ILHI - Indiana Life and Health Insurance Exam

Question 1: An owner wants to move the accumulated value of one contract into another without recognizing the gain at the time of the transfer. Under Section 1035 of the tax code, which one of the following exchanges qualifies for that treatment?

An annuity exchanged for life insurance

A life policy exchanged for an annuity

A life policy exchanged for stock

An annuity exchanged for a mutual fund

Question 2: A policyowner who has been diagnosed with a terminal illness sells his existing life insurance policy to a third party for a cash sum that is less than the face amount but more than the surrender value. Which arrangement is described?

An absolute assignment for value

A collateral assignment to a lender

A viatical settlement

A reduced paid-up nonforfeiture election

Question 3: A corporation sets up a qualified plan under which it decides each year, based on how the business performed, whether to put money in at all and how much. Which plan design allows contributions to be skipped in a lean year?

A defined benefit pension

A SIMPLE retirement plan

A 403b tax-sheltered account

A profit-sharing plan

Question 4: A certificate holder is terminated by her employer and loses her group life coverage. She wants to keep protection on her own without answering health questions. Which set of conversion rules governs what she may obtain from the group insurer?

Term coverage only, priced at original age

Permanent coverage at attained age, no evidence

Permanent coverage after a medical exam

Term coverage, with proof of insurability required

Question 5: During a fact-finding interview a producer lists final expenses, the outstanding mortgage, a college fund for two children, and the monthly income the surviving spouse will require in each future period. Which method of determining coverage is the producer applying?

Human life value approach

Executive bonus planning

Business continuation planning

The needs approach

Question 6: A software firm depends heavily on its lead engineer and buys a life policy so it can absorb lost sales and the cost of hiring a replacement should he die. Which arrangement of ownership, premium payment and beneficiary applies here?

The engineer owns and names his family

The engineer owns, the firm is beneficiary

The firm owns, pays and is beneficiary

The firm owns, the engineer is beneficiary

Question 7: A private employer lets workers set aside part of each paycheck before income tax is withheld, calls those amounts elective salary deferrals, and may add a matching amount at its option. Which retirement savings arrangement is being described here?

A 401k plan

A 403b tax-sheltered account

A SIMPLE retirement plan

A profit-sharing plan

Question 8: A policyowner no longer needs her coverage and is weighing a sale of the contract on the secondary market against simply cashing it in with the issuing company. Regarding the amount she can expect, which statement about a settlement sale is accurate?

It always equals the full face amount

It exceeds surrender value, below face amount

It equals the cash surrender value exactly

It is capped at accumulated premiums paid

Question 9: A fifty-year-old leaves her employer and asks that her qualified plan balance be paid to her so she can move it to an IRA herself. Twenty percent is withheld for taxes. Which action preserves the full tax-deferred treatment of the distribution?

Deposit only the amount actually received

Wait until the next tax year

Request a second rollover immediately

Deposit the full balance within sixty days

Question 10: A policyowner borrows against the cash value of an in-force whole life policy that is not a modified endowment contract, and the loan amount is greater than the premiums he has paid. Which statement describes the income tax treatment of that loan?

The whole loan is taxable now

The loan is not taxable income

Loan interest paid becomes deductible

The loan is taxable at death

Question 11: A self-employed accountant pays annual premiums on a personally owned whole life policy and asks whether those payments can reduce his federal taxable income for the year. Which statement correctly describes the income tax treatment of individual life insurance premiums?

They are not tax-deductible at all

They are deductible as a business expense

They are deductible once cash value builds

They are deductible in the first year

Question 12: A policyowner transfers ownership of a life insurance policy on his own life to an unrelated business associate in exchange for a cash payment. When the insured dies, the new owner collects the face amount. Which tax rule applies to those proceeds?

The exclusion ratio

The seven-pay test

The incidents of ownership rule

The transfer-for-value rule

Question 13: An employer sponsors a group life plan for its workforce. The insurer issues one contract to the employer, and each covered worker receives a document summarizing benefits, showing an individual number and naming a beneficiary. Which document does the worker receive?

A duplicate of the master policy

A certificate of insurance

An individual life insurance policy

A certificate of authority

Question 14: A policy that became a modified endowment contract several years ago now has substantial gain, and the fifty-year-old owner takes a partial withdrawal plus a policy loan in the same year. Which statement best describes the federal tax consequences of those two transactions?

Both are taxed gain first, with penalty

Both come out of cost basis first

Only the withdrawal is taxable income

Neither is taxable while policy continues

Question 15: The owner of a participating whole life policy receives a dividend check from her mutual insurer at the end of the policy year and wonders whether the amount must appear on her tax return. Which statement gives the correct federal treatment?

Dividends are taxed as ordinary income

Dividends are not taxable to her

Dividends are taxed as capital gains

Dividends are taxable above cost basis

Question 16: Four partners want their buy-sell agreement funded so that each survivor personally acquires a share of a deceased partner's interest. A rival proposal has the partnership itself buy the interest back. Which statement BEST distinguishes the two funding structures?

Both structures need the same policy count

Entity plans require each owner to buy

Only entity plans work for partnerships

Cross-purchase needs many more policies than entity

Question 17: In a viatical transaction, one party is the insured who sells the policy, another is the licensed entity that buys it and pays cash, and a third represents the seller for a fee. Which term names the insured who sells?

The viatical settlement provider

The viatical settlement broker

The viator

The certificate holder

Question 18: A policyowner surrenders a universal life contract for its full cash value after twenty years, and the cash value he receives is larger than the total premiums he paid into the contract. Which statement describes the federal income tax result of that surrender?

The gain above cost basis is taxable

The entire cash value is taxable

Nothing is taxable on a surrender

Only accumulated dividends are taxable

Question 19: Four people ask a producer whether they may open and fund a traditional individual retirement account this year. The tax rules allow contributions only from a particular kind of income. Which one of these people clearly satisfies that requirement?

A retiree collecting only pension income

A landlord with only rental income

An investor living on stock dividends

A part-time waiter earning tip wages

Question 20: An employer pays the entire premium for a noncontributory group term life plan and provides one hundred thousand dollars of coverage on a manager. The manager asks about her own tax position. Which statement correctly describes the federal income tax result?

The entire premium is taxable to her

Premium above fifty thousand dollars is taxable

No part of the premium is taxable

The death benefit will be taxable

ILHI Indiana Life and Health Insurance Exam - Set 5 - Part 1