Individual Life Insurance Flashcards

Which life insurance ownership arrangement is typically used to keep the death benefit outside the insured's taxable estate under IRC Section 2042?

Answer: Irrevocable life insurance trust (ILIT)

An ILIT owns the policy so the insured has no incidents of ownership; proceeds are paid to the trust and excluded from the insured's gross estate under IRC Section 2042.

Under a third-party ownership arrangement, who has the right to exercise policy options such as surrendering the policy?

Answer: The policyowner

In a third-party ownership situation, the policyowner — not the insured or beneficiary — holds all contractual rights including the right to surrender, borrow, or change beneficiaries.

The misstatement of age provision in a life insurance policy most commonly results in which adjustment?

Answer: Death benefit adjusted to the amount the premium paid would have purchased at the correct age

When age is misstated, insurers adjust the death benefit to what the paid premiums would have purchased at the insured's true age, rather than voiding the policy.

Which of the following is a characteristic of graded death benefit life insurance?

Answer: Full death benefit is paid only after a specified number of policy years if death is not accidental

Graded benefit policies — often issued on a guaranteed-acceptance basis — pay a limited benefit (often return of premiums plus interest) if the insured dies from natural causes in the first 2-3 policy years.

A 'last survivor' (second-to-die) life insurance policy is most commonly used to fund which planning need?

Answer: Estate liquidity to pay federal estate taxes after the death of the surviving spouse

Second-to-die policies pay at the death of the last surviving insured, aligning perfectly with the estate tax liability that arises when the surviving spouse dies and the marital deduction is exhausted.

Under the life insurance policy loan provision, what is the tax treatment of a loan taken against a non-MEC policy's cash value?

Answer: The loan is income-tax-free as long as the policy remains in force

Policy loans from non-MEC life insurance are not taxable events as long as the policy remains in force, because they are treated as debt, not a distribution of gain.

Which statement accurately describes the paid-up additions dividend option?

Answer: Dividends purchase small increments of single-premium whole life that immediately add to cash value and death benefit

Paid-up additions use dividends to buy small amounts of fully paid-up whole life insurance, increasing both the death benefit and cash value without requiring evidence of insurability.