. Dividends are not taxable because premiums are paid with after-tax dollars.
d. All of the above - Answer Dividends are considered a return of overcharged premium,
and are not taxable because premiums are paid with after-tax dollars. Interest earned
on dividends is taxable income.
The correct answer is: All of the above
Which of the following is true regarding the taxation of universal life insurance policies?
Select one:
a. Premiums are tax-deductible.
,Certification Exam | Chapters 7, 10, 13,
14 ,15
b. All cash value is taxed upon withdrawal.
c. Only withdrawals of premium dollars from the cash value are taxable.
d. Cash value grows tax-deferred, but may be subject to taxation upon withdrawal. -
Answer Partial surrenders from a universal life policy are not taxable up to the amount
of premium that makes up the cash value. Once all premiums have been withdrawn,
then all withdrawals consisting of the interest portion of the cash value are subject to
taxation.
The correct answer is: Cash value grows tax-deferred, but may be subject to taxation
upon withdrawal.
Susan has a $500,000 permanent life insurance policy. She has paid $200,000 in
premiums, and the policy has a cash value of $216,000. If Susan dies, her beneficiary
will pay taxes on:
Select one:
a. $0
b. $16,000
c. $284,000
d. $500,000 - Answer Life insurance death benefits are tax-free. The cash value is
included in the death benefit, so it is not taxed.
The correct answer is: $0
When a life insurance policy becomes a MEC, what are the tax consequences?
Select one:
a. Interest loses tax-deferred advantage.
b. Premiums are no longer tax-deductible.
c. Premiums do not accrue interest.
d. Withdrawals and policy loans are taxed as ordinary income. - Answer All withdrawals
and surrenders from a MEC are taxable, but the interest accrued on the cash value is
tax-deferred, and the death benefit is tax-free if received in a lump-sum.
The correct answer is: Withdrawals and policy loans are taxed as ordinary income.
Which of the following is generally true regarding premiums for individually-purchased
life insurance and annuities?
Select one:
a. They are tax-deductible.
b. They are not tax-deductible.
c. Only life insurance premiums are tax-deductible.
d. Only annuity premiums are tax-deductible. - Answer Individual life insurance and
annuities are purchased with after-tax dollars. Premiums generally cannot be deducted
from taxes.
The correct answer is: They are not tax-deductible.
All of the following statements are true regarding the taxation of personal life insurance
used for charity, EXCEPT:
,Certification Exam | Chapters 7, 10, 13,
14 ,15
Select one:
a. In order for tax deductions to be valid, the charity must retain full ownership rights of
the policy.
b. A charity may be made a beneficiary of a personal life insurance policy, in which case
ownership need not be relinquished.
c. When a charity is made a beneficiary of a personal life insurance policy, premiums
are tax-deductible.
d. When a charity is made a beneficiary of a personal life insurance policy, the
policyowner retains the right to change the beneficiary. - Answer A policy may be given
to the charity, and the value of the policy is tax-deductible. If the individual chooses to
make the premium payments for the charity, those are also tax-deductible. The charity
must retain ownership and rights of the policy for the tax deductions to be valid. The
individual may also make the charity a beneficiary of a policy without relinquishing
ownership. Payments of premiums are not tax-deductible, and the proceeds will be
deducted from the estate as a charitable contribution. In this case, the policyowner
retains the right to change the beneficiary, if necessary.
The correct answer is: When a charity is made a beneficiary of a personal life insurance
policy, premiums are tax-deductible.
Which type of life insurance policy allows an employer to deduct premium payments as
an ordinary business expense for tax purposes?
Select one:
a. Key employee
b. Split-dollar plan
c. Group life insurance
d. Business continuation agreement - Answer Life insurance policy premium payments
are not tax-deductible as a business expense if the company is using the policy for
business purposes; however, the proceeds are tax-free. The exception to this is when a
business purchases group insurance for the benefit of its employees.
The correct answer is: Group life insurance
What is the general rule for taxation of personal life insurance?
Select one:
a. Premiums are paid with after-tax dollars; proceeds received in a lump-sum are
received tax-free; proceeds received in installments are taxable only to the extent of
interest earned.
b. Premiums are paid with pre-tax dollars; proceeds received in a lump-sum are taxed;
proceeds received in installments are not taxed.
c. Premiums are paid with after-tax dollars; proceeds are taxed.
d. Premiums are paid with pre-tax dollars; proceeds are taxable only if received in a
lump-sum. - Answer As a general rule, premiums for life insurance policies are not tax-
deductible and proceeds from life insurance policies are tax-free if received in a lump-
sum. If proceeds are received in installments, a portion of the proceeds will contain
interest, which is taxable.
, Certification Exam | Chapters 7, 10, 13,
14 ,15
The correct answer is: Premiums are paid with after-tax dollars; proceeds received in a
lump-sum are received tax-free; proceeds received in installments are taxable only to
the extent of interest earned.
