Insurance, Risk Management & Taxation Flashcards

A client receives a $50,000 settlement from a personal injury lawsuit. How is this amount treated for federal income tax purposes?

Answer: Excluded from gross income if it compensates for physical injury or sickness

Under IRC Section 104, damages received on account of personal physical injuries or physical sickness are generally excluded from gross income.

Which of the following describes the 'own occupation' definition of disability in an individual disability income policy?

Answer: The insured is disabled if they cannot perform the duties of their specific occupation

The own-occupation definition pays benefits when the insured cannot perform the material duties of their specific occupation, even if they can work in another capacity.

Under ERISA, which of the following is a fiduciary obligation of a qualified plan administrator?

Answer: Acting solely in the interest of plan participants and beneficiaries

ERISA requires plan fiduciaries to act solely in the interest of plan participants and beneficiaries when managing plan assets.

A client wants to reduce estate taxes by transferring assets to grandchildren. Which vehicle is specifically designed to skip a generation of estate and gift tax?

Answer: A generation-skipping trust using the GST exemption

Generation-skipping trusts leverage the GST (generation-skipping transfer) tax exemption to transfer assets to grandchildren while avoiding a layer of estate tax at the children's level.

Which of the following best describes a 'pure risk' in insurance terminology?

Answer: A risk where only loss or no loss can occur, with no possibility of gain

Pure risk involves only two outcomes: loss or no loss, with no chance of gain, and is the type of risk typically insurable by commercial insurers.

When a policy loan is taken from a life insurance policy and the policy later lapses, which tax consequence occurs?

Answer: The loan amount in excess of basis becomes taxable income in the year of lapse

When a policy lapses with an outstanding loan, the loan proceeds that exceed the policy's cost basis are treated as taxable income in the year of lapse.

Which of the following is a characteristic of a Section 1035 exchange?

Answer: It permits a tax-free exchange of one life insurance policy for another or for an annuity

A Section 1035 exchange allows policyholders to exchange a life insurance policy for another life insurance policy or an annuity contract on a tax-free basis, preserving the cost basis.