Life Insurance & Estate Liquidity Flashcards

Which type of life insurance policy builds cash value on a tax-deferred basis while providing a death benefit?

Answer: Whole life insurance

Whole life insurance accumulates cash value tax-deferred and pays a guaranteed death benefit, unlike pure term policies.

In estate planning, an Irrevocable Life Insurance Trust (ILIT) is primarily used to:

Answer: Exclude life insurance proceeds from the taxable estate

An ILIT owns the policy so proceeds are excluded from the insured's gross estate, reducing potential estate taxes.

The 'three-year rule' under IRC §2035 requires that life insurance transferred to an ILIT within three years of death be:

Answer: Included back in the decedent's gross estate

IRC §2035 pulls back into the gross estate any life insurance transferred within three years of the insured's death.

Which of the following best describes 'estate liquidity'?

Answer: The availability of cash or near-cash assets to meet estate settlement costs without forced sales

Estate liquidity refers to having sufficient cash on hand to pay taxes, debts, and expenses without selling assets at distressed prices.

A 'second-to-die' (survivorship) life insurance policy pays the death benefit:

Answer: When both insureds have died

Survivorship policies are designed to pay at the second death, which is typically when estate taxes are due after both spouses have passed.

Premium payments made to an ILIT by the grantor are typically structured as gifts using which IRS provision?

Answer: Annual gift tax exclusion with Crummey notices

Crummey withdrawal rights convert premium contributions into present-interest gifts eligible for the annual exclusion.

Which life insurance product allows the policyholder to adjust both premiums and death benefits within certain limits?

Answer: Universal life

Universal life insurance offers flexible premiums and adjustable death benefits, funded by a cash value account earning current interest rates.