Life & Health Insurance Exam Premium Calculations and Tax Treatment 2

Question 1

Cash value withdrawals from a whole life policy are taxed as:

Accepted Answer

Ordinary income only to the extent they exceed the policy's cost basis

Answer

Life insurance cash value withdrawals are tax-free up to the policy's cost basis (total premiums paid); amounts above the basis are taxable as ordinary income.

Question 2

What is the 'mortality and expense risk charge' (M&E) in a variable annuity?

Accepted Answer

An annual fee charged by the insurer for insurance guarantees and administrative costs

Answer

The M&E charge is an ongoing annual fee deducted from the annuity's account value to compensate the insurer for mortality risk and administrative expenses.

Question 3

Dividends paid on a participating whole life policy are considered by the IRS as:

Accepted Answer

A return of premium and generally not taxable until they exceed premiums paid

Answer

Policy dividends are treated as a return of the premium (cost basis) and are not taxable income unless they exceed the total premiums paid.

Question 4

Which of the following best describes 'experience rating' in group health insurance?

Accepted Answer

Adjusting group premiums based on the group's own claims history

Answer

Experience rating sets a group's premium based primarily on that group's own past claims experience, rewarding healthy groups with lower rates.

Question 5

Under the modified endowment contract (MEC) rules, policy loans from a MEC are taxed as:

Accepted Answer

Ordinary income to the extent of gain, plus a 10% penalty if under age 59½

Answer

Loans and withdrawals from a MEC are subject to LIFO taxation (gain out first) and an additional 10% penalty tax if taken before age 59½.

Life & Health Insurance Exam Practice Test

Life & Health Insurance Exam Practice Test

Life & Health Insurance Exam Premium Calculations and Tax Treatment 2