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In order to qualify for conversion from a group life policy to an individual policy of the same coverage, a person must have been insured under the group plan for how many years?

A.) 5
B.) 10
C.) 1
D.) 3
A.) 5

If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.
An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true?

A.) He cannot withdraw money from his MEC before age 59½.
B.) He will have to pay a penalty if he is younger than 59½.
C.) He will have to pay a penalty regardless of his age.
D.) He will not have to pay a penalty, regardless of his age.
B.) He will have to pay a penalty if he is younger than 59½.

Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract. All withdrawals are subject to taxation on a LIFO basis, and if withdrawals are made earlier than the age of 59½, a 10% penalty is imposed.
The minimum number of credits required for partially insured status is

A.) 4
B.) 6
C.) 10
D.) 20
B.) 6

To be considered partially insured, an individual must have earned 6 credits during the last 13-quarter period.
Which of the following statements is true concerning whole life?

A.) Policy loans are tax deductible.
B.) Lump sum death benefits are not taxable.
C.) Dividend interest is not taxable.
D.) Premiums are tax deductible.
B.) Lump sum death benefits are not taxable.

Dividend interest is taxable; policy loans are not tax deductible; premiums are not tax deductible.
Which of the following are Social Security benefits?

A.) Term and Whole Life
B.) Medicaid and Medicare
C.) Retirement, Disability and Survivors
D.) Retirement and Disability
C.) Retirement, Disability and Survivors

Social Security provides three types of benefits: Retirement, Disability and Survivors; it also determines entitlement to Medicare benefits.
In which of the following instances would the premium be tax deductible?

A.) Premiums paid by a mother on her son's policy
B.) Premiums paid by an employer on the life of a key person
C.) Premiums paid by an employer on a $30,000 group term life insurance plan for employees
D.) Premiums paid by an individual on his/her own life insurance
C.) Premiums paid by an employer on a $30,000 group term life insurance plan for employees

As a general rule, premiums paid for life insurance are not tax deductible. The exception to this rule is when an employer buys group term life insurance for his employees since it is considered a business expense.
How is Social Security funded?

A.) Federal grant money
B.) Taxes imposed on a worker's earned income
C.) State payroll taxes
D.) Sales tax
B.) Taxes imposed on a worker's earned income

Social Security is funded by the taxes imposed on a worker's earned income. This is a payroll tax paid for by all employees and employers, including self-employed individuals. This tax is imposed on a certain percentage of the employee's income, referred to as the taxable wage base.
Which of the following accurately compares business and personal life insurance?

A.) Business insurance does not require premium payment, unlike personal life insurance.
B.) Personal life insurance covers a wide range of costs, unlike business insurance.
C.) Both create an immediate payment upon the death of the insured.
D.) Business insurance pays higher death benefits than personal life insurance.
C.) Both create an immediate payment upon the death of the insured.

Both business and personal life insurance pay an immediate death benefit.
Which of the following is INCORRECT concerning a noncontributory group plan?

A.) The employees receive individual policies.
B.) They help to reduce adverse selection against the insurer.
C.) They require 100% employee participation.
D.) The employer pays 100% of the premiums.
A.) The employees receive individual policies.

The employer receives a master policy, and employees receive a certificate of insurance.
Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated?

A.) Those who have no history of claims
B.) Those who have been insured under the plan for at least 5 years
C.) Those who have worked in the company for at least 3 years
D.) Those who have dependents
B.) Those who have been insured under the plan for at least 5 years

If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.
What percentage of a company's employees must take part in a non-contributory group life plan?

A.) 25%
B.) 75%
C.) 100%
D.) 0%
C.) 100%

If the employer pays all of the premium, all employees must be covered to avoid adverse selection.
A life insurance policy used to fund an agreement that contractually establishes the intent of someone to purchase a business upon the insured business owner's death is a

A.) Key person policy.
B.) Split-dollar plan.
C.) Stock redemption plan.
D.) Buy-sell agreement.
D.) Buy-sell agreement.

Buy-Sell agreements are used to contractually establish the intent of someone else to purchase the business upon the insured's death, and to set a value (purchase price) on a business. Life insurance is used to fund the buy-sell agreement. Any type of life insurance may be purchased to provide the necessary funds for the agreement. Insurance can be used to either fully or partially fund the buy-sell agreement.
All of the following are true of Key Person insurance EXCEPT

A.) The key employee is the insured.
B.) The plan is funded by permanent insurance only.
C.) There is no limitation on the number of key employee plans in force at any one time.
D.) The employer is the owner, payor and beneficiary of the policy.
B.) The plan is funded by permanent insurance only.

Key Person coverage may be funded by any type of life insurance.
What is the main purpose of the Seven-pay Test?

A.) It requires level premium payments for 7 years.
B.) It ensures that the policy benefits are paid out in 7 years.
C.) It guarantees interest minimum.
D.) It determines if the insurance policy is an MEC.
D.) It determines if the insurance policy is an MEC.

The Seven-pay Test determines whether an insurance policy is “over-funded" or if it's a Modified Endowment Contract. In other words, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.
If there is a material change in an MEC contract,

A.) A new 7-pay test is required.
B.) The required premium will increase.
C.) The insurer must notify the Department of Insurance.
D.) MEC reverts to a life insurance policy.
A.) A new 7-pay test is required.

A new 7-pay test is required after each material change of the contract, i.e. with any increase in death benefit.
Which of the following would NOT be taxable?

A.) Interest on death benefit proceeds
B.) A policy loan borrowed by the policyowner
C.) Cash value in excess of premiums paid upon policy surrender
D.) Death benefit included in the insured’s estate
B.) A policy loan borrowed by the policyowner

A loan from the cash value of a life insurance policy is not taxable to the policyowner. All the other options will be taxed.
What are liquid resources in a life insurance contract?

A.) The money in a savings account
B.) The cash value available to the insured
C.) The cash value in an annuity
D.) The money in an IRA
B.) The cash value available to the insured

Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and
Can a worker receive Social Security retirement benefits before age 65?

A.) Yes, as long as the worker has earned the required work credits.
B.) No, unless the worker has a disable dependent.
C.) Yes, the qualifying worker can receive reduced benefits at age 62.
D.) No, benefits cannot start before age 65.
C.) Yes, the qualifying worker can receive reduced benefits at age 62.

Reduced Social Security retirement benefits are available to qualified workers starting at age 62. Full benefits begin at age 65.
Withdrawals from an IRA taken before the participant reaches age 59 1/2 are subject to

A.) Taxation, but no penalty.
B.) No taxation and no penalties.
C.) Income taxation and a penalty.
D.) A penalty, but no taxation.
C.) Income taxation and a penalty.

If funds are withdrawn from an IRA before the participant reaches age 59 1/2, the funds are subject to both income taxation and a penalty.
A claimant, who is totally and permanently disabled, is eligible for Social Security Disability benefits after an elimination period of

A.) 12 months.
B.) 24 months.
C.) 0 months.
D.) 5 months.
D.) 5 months.

Social Security applies a 5 month waiting period to claimants for disability benefits.
Which of the following statements is NOT true regarding IRAs?

A.) Anyone with earned income under the age of 70 ½ may open a traditional IRA.
B.) Accumulated contributions grow tax deferred.
C.) Married couples are required to purchase a jointly owned IRA.
D.) A nonworking spouse is eligible to contribute to a separate IRA account.
C.) Married couples are required to purchase a jointly owned IRA.

Anyone with earned income who has not attained age 70 1/2 can have an IRA. A married couple could currently contribute up to $10,000 per year to two separate accounts.
All of the following benefits are available under Social Security EXCEPT

A.) Welfare benefits.
B.) Old-age and retirement benefits.
C.) Disability benefits.
D.) Death benefits.
A.) Welfare benefits.

