Life Insurance & Estate Liquidity Flashcards
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Read the first 7 Life Insurance & Estate Liquidity flashcards as text
The primary advantage of a life insurance policy loan compared to surrendering the policy for cash is:
Answer: The policy remains in force and the death benefit is preserved
Policy loans allow the owner to access cash value while keeping the policy in force, preserving the death benefit for estate liquidity purposes.
In community property states, which portion of a life insurance policy purchased with community funds is generally includable in the deceased spouse's gross estate?
Answer: One-half of the policy value
Because community property is owned 50/50, only half the policy's value is attributed to the deceased spouse's estate.
A Modified Endowment Contract (MEC) is created when a life insurance policy fails the:
Answer: Seven-pay test under IRC §7702A
A policy becomes an MEC if cumulative premiums paid in the first seven years exceed what would fund the policy on a seven-pay basis, triggering LIFO tax treatment on distributions.
Which of the following correctly describes the 'waiver of premium' rider in the context of estate liquidity planning?
Answer: It keeps the policy in force without premium payments if the insured becomes totally disabled
The waiver of premium rider ensures that disability does not cause a policy lapse, protecting the estate's expected liquidity from the death benefit.
For estate tax purposes, life insurance payable to a named beneficiary (not the estate) is included in the decedent's gross estate if the decedent:
Answer: Possessed any incident of ownership at death
IRC §2042 includes life insurance in the gross estate if the decedent held any incident of ownership at the moment of death, regardless of beneficiary designation.
A business uses a 'key-person' life insurance policy primarily to:
Answer: Protect the business against financial loss from the death of a critical employee
Key-person insurance indemnifies the business for lost revenue, recruitment costs, and operational disruption caused by the death of an indispensable employee.
An estate planner recommends a 'life insurance retirement plan' (LIRP) using an overfunded permanent policy. The primary tax advantage is that:
Answer: Policy loans and withdrawals up to basis can provide income-tax-free retirement income if the policy stays in force
When a permanent policy is kept in force until death, loans against its cash value can be repaid by the income-tax-free death benefit, effectively providing tax-free retirement income.