General knowledge · Section IV · On both exams
Retirement and other insurance concepts
A mixed section: third-party ownership, life settlements, group life, retirement plans, needs analysis and suitability, Social Security benefits, and how premiums, proceeds and dividends are taxed. Tax questions here rely on federal law and IRS publications.
Questions on the exam
- Life, Accident and Health: 8 questions
- Life Agent: 8 questions
Life, Accident and Health exam · Life Agent exam
What the official outline lists
- Third-party ownership
- Life settlements
- Group life insurance
- Retirement plans
- Life insurance needs analysis/suitability
- Social Security benefits
- Tax treatment of insurance premiums, proceeds, and dividends
Practice questions
Choose your answer, then open “Show the answer” to see why each option is right or wrong and the exact source text.
1. A life insurance agent is promoting a policy to an applicant. Which statement would violate the Texas Life Settlements Act's prohibited practices?
- Telling the applicant that the insurance is free for the first year, although the policy does not provide that
- Telling the applicant that the insurance is free for the first year, when the policy itself provides for that free period
- Telling the applicant that the policy costs less than a competing policy
- Telling the applicant that coverage begins on the date the first premium is paid
Show the answer
Correct answer: A. Telling the applicant that the insurance is free for the first year, although the policy does not provide that
TIC §1111A.017(a)(9) prohibits a life insurance agent, insurance company, broker, or provider from representing to an applicant or policyholder that the insurance is free or without cost for any period of time unless provided in the policy. Telling the applicant the coverage is free for a year, when the policy does not say so, is therefore prohibited.
Why the other options are wrong
- B. Incorrect. §1111A.017(a)(9) prohibits a free or no-cost representation only 'unless provided in the policy'; here the policy provides the free period, so the statement is not prohibited by that provision.
- C. Incorrect. A statement comparing cost to another policy is not a representation that the insurance is free or without cost for any period of time, so it does not fall under §1111A.017(a)(9).
- D. Incorrect. A statement about when coverage begins is not a representation that the insurance is free or without cost for any period of time, so it does not fall under §1111A.017(a)(9).
with respect to any life insurance agent, insurance company, broker, or provider, make any statement or representation to the applicant or policyholder in connection with the sale or financing of a life insurance policy to the effect that the insurance is free or without cost to the policyholder for any period of time unless provided in the policy.
2. A group life insurance policy terminates. Which of the following insured individuals is entitled to have the insurer issue an individual life policy under the Texas Insurance Code provision for termination of the group policy?
- An individual who was insured under the group policy for at least five years before the termination
- An individual who was insured under the group policy for at least one year before the termination
- An individual who was insured under the group policy for at least two years before the termination
- An individual who was insured under the group policy for at least three years before the termination
Show the answer
Correct answer: A. An individual who was insured under the group policy for at least five years before the termination
TIC §1131.111(a) gives the right to an individual policy to each individual insured on the date the group policy terminates whose insurance terminates and who has been insured under the policy for at least five years before the termination or amendment.
Why the other options are wrong
- B. One year is shorter than the requirement; TIC §1131.111(a) requires at least five years of coverage.
- C. Two years is shorter than the requirement; TIC §1131.111(a) requires at least five years of coverage.
- D. Three years is shorter than the requirement; TIC §1131.111(a) requires at least five years of coverage.
A group life insurance policy must provide that if the policy terminates or is amended so as to terminate the insurance of a class of insured individuals, each individual insured under the policy on the date of the termination or amendment whose insurance terminates and who has been insured under the policy for at least five years before the date of the termination or amendment is entitled to have the insurer issue to the individual an individual life insurance policy, subject to the conditions and limitations provided by Section 1131.110.
3. A business owns an employer-owned life insurance contract on the life of one of its employees, and the business is a beneficiary under the contract. If no exception applies, what limits the death proceeds the business may exclude from its gross income?
- The total of the premiums and other amounts the business paid for the contract
- The full death benefit stated in the contract, with no limit
- Only the cash value the contract had on the date of the insured's death
- The face amount of the contract reduced by the premiums the business paid
Show the answer
Correct answer: A. The total of the premiums and other amounts the business paid for the contract
Under 26 U.S.C. 101(j)(1), for an employer-owned life insurance contract the amount excluded from the applicable policyholder's gross income cannot exceed the sum of the premiums and other amounts the policyholder paid for the contract.
Why the other options are wrong
- B. Incorrect. Section 101(j)(1) caps the exclusion for an employer-owned contract; the full death benefit is not excludable as a matter of course.
- C. Incorrect. The cap in 101(j)(1) is measured by premiums and other amounts paid, not by the contract's cash value.
- D. Incorrect. The cap is the sum of premiums and other amounts paid, not the face amount reduced by premiums.
(1) General rule In the case of an employer-owned life insurance contract, the amount excluded from gross income of an applicable policyholder by reason of paragraph (1) of subsection (a) shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract.
4. Which of the following does the Texas Department of Insurance say to consider when adding up how much life insurance you will need?