Social Security is an entitlement program, not a welfare program.
Bob just received his first Social Security disability payment. From this, we can assume

A.) He had previously applied for Medicaid.
B.) He is more than 65 years of age.
C.) His disability began at least 12 months ago.
D.) His disability is expected to last at least 12 months.
D.) His disability is expected to last at least 12 months.

To qualify for Social Security disability benefits, the person must be under age 65, fully insured under Social Security, and suffer a disablement that is expected to last at least 12 months.
The following are legitimate uses of insurance in a business setting EXCEPT

A.) Funding against financial loss caused by the death of a key employee.
B.) Funding business continuation agreements.
C.) Funding against general company financial loss.
D.) Compensating executives.
C.) Funding against general company financial loss.

Both life and health insurance can be used for a variety of purposes in a business setting, including the funding of business continuation agreements, compensating executives, and protecting the firm against financial loss resulting from the death or disability of key employees.
All of the following statements concerning an employer sponsored non-qualified retirement plan are true EXCEPT

A.) The employer can receive a current tax deduction for any contributions made to the plan.
B.) The plan is a legal method of accumulating money for retirement needs.
C.) The plan can discriminate as to who may participate.
D.) The plan is not approved for favorable tax treatment by the IRS.
A.) The employer can receive a current tax deduction for any contributions made to the plan.

Employers do not receive a current tax deduction for any contributions made to a non-qualified plan. The plans are legal; however, they do not qualify for any favorable tax treatment under the IRS rules.
Who is a third-party owner?

A.) An employer in a group policy
B.) An irrevocable beneficiary
C.) A policyowner who is not the insured
D.) An insurer who issues a policy for two people
C.) A policyowner who is not the insured

Third-party owner is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it.
When an employee terminates coverage under a group insurance policy, coverage continues in force

A.) Until the employee notifies the group insurance provider that coverage conversion policy is issued.
B.) For 31 days.
C.) For 60 days.
D.) Until the employee can obtain coverage under a new group plan.
B.) For 31 days.

An employee has 31 days under the conversion privilege to convert to an individual policy.
Carol is insured under her employer's group life insurance plan at her place of employment. All of the following statements about her coverage are true EXCEPT

A.) Carol could choose what type of insurance her conversion policy provided (Term or Permanent).
B.) Carol would not need to prove insurability for a conversion policy.
C.) If Carol quits, she may, within 31 days, request that her coverage be converted to an individual policy.
D.) Should Carol convert her coverage, the premium will be based upon her attained age.
A.) Carol could choose what type of insurance her conversion policy provided (Term or Permanent).

When group coverage is converted to an individual policy, the insurer will determine the type of coverage, (usually permanent insurance).
Which of the following statements is true concerning a 403(b) plan (TSA)?

A.) A provision of the IRS which permits any state or local government the opportunity to organize deferred compensation arrangements for its employees.
B.) Permits small incorporated businesses to arrange deferred compensation programs for its employees.
C.) An arrangement made with certain tax-exempt "501c(3)" organizations and public schools under which employees may set aside amounts of income for retirement purposes.
D.) A provision allowing small businesses to make annual tax deductions of up to $30,000 for each participant or 15% of earned income, whichever is less.
C.) An arrangement made with certain tax-exempt "501c(3)" organizations and public schools under which employees may set aside amounts of income for retirement purposes.

A 403(b) plan (TSA) is designed for certain tax exempt employers in order that they may provide a retirement plan for its employees.
What are the personal uses of life insurance?

A.) Insured protection, estate creation and cash accumulation
B.) Cash accumulation, estate depletion and liquidity
C.) Beneficiary protection, liquidity, estate creation and cash accumulation
D.) Survivor protection, estate creation and conservation, cash accumulation and liquidity
D.) Survivor protection, estate creation and conservation, cash accumulation and liquidity

Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity.
Group life insurance is a single policy written to provide coverage to members of a group. Which of the following statements concerning group life is CORRECT?

