Financial Advisor Insurance Planning for Financial Advisors 4 — Questions and Answers
Question 1: A client owns a $500,000 permanent life insurance policy with a $120,000 cash value. If the policy lapses, what is the tax consequence?
- No tax consequence since life insurance is tax-free
- Ordinary income tax on the gain above basis in the policy (Correct answer)
- Capital gains tax on the entire cash value
- A 10% early withdrawal penalty plus ordinary income tax
Correct answer: Ordinary income tax on the gain above basis in the policy
When a permanent life policy lapses with a gain (cash value exceeds premiums paid), the gain is taxable as ordinary income.
Question 2: Which type of annuity rider guarantees the owner can withdraw a set percentage of the benefit base annually regardless of account performance?
- Guaranteed Minimum Accumulation Benefit (GMAB)
- Guaranteed Minimum Income Benefit (GMIB)
- Guaranteed Minimum Withdrawal Benefit (GMWB) (Correct answer)
- Return of Premium Rider
Correct answer: Guaranteed Minimum Withdrawal Benefit (GMWB)
A GMWB rider guarantees systematic withdrawals of a specified percentage of the benefit base even if the account value drops to zero.
Question 3: A 45-year-old client wants long-term care coverage but is concerned about losing premiums if they never use benefits. Which product best addresses this concern?
- Traditional stand-alone LTC policy
- A linked-benefit (hybrid) life/LTC policy (Correct answer)
- A Medicare supplement plan
- Group disability insurance
Correct answer: A linked-benefit (hybrid) life/LTC policy
Hybrid life/LTC policies provide a death benefit if LTC is never used, so premiums are not 'lost' unlike traditional stand-alone LTC policies.
Question 4: Under the HIPAA provisions, which statement about long-term care insurance is CORRECT?
- All LTC benefits are taxable income to the recipient
- Tax-qualified LTC premiums may be deductible as a medical expense subject to AGI limits (Correct answer)
- LTC policies must cover custodial care only, not skilled nursing
- Employer-paid LTC premiums are always included in the employee's gross income
Correct answer: Tax-qualified LTC premiums may be deductible as a medical expense subject to AGI limits
HIPAA established tax-qualified LTC policies whose premiums are deductible as medical expenses to the extent they exceed 7.5% of AGI, subject to age-based limits.
Question 5: A business owner wants key-person life insurance. How are premiums and death benefits typically treated for a C-corporation?
- Premiums are deductible; death benefit is taxable income
- Premiums are not deductible; death benefit is generally received income-tax-free (Correct answer)
- Both premiums and death benefit are tax-deductible
- Premiums are deductible; death benefit is tax-free only if reinvested in the business
Correct answer: Premiums are not deductible; death benefit is generally received income-tax-free
Key-person life insurance premiums paid by a C-corporation are not deductible, but the death benefit proceeds are generally received income-tax-free by the corporation.
Question 6: Which disability income policy provision requires the insured to accept a lower-paying job within their general occupation before benefits are paid?
- Own-occupation definition
- Any-occupation definition (Correct answer)
- Modified own-occupation definition
- Residual disability definition
Correct answer: Any-occupation definition
The any-occupation definition pays benefits only if the insured cannot perform any occupation for which they are reasonably suited, making it the most restrictive definition.
Question 7: A client's whole life policy has a $200,000 face amount, $40,000 cash value, and $15,000 in outstanding policy loans. What is the net death benefit payable to the beneficiary?
- $200,000
- $185,000 (Correct answer)
- $160,000
- $40,000
Correct answer: $185,000
Outstanding policy loans plus accrued interest reduce the death benefit paid, so the beneficiary receives $200,000 minus the $15,000 loan = $185,000.
Financial Advisor Insurance Planning for Financial Advisors 4
A client owns a $500,000 permanent life insurance policy with a $120,000 cash value.
If the policy lapses, what is the tax consequence?