CEA Life Insurance & Estate Liquidity 2

Question 1

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

Accepted Answer

Whole life insurance

Answer

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:

Accepted Answer

Exclude life insurance proceeds from the taxable estate

Answer

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:

Accepted Answer

Included back in the decedent's gross estate

Answer

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'?

Accepted Answer

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

Answer

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:

Accepted Answer

When both insureds have died

Answer

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

(CEA) Certified Estate Advisor Practice Test