CEA Life Insurance & Estate Liquidity 2 — Questions and Answers
Question 1: Which type of life insurance policy builds cash value on a tax-deferred basis while providing a death benefit?
- Term life insurance
- Whole life insurance (Correct answer)
- Group life insurance
- Credit life insurance
Correct answer: Whole life insurance
Whole life insurance accumulates cash value tax-deferred and pays a guaranteed death benefit, unlike pure term policies.
Question 2: In estate planning, an Irrevocable Life Insurance Trust (ILIT) is primarily used to:
- Avoid probate for real estate
- Exclude life insurance proceeds from the taxable estate (Correct answer)
- Provide asset protection from creditors during the insured's lifetime
- Convert term insurance to permanent insurance
Correct 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.
Question 3: The 'three-year rule' under IRC §2035 requires that life insurance transferred to an ILIT within three years of death be:
- Excluded from the estate entirely
- Included back in the decedent's gross estate (Correct answer)
- Taxed at capital gains rates
- Treated as a gift to beneficiaries
Correct 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.
Question 4: Which of the following best describes 'estate liquidity'?
- The total market value of all estate assets
- The availability of cash or near-cash assets to meet estate settlement costs without forced sales (Correct answer)
- The ease of transferring real property through probate
- The ratio of liquid to illiquid assets in a trust
Correct 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.
Question 5: A 'second-to-die' (survivorship) life insurance policy pays the death benefit:
- When the first insured spouse dies
- When both insureds have died (Correct answer)
- At the end of the policy term regardless of death
- Upon the insured becoming disabled
Correct 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.
Question 6: Premium payments made to an ILIT by the grantor are typically structured as gifts using which IRS provision?
- Charitable deduction
- Annual gift tax exclusion with Crummey notices (Correct answer)
- Generation-skipping transfer exemption
- Qualified disclaimer rules
Correct answer: Annual gift tax exclusion with Crummey notices
Crummey withdrawal rights convert premium contributions into present-interest gifts eligible for the annual exclusion.
Question 7: Which life insurance product allows the policyholder to adjust both premiums and death benefits within certain limits?
- Term life
- Whole life
- Universal life (Correct answer)
- Group term life
Correct answer: Universal life
Universal life insurance offers flexible premiums and adjustable death benefits, funded by a cash value account earning current interest rates.
CEA Life Insurance & Estate Liquidity 2
Which type of life insurance policy builds cash value on a tax-deferred basis while providing a death benefit?