A.) Premiums are determined by age, occupation, and individual underwriting.
B.) 100% participation of members is required in noncontributory plans.
C.) Each member covered receives a policy.
D.) Coverage cannot be converted when an individual leaves the group.
B.) 100% participation of members is required in noncontributory plans.

If the employer pays all of the premium, then all employees must be included.
Who would be eligible to contribute to an IRA?

A.) A 35-year old receiving monthly unemployment checks
B.) An 18-year old non-working student
C.) A 50-year old school teacher
D.) A 75-year old professional earning income
C.) A 50-year old school teacher

Anyone with earned income who has not attained age 70 1/2 can have an IRA. Unemployment benefits would not be considered "earned income".
What does “liquidity” refer to in a life insurance policy?

A.) The policyowner receives dividend checks each year.
B.) The insured is receiving payments each month in retirement.
C.) Cash values can be borrowed at any time.
D.) The death benefit replaces the assets that would have accumulated if the insured had not died.
C.) Cash values can be borrowed at any time.

Liquidity in life insurance refers to availability of cash to the insured through cash values.
A key person insurance policy can pay for which of the following?

A.) Workers compensation
B.) Hospital bills of the key employee
C.) Costs of training a replacement
D.) Loss of personal income
C.) Costs of training a replacement

A key person insurance policy will pay for costs of running the business and replacing the employee.
Jane is eligible for full death, retirement, and disability benefits under Social Security. Her worker status with Social Security is

A.) Completely insured.
B.) Fully insured.
C.) Partially insured.
D.) Correctly insured.
B.) Fully insured.

A worker is fully insured under Social Security if he/she has accumulated the required number of credits based on his/her age.
Which of the following is the best reason to purchase life insurance rather than annuities?

A.) To create regular income payments
B.) To liquidate a sum of money over a lifetime
C.) To create an estate
D.) To liquidate a sum of money over a period of years
C.) To create an estate

With insurance, the death benefit creates an immediate estate should the insured die.
Life insurance may be used to pay state inheritance taxes and federal estate taxes so that it is not necessary to sell off assets from the estate to pay these costs. This is called

A.) Survivorship insurance.
B.) Estate conservation.
C.) Estate creation.
D.) Survivor protection.
B.) Estate conservation.

Life insurance may be used to pay state inheritance taxes and federal estate taxes so that it is not necessary to sell off assets from the estate to pay these costs. This is called estate conservation.
An individual has been contributing to a retirement account after taxes are taken out of his paycheck. His financial advisor told him that he will be allowed to make contributions after age 70½. The account owner does not have to pay taxes on the growth of his account. What type of retirement account is it?

A.) 403(b) plan
B.) Simplified Employee Pension Plan
C.) Traditional IRA
D.) Roth IRA
D.) Roth IRA

Roth IRAs have several distinguishing features. Unlike traditional IRAs, the account owner can continue beyond age 70½, and distributions do not have to begin at age 70½. The contributions are not tax-deductible.
Who can make a fully deductible contribution to a traditional IRA?

A.) Anybody: all IRA contributions are fully deductible regardless of income level
B.) Someone making contributions to an educational IRA
C.) A person whose contributions are funded by a return on investment
D.) An individual not covered by an employer-sponsored plan whose earned income is below a required limit
D.) An individual not covered by an employer-sponsored plan whose earned income is below a required limit

Any eligible person not participating in a qualified retirement plan can take a full deduction from taxable income up to the maximum limit. Also, individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level.
An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers, for example, is a(n)

A.) 403(b) Plan (TSA).
B.) Keogh Plan.
C.) IPG Plan.
D.) PST Plan.
A.) 403(b) Plan (TSA).

