Retirement and Other Insurance Concepts — practice questions

9% of the exam ≈8 real questions 13 free questions here

Qualified and nonqualified plans, group life, business uses of life insurance, life settlements, Social Security and taxation: 8 of the 85 scored questions. A small section of tax rules that are easy points once they are memorized.

Where people lose points

• The death benefit is free of income tax; cash value gains taken out while living are not.
• A modified endowment contract taxes lifetime withdrawals gains-first, with a 10% penalty before 59½; the death benefit stays tax-free.
• Group life conversion has a 31-day window and needs no evidence of insurability.
• Key person coverage protects the business; a buy-sell agreement funds a change of ownership.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on retirement and other insurance concepts.

1. To qualify for Social Security disability income benefits, a covered worker must meet which definition of disability?

   • AUnable to perform the main duties of his or her own regular occupation for a period of 90 days or more
   • BUnable to work at any job at all for at least 90 consecutive days
   • CSuffering any injury that reduces his or her earnings by 20% or more
   • DUnable to engage in any substantial gainful activity, expected to last 12 months or end in deathCorrect

   Why: Social Security uses the strictest common definition of disability: the inability to engage in any substantial gainful activity due to an impairment expected to last at least 12 months or result in death, plus a 5-month waiting period before benefits begin. The 'own occupation' standard in option A is a definition found in private disability income policies, not Social Security.

   Reference Outline VII (Social Insurance): Social Security benefits — disability definition

2. A fully insured worker becomes disabled on March 15 and meets Social Security's definition of disability. Assuming the claim is approved, for which month is the FIRST Social Security disability benefit payable?

   • AMarch
   • BApril
   • CSeptemberCorrect
   • DMarch of the following year

   Why: Social Security imposes a five-month waiting period, counted in full calendar months beginning with the first full month after onset — April through August — so the first payable month is the sixth full month, September. Choice B ignores the waiting period entirely; the separate 24-month rule determines when the disabled worker becomes entitled to Medicare, not when cash benefits start.

   Reference Outline VII (Social Insurance): Social Security disability — five-month waiting period

3. Three years after a policy became a MEC, the owner reduces his funding so that all future premiums are well inside the seven-pay limit. He dies several years later. Which statement is correct?

   • AThe contract remains a MEC permanently, but the death benefit is still income-tax-freeCorrect
   • BThe contract loses its MEC status as soon as the funding returns to within the limit
   • CThe contract remains a MEC and the entire death benefit is taxed as ordinary income to the heir
   • DThe death benefit is taxable to the extent of the gain in the contract at death

   Why: Once a contract fails the seven-pay test it is a MEC for the rest of its existence, and any contract received in exchange for it is a MEC as well. MEC status changes only the taxation of living distributions — loans, withdrawals, and surrenders — so the death benefit keeps its income tax exclusion, which is why choices C and D are wrong. Outline IV.

   Reference Outline IV — "Once a MEC, always a MEC"; death benefit exclusion

4. Why are policy dividends paid on a participating whole life policy generally not taxable income to the policyowner?

   • ABecause they are paid out of the insurer’s surplus rather than out of its taxable earnings for the year
   • BBecause dividends must always be applied to purchase paid-up additions rather than taken in cash
   • CBecause all life insurance transactions are exempt from federal income tax under the Internal Revenue Code, regardless of type
   • DBecause they are a return of premium the owner overpaid, taxable only once they exceed total premiums paidCorrect

   Why: A dividend is a refund of an overcharge, so it reduces the owner's cost basis in the policy and is taxable only once total dividends received exceed total premiums paid. Note the adjacent rule: interest credited on dividends left on deposit with the insurer IS taxable in the year it is credited, even though the dividend itself is not. Outline IV.

   Reference Outline IV — Taxation of policy dividends

5. An employee converting her group term life certificate to individual coverage after leaving her job is entitled to obtain:

   • AAn individual term policy continuing at the group rate she paid as an employee
   • BAny individual policy the insurer sells, priced at her original age when she entered the group
   • CA policy on a form the insurer customarily issues, at attained-age rate, no insurabilityCorrect
   • DA new group certificate issued through a state-run group life continuation pool

   Why: Under s. 627.566, F.S., an employee whose group life eligibility ends may convert, without evidence of insurability, to an individual policy on any form the insurer then customarily issues, except that the group policy may exclude the term option — which is why conversions are normally to a permanent, cash value form. The premium is the insurer's customary rate for that form and amount, for her class of risk, and for her age attained on the individual policy's effective date, so it is far higher than the group rate; choice A is the most common misconception. She must apply and pay the first premium within 31 days after group coverage ends.