Erin bought a $100,000 whole life insurance policy. When she is 65 she decides to
surrender the policy for its cash value of $60,000. Of the cash value, $50,000 is
premiums. How much of Erin's cash surrender is taxable?
Select one:
a. $10,000
b. $50,000
c. $60,000
d. $100,000 - Answer The difference between the cash value and the premiums paid is
taxable upon policy surrender ($60,000 - $50,000 = $10,000).
The correct answer is: $10,000
A policy loan on a whole life policy is:
Select one:
a. Not taxable
b. Taxable
c. Tax-deferred
d. Taxable if not repaid prior to policy maturation - Answer Policy loans are not taxable.
The correct answer is: Not taxable
Which of the following statements best describes how cash value in a life insurance
policy is taxed?
Select one:
a. Cash value grows tax-free.
b. Cash value does not earn interest and is, therefore, not taxable.
c. If the policy cash value is surrendered, the interest earned on the cash value is
taxable as ordinary income.
d. None of the above - Answer In whole life insurance policies, premiums build cash
value. The cash value increases as interest is earned on the premiums, which grows
tax-deferred. The policyowner can borrow against the policy cash value. If the policy
cash value is surrendered or endows, the interest is taxable as ordinary income.
The correct answer is: If the policy cash value is surrendered, the interest earned on the
cash value is taxable as ordinary income.
All of the following are reasons the face amount of a life insurance policy may be
subject to tax, EXCEPT:
Select one:
a. The policy's ownership has been transferred to a third party.
b. The designated beneficiary is the deceased's estate.
c. The deceased transferred ownership of the policy within three years prior to death.
14 ,15
Who pays tax on personal life insurance given as a gift?
Select one:
a. The insurer
b. The state
c. The gift-giver
d. The gift recipient - Answer Life insurance given as a gift may be subject to a federal
gift tax, which is paid by the giver of the gift.
The correct answer is: The gift-giver
All of the following statements about key person life insurance are true, EXCEPT:
Select one:
a. A business is the owner, premium payor, and beneficiary of the policy.
b. The key employee must agree to the coverage.
c. The coverage is intended to cover the cost of hiring and training a replacement
employee.
d. Premiums are tax-deductible as a business expense. - Answer Premiums for key
person life insurance are not tax-deductible.
The correct answer is: Premiums are tax-deductible as a business expense.
Which of the following best describes the seven-pay test?
Select one:
a. Premiums paid over a seven-year period cannot exceed the total level annual
premiums for a paid-up policy in seven years.
b. Policy cash value cannot exceed cost basis.
c. First seven premium payments cannot exceed cost basis over a ten-year period.
d. First seven annuity premium payments cannot exceed cost basis over a ten-year
period. - Answer The seven-pay test assures that life insurance policies meet the legal
definition of life insurance and do not become MECs.
The correct answer is: Premiums paid over a seven-year period cannot exceed the total
level annual premiums for a paid-up policy in seven years.
How are personal life insurance dividends taxed?
Select one:
a. Interest earned on dividends is considered taxable income.
b. Dividends are considered a return of overcharged premium.
c. Dividends are not taxable because premiums are paid with after-tax dollars.
d. All of the above - Answer Dividends are considered a return of overcharged premium,
and are not taxable because premiums are paid with after-tax dollars. Interest earned
on dividends is taxable income.
The correct answer is: All of the above
Which of the following is true regarding the taxation of universal life insurance policies?
Select one:
a. Premiums are tax-deductible.
,Certification Exam | Chapters 7, 10, 13,
14 ,15
b. All cash value is taxed upon withdrawal.
c. Only withdrawals of premium dollars from the cash value are taxable.
d. Cash value grows tax-deferred, but may be subject to taxation upon withdrawal. -
Answer Partial surrenders from a universal life policy are not taxable up to the amount
of premium that makes up the cash value. Once all premiums have been withdrawn,
then all withdrawals consisting of the interest portion of the cash value are subject to
taxation.
The correct answer is: Cash value grows tax-deferred, but may be subject to taxation
upon withdrawal.
Susan has a $500,000 permanent life insurance policy. She has paid $200,000 in
premiums, and the policy has a cash value of $216,000. If Susan dies, her beneficiary
will pay taxes on:
Select one:
a. $0
b. $16,000
c. $284,000
d. $500,000 - Answer Life insurance death benefits are tax-free. The cash value is
included in the death benefit, so it is not taxed.
The correct answer is: $0
When a life insurance policy becomes a MEC, what are the tax consequences?
Select one:
a. Interest loses tax-deferred advantage.
b. Premiums are no longer tax-deductible.
c. Premiums do not accrue interest.
d. Withdrawals and policy loans are taxed as ordinary income. - Answer All withdrawals
and surrenders from a MEC are taxable, but the interest accrued on the cash value is
tax-deferred, and the death benefit is tax-free if received in a lump-sum.
