Life Insurance Legal Aspects Flashcards

The legal doctrine of subrogation, as it applies to life insurance, differs from property insurance because:

Answer: Life insurance is not a contract of indemnity, so subrogation generally does not apply

Because life insurance pays a stated sum rather than indemnifying an actual loss, it is not a contract of indemnity and subrogation rights do not apply—the beneficiary keeps both the proceeds and any wrongful death award.

Under the Uniform Transfers to Minors Act (UTMA), when a minor is named as a life insurance beneficiary, proceeds paid to a custodian under UTMA must be distributed to the minor at the latest by age:

Answer: 18 to 25, depending on state law

UTMA allows states to set the distribution age anywhere from 18 to 25, so the age at which a minor must receive custodial assets varies by state.

Which provision in a life insurance policy requires the insurer to notify the policyowner before a policy lapses for non-payment of premium?

Answer: The notice of lapse (or advance notice) provision

Many states require insurers to send advance notice of an impending lapse to the policyowner (and sometimes a designee) before the policy terminates for non-payment.

In the context of life insurance policy replacement, NAIC Model Regulation 187 primarily requires that:

Answer: Replacing agents compare the existing and proposed policies and provide a signed comparison to the applicant

NAIC Model Regulation 187 requires replacing producers to conduct a needs analysis, provide a signed comparison of existing and proposed coverage, and document that the replacement is in the client's best interest.

For federal income tax purposes, life insurance death benefits paid to a named beneficiary in a lump sum are generally:

Answer: Excluded from the beneficiary's gross income under IRC Section 101(a)

IRC Section 101(a) excludes life insurance death benefits from the gross income of the beneficiary when received because of the insured's death, subject to limited exceptions.

The 'transfer for value' rule under IRC Section 101(a)(2) provides that if a life insurance policy is transferred for valuable consideration, the death benefit in excess of the consideration paid is:

Answer: Includible in the transferee's gross income at the insured's death

Under the transfer for value rule, a policy sold or transferred for valuable consideration loses its income-tax exclusion on the amount of proceeds exceeding the consideration paid plus subsequent premiums, with limited exceptions.

Under the Omnibus Budget Reconciliation Act (OBRA) and related regulations, employer-provided group term life insurance coverage exceeding which amount results in taxable imputed income to the employee?

Answer: $50,000

IRC Section 79 excludes the cost of the first $50,000 of employer-provided group term life insurance from the employee's gross income; coverage above that threshold creates imputed income taxed using IRS Table I rates.