Financial Advisor Insurance Planning for Financial Advisors 5 — Questions and Answers
Question 1: A couple has a $2 million combined estate. Which life insurance strategy allows them to minimize estate taxes while leveraging one premium outlay for survivor needs?
- Two separate term policies on each spouse
- A survivorship (second-to-die) whole life policy inside an ILIT (Correct answer)
- A first-to-die joint policy payable to the surviving spouse
- Universal life with an accelerated death benefit rider
Correct answer: A survivorship (second-to-die) whole life policy inside an ILIT
A survivorship policy held inside an Irrevocable Life Insurance Trust (ILIT) pays at the second death when estate taxes are typically due, and keeps proceeds out of the taxable estate.
Question 2: Which annuity payout option provides the highest monthly income but leaves no residual benefit to heirs?
- Joint and 100% survivor annuity
- Life with 20-year certain annuity
- Straight life (life only) annuity (Correct answer)
- Period-certain annuity for 10 years
Correct answer: Straight life (life only) annuity
A straight life annuity pays the highest monthly amount because payments cease at the annuitant's death with nothing paid to beneficiaries.
Question 3: Under IRC Section 1035, which exchange is NOT a tax-free exchange?
- Life insurance policy exchanged for another life insurance policy
- Life insurance policy exchanged for an annuity
- Annuity exchanged for a life insurance policy (Correct answer)
- Annuity exchanged for another annuity
Correct answer: Annuity exchanged for a life insurance policy
Section 1035 does not permit a tax-free exchange of an annuity for a life insurance policy; the exchange must flow from equal or 'higher' contract types.
Question 4: A client's group disability plan pays 60% of pre-disability income. The employer pays 100% of the premium. If the client becomes disabled, how are the benefits taxed?
- Completely tax-free because disability payments are always excluded from income
- Fully taxable as ordinary income because the employer paid the premium with pre-tax dollars (Correct answer)
- Taxable only on the portion exceeding the employee's salary at disability
- Subject to capital gains tax rates
Correct answer: Fully taxable as ordinary income because the employer paid the premium with pre-tax dollars
When an employer pays disability premiums and deducts them as a business expense, the resulting disability benefits are fully includable in the employee's gross income.
Question 5: An 'elimination period' in a disability income policy is BEST described as:
- The maximum benefit period after which coverage ends
- A waiting period the insured must satisfy before benefits begin (Correct answer)
- A provision that eliminates coverage for pre-existing conditions
- The period during which premiums are waived while disabled
Correct answer: A waiting period the insured must satisfy before benefits begin
The elimination period is a self-insured waiting period (commonly 30–180 days) that must pass after disability onset before the insurer begins paying benefits.
Question 6: Which provision in a life insurance policy allows the owner to keep coverage in force without paying further premiums by using accumulated cash value?
- Automatic premium loan provision (Correct answer)
- Waiver of premium rider
- Reduced paid-up option
- Extended term option
Correct answer: Automatic premium loan provision
The automatic premium loan provision automatically takes a policy loan from the cash value to pay a premium when the owner fails to pay, keeping the policy in force.
Question 7: A financial advisor recommends replacing an existing life insurance policy with a new one. Which regulation primarily governs replacement transactions and requires comparison disclosures?
- ERISA Section 404
- NAIC Life Insurance Replacement Model Regulation (Correct answer)
- SEC Regulation Best Interest (Reg BI)
- FINRA Rule 2111 Suitability
Correct answer: NAIC Life Insurance Replacement Model Regulation
The NAIC Life Insurance Replacement Model Regulation requires insurers and agents to provide comparison documents so consumers can evaluate whether replacing an existing policy is in their best interest.
Financial Advisor Insurance Planning for Financial Advisors 5
A couple has a $2 million combined estate.
Which life insurance strategy allows them to minimize estate taxes while leveraging one premium outlay for survivor needs?