Insurance, Risk Management & Taxation Flashcards

Which type of disability insurance provision allows the insured to increase coverage without evidence of insurability as income rises?

Answer: Guaranteed insurability rider

A guaranteed insurability rider allows the insured to purchase additional disability coverage at specified intervals without undergoing medical underwriting.

A married couple files a joint return. Under the capital gains exclusion for a primary residence, how much gain can they exclude upon sale of their home?

Answer: $500,000

Under IRC Section 121, married couples filing jointly can exclude up to $500,000 of gain from the sale of a primary residence if they meet the ownership and use tests.

What is the primary purpose of an irrevocable life insurance trust (ILIT)?

Answer: To keep life insurance proceeds out of the grantor's taxable estate

An ILIT is designed to own life insurance policies so that death benefits are excluded from the grantor's gross estate, reducing potential estate taxes.

Under the risk management process, which step involves quantifying the potential financial impact of identified risks?

Answer: Risk analysis

Risk analysis (or risk evaluation) involves assessing the frequency and severity of potential losses to quantify their financial impact.

A client pays $3,000 in long-term care insurance premiums. Which statement is correct regarding the tax deductibility of these premiums?

Answer: They are deductible as a medical expense up to age-based limits set by the IRS

Premiums for qualified long-term care insurance are deductible as medical expenses subject to age-based limits that are annually adjusted by the IRS.

Which of the following is an example of risk retention?

Answer: Establishing a self-insured retention fund

Risk retention occurs when an individual or organization intentionally sets aside funds to cover potential losses rather than transferring the risk to an insurer.

For federal income tax purposes, the inside buildup of cash value in a life insurance policy is:

Answer: Tax-deferred until the policy is surrendered or lapses

The growth of cash value inside a life insurance policy accumulates tax-deferred, meaning no income tax is owed until the policy is surrendered or distributed.