Life & Health Insurance Exam Premium Calculations and Tax Treatment 1 — Questions and Answers
Question 1: Life insurance death benefits paid to a named beneficiary are generally treated as:
- Fully taxable ordinary income
- Income tax-free under IRC Section 101(a) (Correct answer)
- Subject to capital gains tax
- Taxable as a gift
Correct answer: Income tax-free under IRC Section 101(a)
Under IRC Section 101(a), life insurance death proceeds paid by reason of the insured's death are generally excluded from the beneficiary's gross income.
Question 2: Which factor does NOT directly affect the net premium calculation for a life insurance policy?
- Mortality rate
- Interest rate assumption
- Expense loading (Correct answer)
- The insured's occupation
Correct answer: Expense loading
Net premium is calculated using only mortality and interest assumptions; expense loading is added separately to arrive at the gross premium.
Question 3: Employer-paid group term life insurance premiums for coverage up to what amount are excluded from an employee's taxable income?
- $25,000
- $50,000 (Correct answer)
- $100,000
- $250,000
Correct answer: $50,000
Under IRC Section 79, employer-paid group term life insurance premiums for the first $50,000 of coverage are excluded from the employee's gross income.
Question 4: What is 'level premium' in permanent life insurance?
- Premiums that decrease over time as the cash value grows
- Premiums that remain the same throughout the premium-paying period (Correct answer)
- Premiums that increase each year based on attained age
- Premiums that fluctuate with investment performance
Correct answer: Premiums that remain the same throughout the premium-paying period
Level premiums are fixed at policy issue and do not change, allowing the insurer to collect more than mortality costs early on and build cash value to subsidize later higher-risk years.
Question 5: A health savings account (HSA) contribution made by an individual is:
- Not deductible and grows tax-free
- Tax-deductible and grows tax-free if used for qualified medical expenses (Correct answer)
- Taxable as income when withdrawn for any purpose
- Matched dollar-for-dollar by the federal government
Correct answer: Tax-deductible and grows tax-free if used for qualified medical expenses
HSA contributions are tax-deductible, grow tax-deferred, and are withdrawn tax-free when used for qualified medical expenses.
Question 6: Which premium mode typically results in the highest total annual cost to the policyholder?
- Annual
- Semi-annual
- Quarterly
- Monthly (Correct answer)
Correct answer: Monthly
Monthly premium payments result in the highest total annual cost because insurers add a modal factor for the administrative costs and time value of money on more frequent payments.
Life & Health Insurance Exam Premium Calculations and Tax Treatment 1
Life insurance death benefits paid to a named beneficiary are generally treated as: