CEA Life Insurance & Estate Liquidity 5

Question 1

The primary advantage of a life insurance policy loan compared to surrendering the policy for cash is:

Accepted Answer

The policy remains in force and the death benefit is preserved

Answer

Policy loans allow the owner to access cash value while keeping the policy in force, preserving the death benefit for estate liquidity purposes.

Question 2

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?

Accepted Answer

One-half of the policy value

Answer

Because community property is owned 50/50, only half the policy's value is attributed to the deceased spouse's estate.

Question 3

A Modified Endowment Contract (MEC) is created when a life insurance policy fails the:

Accepted Answer

Seven-pay test under IRC §7702A

Answer

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.

Question 4

Which of the following correctly describes the 'waiver of premium' rider in the context of estate liquidity planning?

Accepted Answer

It keeps the policy in force without premium payments if the insured becomes totally disabled

Answer

The waiver of premium rider ensures that disability does not cause a policy lapse, protecting the estate's expected liquidity from the death benefit.

Question 5

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:

Accepted Answer

Possessed any incident of ownership at death

Answer

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.

(CEA) Certified Estate Advisor Practice Test

(CEA) Certified Estate Advisor Practice Test

CEA Life Insurance & Estate Liquidity 5