The correct answer is: Withdrawals and policy loans are taxed as ordinary income.
Which of the following is generally true regarding premiums for individually-purchased
life insurance and annuities?
Select one:
a. They are tax-deductible.
b. They are not tax-deductible.
c. Only life insurance premiums are tax-deductible.
d. Only annuity premiums are tax-deductible. - Answer Individual life insurance and
annuities are purchased with after-tax dollars. Premiums generally cannot be deducted
from taxes.
The correct answer is: They are not tax-deductible.
All of the following statements are true regarding the taxation of personal life insurance
used for charity, EXCEPT:
,Certification Exam | Chapters 7, 10, 13,
14 ,15
Select one:
a. In order for tax deductions to be valid, the charity must retain full ownership rights of
the policy.
b. A charity may be made a beneficiary of a personal life insurance policy, in which case
ownership need not be relinquished.
c. When a charity is made a beneficiary of a personal life insurance policy, premiums
are tax-deductible.
d. When a charity is made a beneficiary of a personal life insurance policy, the
policyowner retains the right to change the beneficiary. - Answer A policy may be given
to the charity, and the value of the policy is tax-deductible. If the individual chooses to
make the premium payments for the charity, those are also tax-deductible. The charity
must retain ownership and rights of the policy for the tax deductions to be valid. The
individual may also make the charity a beneficiary of a policy without relinquishing
ownership. Payments of premiums are not tax-deductible, and the proceeds will be
deducted from the estate as a charitable contribution. In this case, the policyowner
retains the right to change the beneficiary, if necessary.
The correct answer is: When a charity is made a beneficiary of a personal life insurance
policy, premiums are tax-deductible.
Which type of life insurance policy allows an employer to deduct premium payments as
an ordinary business expense for tax purposes?
Select one:
a. Key employee
b. Split-dollar plan
c. Group life insurance
d. Business continuation agreement - Answer Life insurance policy premium payments
are not tax-deductible as a business expense if the company is using the policy for
business purposes; however, the proceeds are tax-free. The exception to this is when a
business purchases group insurance for the benefit of its employees.
The correct answer is: Group life insurance
What is the general rule for taxation of personal life insurance?
Select one:
a. Premiums are paid with after-tax dollars; proceeds received in a lump-sum are
received tax-free; proceeds received in installments are taxable only to the extent of
interest earned.
b. Premiums are paid with pre-tax dollars; proceeds received in a lump-sum are taxed;
proceeds received in installments are not taxed.
c. Premiums are paid with after-tax dollars; proceeds are taxed.
d. Premiums are paid with pre-tax dollars; proceeds are taxable only if received in a
lump-sum. - Answer As a general rule, premiums for life insurance policies are not tax-
deductible and proceeds from life insurance policies are tax-free if received in a lump-
sum. If proceeds are received in installments, a portion of the proceeds will contain
interest, which is taxable.
, Certification Exam | Chapters 7, 10, 13,
14 ,15
The correct answer is: Premiums are paid with after-tax dollars; proceeds received in a
lump-sum are received tax-free; proceeds received in installments are taxable only to
the extent of interest earned.
Erin bought a $100,000 whole life insurance policy. When she is 65 she decides to
surrender the policy for its cash value of $60,000. Of the cash value, $50,000 is
premiums. How much of Erin's cash surrender is taxable?
Select one:
a. $10,000
b. $50,000
c. $60,000
d. $100,000 - Answer The difference between the cash value and the premiums paid is
taxable upon policy surrender ($60,000 - $50,000 = $10,000).
The correct answer is: $10,000
A policy loan on a whole life policy is:
Select one:
a. Not taxable
b. Taxable
c. Tax-deferred
d. Taxable if not repaid prior to policy maturation - Answer Policy loans are not taxable.
The correct answer is: Not taxable
Which of the following statements best describes how cash value in a life insurance
policy is taxed?
Select one:
a. Cash value grows tax-free.
b. Cash value does not earn interest and is, therefore, not taxable.
c. If the policy cash value is surrendered, the interest earned on the cash value is
taxable as ordinary income.
d. None of the above - Answer In whole life insurance policies, premiums build cash
value. The cash value increases as interest is earned on the premiums, which grows
tax-deferred. The policyowner can borrow against the policy cash value. If the policy
cash value is surrendered or endows, the interest is taxable as ordinary income.
The correct answer is: If the policy cash value is surrendered, the interest earned on the
cash value is taxable as ordinary income.
All of the following are reasons the face amount of a life insurance policy may be
subject to tax, EXCEPT:
Select one:
a. The policy's ownership has been transferred to a third party.
b. The designated beneficiary is the deceased's estate.
c. The deceased transferred ownership of the policy within three years prior to death.