- Money to cover a funeral
- The cost of a family vacation
- The price of a new car
- Next year's property tax rate
Show the answer
Correct answer: A. Money to cover a funeral
The TDI tip "Do you need life insurance?" lists items to consider when working out how much insurance you need: your mortgage and other debts, the income that would need to be replaced, money to cover a funeral, and college for the kids.
Why the other options are wrong
- B. A family vacation is not among the items listed: mortgage and other debts, income to be replaced, funeral costs and college for the kids.
- C. The price of a new car is not among the items listed: mortgage and other debts, income to be replaced, funeral costs and college for the kids.
- D. A property tax rate is not among the items listed: mortgage and other debts, income to be replaced, funeral costs and college for the kids.
Consider your mortgage and other debts, how much income would need to be replaced, money to cover a funeral, and college for the kids.
5. According to the Social Security Administration, what is the earliest age at which a worker can start receiving Social Security retirement benefits?
- Age 62
- Age 60
- Age 65
- Age 67
Show the answer
Correct answer: A. Age 62
According to SSA Publication 05-10035 (Retirement Benefits), you can receive Social Security retirement benefits as early as age 62, although benefits are reduced if you start before your full retirement age.
Why the other options are wrong
- B. The publication states age 62, not age 60, as the earliest age for retirement benefits.
- C. Age 65 is not the earliest age; the publication says retirement benefits can start as early as age 62.
- D. Age 67 is the full retirement age for people born in 1960 or later, not the earliest age; the publication says benefits can start as early as age 62.
You can receive Social Security retirement benefits as early as age 62. However, we’ll reduce your benefits if you start receiving them before your full retirement age.
6. A taxable distribution from a modified endowment contract is generally subject to the 10-percent additional tax. Which distribution is excepted from that tax?
- A distribution used by the taxpayer to buy a first home
- A distribution made after the contract has been in force for 10 years
- A distribution used by the taxpayer to pay medical expenses
- A distribution made on or after the date the taxpayer attains age 59½
Show the answer
Correct answer: D. A distribution made on or after the date the taxpayer attains age 59½
Under 26 U.S.C. 72(v)(2)(A), the 10-percent additional tax does not apply to a distribution made on or after the date on which the taxpayer attains age 59½. The other exceptions are for distributions attributable to disability and certain series of substantially equal periodic payments.
Why the other options are wrong
- A. Buying a first home is not among the exceptions listed in section 72(v)(2): age 59½, disability, or a series of substantially equal periodic payments.
- B. Section 72(v)(2) does not make the exception depend on how long the contract has been in force.
- C. Paying medical expenses is not among the exceptions listed in section 72(v)(2).
Paragraph (1) shall not apply to any distribution— (A) made on or after the date on which the taxpayer attains age 59½, (B) which is attributable to the taxpayer’s becoming disabled (within the meaning of subsection (m)(7)), or (C) which is part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and his beneficiary.
7. Jordan owns a life insurance contract issued after June 21, 1988. In contract year 4, at Jordan's request (not due to nonpayment of premiums), the death benefit is reduced. How is the 7-pay test applied after the reduction?
- As if the contract had been newly entered into on the date of the reduction
- As if the contract had originally been issued at the reduced benefit level
- As if the reduction had not occurred, using the original benefit level
- The 7-pay test stops applying to the contract once its benefits are reduced
Show the answer
Correct answer: B. As if the contract had originally been issued at the reduced benefit level
Under 26 U.S.C. 7702A(c)(2)(A), if there is a reduction in benefits within the 1st 7 contract years, section 7702A is applied as if the contract had originally been issued at the reduced benefit level. Contract year 4 is within the first 7 contract years.
Why the other options are wrong
- A. Section 7702A(c)(2)(A) does not say the contract is treated as newly entered into on the date of the reduction; it applies the section as if the contract had originally been issued at the reduced benefit level.
- C. Section 7702A(c)(2)(A) applies the section as if the contract had been issued at the reduced benefit level, not the original level.
- D. Section 7702A(c)(2)(A) does not end the test; it applies the section as if the contract had been issued at the reduced level.
If there is a reduction in benefits under the contract within the 1st 7 contract years, this section shall be applied as if the contract had originally been issued at the reduced benefit level.
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Key flashcards
Front and back, as in the app.
- Group life conversion when the group policy terminates (Texas): minimum time insured
- At least five years before the date of the termination or amendment (Texas Insurance Code §1131.111(a), “Right to individual policy on termination of coverage under group policy”)
- Under 26 U.S.C. 101(j), what two conditions make a life insurance contract an employer-owned life insurance contract?
- (1) It is owned by a person engaged in a trade or business that is, directly or indirectly, a beneficiary (or a related person is); and (2) it covers the life of an insured who is an employee of that trade or business on the date the contract is issued. (26 U.S.C. 101(j)(3)(A), “Certain death benefits”)
Terms on this topic
- Disability — Discapacidad
- Life settlements — Acuerdos de liquidación de seguro de vida
- Group life insurance — Seguro de vida grupal
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