CLU Individual Life Insurance Planning 5

Question 1

Under the IRC Section 101(a) general rule, how is a life insurance death benefit treated for federal income tax purposes when paid to a named beneficiary?

Accepted Answer

Excluded from the beneficiary's gross income

Answer

IRC §101(a) generally excludes life insurance death benefits from federal income tax when paid by reason of death of the insured.

Question 2

A 'transfer for value' rule violation causes which portion of a life insurance death benefit to become taxable?

Accepted Answer

Only the amount received in excess of the value paid for the policy plus subsequent premiums paid is taxable

Answer

When a policy is transferred for valuable consideration, the death benefit exceeding the buyer's investment (amount paid plus premiums paid after transfer) loses its income-tax exclusion.

Question 3

Which of the following transfers of a life insurance policy is an exception to the transfer for value rule?

Accepted Answer

A transfer to the insured

Answer

Transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, and to a corporation in which the insured is a shareholder or officer are excepted from the transfer for value rule.

Question 4

What is the primary function of an irrevocable life insurance trust (ILIT) in estate planning?

Accepted Answer

To keep life insurance proceeds out of the insured's taxable estate

Answer

An ILIT owns the life insurance policy so that, if properly structured, the death proceeds are excluded from the grantor's gross estate under IRC §2042.

Question 5

A client age 62 is considering a 1035 exchange. Which statement about IRC Section 1035 exchanges is CORRECT?

Accepted Answer

A life insurance policy can be exchanged tax-free for another life insurance policy or an annuity

Answer

IRC §1035 allows a tax-free exchange of a life insurance policy for another life insurance policy, an endowment, or an annuity, but not the reverse (annuity to life insurance).

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Individual Life Insurance Planning 5