Under a 403(b) Plan, tax-sheltered annuities may be established for the employees of specified nonprofit charitable, educational, religious and other 501c(3) organizations, including teachers in public schools systems. Such plans generally are not available to other kinds of employees.
All of the following are characteristics of group life insurance, EXCEPT

A.) Certificate holders may convert coverage to an individual policy without evidence of insurability.
B.) Premiums are determined by the age, sex and occupation of each individual certificate holder.
C.) Amount of coverage is determined according to nondiscriminatory rules.
D.) Individuals covered under the policy receive a certificate of insurance.
B.) Premiums are determined by the age, sex and occupation of each individual certificate holder.

Premiums are determined by the age, sex and occupation of the entire group.
Which of the following is INCORRECT regarding whole life insurance?

A.) Dividend interest is taxable.
B.) Policy loans are tax deductible.
C.) Cash value exceeding the premiums paid is taxable.
D.) Premiums are not tax deductible.
B.) Policy loans are tax deductible.

Policy loans are not tax deductible.
A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then

A.) IRS has no jurisdiction.
B.) The amount received is taxable income.
C.) The amount received is tax-free.
D.) The amount is subject to the exclusionary rule.
C.) The amount received is tax-free.

Should a key person die, the benefit is treated as a reimbursement to the business for loss of services from that key person.
An employee quits her job where she has a balance of $10,000 in her qualified plan. The balance was paid out directly to the employee in order for her to move the funds to a new account. If she decides to rollover her plan to a Traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover?

A.) $8,000, 30 days
B.) $10,000, 60 days
C.) $10,000, 30 days
D.) $8,000, 60 days
D.) $8,000, 60 days

Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor.
When John died, his survivors were eligible for limited benefits under his Social Security account. His insured status was

A.) Partially insured.
B.) Conditionally insured.
C.) Previously insured.
D.) Insured.
A.) Partially insured.

To be considered "partially insured" and thus eligible for limited survivor benefits, a worker must have earned six credits during the 13-quarter period ending with the quarter in which the worker died.
Who is the owner and who is the beneficiary on a Key Person Life Insurance Policy?

A.) The employer is the owner and the Key Person is the beneficiary.
B.) The Key Person is the owner and beneficiary.
C.) The Key Person is the owner and the employer is the beneficiary.
D.) The employer is the owner and beneficiary.
D.) The employer is the owner and beneficiary.

With the key-person coverage, the business (the employer) is the applicant, owner, premium payer, and beneficiary.
Which of the following would be a unique benefit life insurance has over other types of insurance?

A.) Its proceeds are paid to the beneficiary.
B.) It performs the function of cash accumulation.
C.) It is a contract between the policyowner and the insurer.
D.) It guarantees income when needed.
B.) It performs the function of cash accumulation.

Life insurance has a unique advantage over other types of insurance: it performs the function of cash accumulation.
Which of the following insurance arrangements will be appropriate for a parent buying a life insurance policy on a child where the parent is the policyowner?

A.) An irrevocable beneficiary
B.) A buy-sell agreement
C.) Family term rider
D.) Third-party ownership
D.) Third-party ownership

Contracts that are owned by someone other than the insured are known as third-party ownership. Most policies involving third-party ownership are written in business situations or for minors in which the parent owns the policy.
Which of the following is the required number of participants in a contributory group plan?

A.) 100%
B.) 25%
C.) 50%
D.) 75%
D.) 75%

Under a contributory group plan, an insurer will require that 75% of eligible employees be included in the plan.
Ted and Fred are attorneys at law and operate their practice as a partnership. They want to start a program through their practice that will provide retirement benefits for themselves and three employees. They would likely choose

A.) HR-10 (Keogh Plan).
B.) Section 457 Deferred Compensation Plan.
C.) 403(b) PLAN.
D.) 401(k) plan.
A.) HR-10 (Keogh Plan).

HR-10 (Keogh Plans) are plans specifically for self-employed and their employees.
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