   Reference Outline IV — Group life conversion privilege; s. 627.566, F.S. (conversion on termination of eligibility)

6. At age 55, a man withdraws $25,000 from a nonqualified deferred annuity he funded with $80,000 of after-tax premium. The contract is now worth $130,000. How is the withdrawal taxed?

   • AEntirely tax-free, as a return of his cost basis
   • BThe full $25,000 is ordinary income, plus a 10% penaltyCorrect
   • C$9,615 is taxable, using an exclusion ratio
   • DThe $25,000 is taxed as long-term capital gain

   Why: Withdrawals from a deferred annuity issued after August 13, 1982, come out gain-first on a LIFO basis; with $50,000 of gain in this contract the entire $25,000 is ordinary income, and the 10% penalty applies because he is under 59½. Choice C misapplies the exclusion ratio, which governs annuitized payments under a settlement option — not lump-sum withdrawals during the accumulation period. Outline IV.

   Reference Outline IV — Nonqualified annuity withdrawals: LIFO taxation

7. Under current federal law, at what age must an individual born in 1955 begin required minimum distributions from a traditional IRA, and which account requires no distributions during the owner's lifetime?

   • AAge 70½; a Roth IRA requires none
   • BAge 72; a traditional IRA requires none
   • CAge 73; a Roth IRA requires noneCorrect
   • DAge 75; a SEP IRA requires none

   Why: SECURE 2.0 set the required beginning age at 73 for people who turned 72 after 2022 and reach 73 before 2033, rising to 75 for those born in 1960 or later; the first distribution may be deferred to April 1 of the following year. Roth IRA owners are never required to take lifetime distributions, which is why choice A is right on the account but wrong on the outdated 70½ age. Outline IV.

   Reference Outline IV — Required minimum distributions (SECURE 2.0)

8. Two shareholders convert an entity-purchase buy-sell into a cross-purchase plan, and the corporation sells to each shareholder, for cash, the existing policy insuring the other shareholder. What is the income tax result when the first insured dies?

   • AThe transfer-for-value rule applies, so proceeds above consideration plus premiums are taxableCorrect
   • BThe proceeds are fully income-tax-free under the general death benefit exclusion rule
   • CThe proceeds are tax-free because the insured is a shareholder of the transferring corporation
   • DThe proceeds are taxed entirely as long-term capital gain to the surviving shareholder

   Why: Selling a policy for valuable consideration normally strips the income tax exclusion. The statutory exceptions are transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, and to a CORPORATION in which the insured is a shareholder or officer — a transfer to a co-shareholder is not on the list, which is why business owners often use a partnership or trust to hold cross-purchase policies. Choice C reads the corporation exception backwards: the corporation must be the transferee, not the transferor. Outline IV.

   Reference Outline IV — Transfer-for-value rule and its exceptions

9. A mother owns a life insurance policy on the life of her adult son; her daughter-in-law is the named beneficiary. Who has the right to take out a policy loan or change the beneficiary?

   • AThe son, because the policy insures his life
   • BThe mother, because all ownership rights belong to the policyownerCorrect
   • CThe daughter-in-law, because she has a vested interest as beneficiary
   • DThe son and daughter-in-law jointly, with the mother's written consent

   Why: This is third-party ownership: the policyowner and the insured are different people, and every ownership right — policy loans, beneficiary changes, assignments, surrender — belongs to the owner, not the insured. A revocable beneficiary has only an expectancy, not a vested right, so the daughter-in-law has no say. Outline IV.A (third-party ownership).

   Reference Outline IV.A — Third-party ownership

10. In a noncontributory group life insurance plan, the employer pays the entire premium. What percentage of eligible employees must be covered under the plan?

    • A25 percent
    • B50 percent
    • C75 percent
    • D100 percentCorrect

    Why: Noncontributory plans require 100 percent participation of eligible employees: since employees pay nothing, covering everyone prevents adverse selection and simplifies administration. The 75 percent figure (the closest distractor) is the typical participation requirement for contributory plans, in which employees pay part of the premium. Outline IV.C (contributory vs. noncontributory).

    Reference Outline IV.C — Group life: contributory vs. noncontributory

Drill other domains

• Types of Policies and Features (Life and Annuities) (17.5%)
• Policy Riders, Provisions, Options and Exclusions (17.5%)
• Application, Underwriting and Policy Delivery (14%)
• Florida Statutes and Rules Common to All Lines (24%)
• Florida Statutes — Life and Annuity (incl. Variable Products) (18%)

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