Life Insurance & Estate Liquidity Flashcards

Variable life insurance differs from whole life insurance primarily because:

Answer: The death benefit and cash value fluctuate based on separate account investment performance

Variable life ties cash value and potentially the death benefit to investment sub-accounts chosen by the policyholder, introducing market risk.

When computing the includable amount of a life insurance policy in a decedent's gross estate where the decedent held 'incidents of ownership,' the value used is typically the:

Answer: Net premium reserve (interpolated terminal reserve) plus unearned premiums

For estate tax valuation of policies on someone else's life, the IRS uses the interpolated terminal reserve plus unearned premiums as the policy's fair market value.

A charitable remainder trust (CRT) combined with life insurance is sometimes called a 'wealth replacement trust' because the life insurance is used to:

Answer: Replace the value of assets donated to the CRT for the donor's heirs

Heirs lose the donated assets to charity at the CRT's termination, so life insurance on the donor is purchased (often in an ILIT) to restore that wealth for beneficiaries.

Which of the following is NOT an 'incident of ownership' that would cause life insurance to be included in the insured's gross estate?

Answer: Being named as the policy's contingent beneficiary

Being a contingent beneficiary is not an incident of ownership; incidents of ownership include control rights over the policy itself, not just receiving benefits.

A key purpose of using life insurance in an estate freeze strategy is to:

Answer: Fund the estate tax liability that arises from assets transferred at a frozen value

Estate freeze techniques (GRATs, SCINs, installment sales) shift appreciation but may leave an estate tax liability; life insurance provides funds to pay that tax.

Under IRC §7702, a life insurance contract must satisfy either the cash value accumulation test or the guideline premium test to:

Answer: Receive favorable income tax treatment as life insurance

IRC §7702 defines what qualifies as life insurance for federal tax purposes, ensuring policies aren't primarily investment vehicles.

A self-canceling installment note (SCIN) in an estate plan often uses life insurance because the note:

Answer: Cancels at the seller's death, potentially creating income tax for the buyer, while insurance provides liquidity to cover it

When a SCIN cancels at death, the forgiven balance may generate taxable income for the buyer-heir; life insurance can fund this unexpected tax burden.