CGPT Exam 4 Explained :Verified Answers
& Rationales (Brooklyn College)
How are annuities taxed during accumulation phase?
Tax-deferred
How are annuity withdrawals taxed?
Earnings taxed as ordinary income
What is LIFO taxation in annuities?
Earnings are withdrawn before principal
What is the penalty for early annuity withdrawal?
10% penalty before age 59½
What is annuitization?
Conversion of annuity into periodic income payments
What is the 1035 exchange?
Tax-free exchange of one life policy or annuity for another
What can be exchanged in a 1035 exchange?
Life to life, life to annuity, annuity to annuity (not annuity to life)
What is the purpose of the life insurance application?
To provide information about the applicant for underwriting and risk assessment
Who is responsible for completing the application accurately?
The agent and the applicant
Are statements in an insurance application considered representations or warranties?
Representations
What is material misrepresentation?
False information that affects underwriting decision
What can an insurer do if there is material misrepresentation?
Rescind the policy
What is the Agent's Report?
Agent's personal observations about the applicant
Can the applicant see the Agent's Report?
No
What is a conditional receipt?
Coverage begins if conditions are met (usually passing underwriting)
What is a binding receipt?
Provides immediate temporary coverage until underwriting decision
What determines if coverage is effective with a conditional receipt?
If the applicant is insurable as applied for
What is premium receipt?
Proof that initial premium has been paid
What is underwriting?
Process of evaluating risk to determine eligibility and premium
What factors are considered in underwriting?
Age, gender, health, occupation, lifestyle
What is a Medical Information Bureau (MIB)?
,Organization that shares medical information among insurers
What is the purpose of MIB?
To detect fraud and misrepresentation
What is a Fair Credit Reporting Act (FCRA)?
Regulates use of consumer reports in underwriting
What must insurer do under FCRA if adverse action is taken?
Notify applicant and provide reporting agency info
What is a consumer report?
Information about applicant's credit, character, and reputation
What is an investigative consumer report?
Includes interviews with neighbors, friends, associates
What must be done before ordering an investigative report?
Applicant must be notified in writing
What is a HIPAA authorization?
Allows access to applicant's medical records
What is HIV consent?
Applicant must give written consent before HIV testing
What is risk classification?
Grouping applicants based on risk level
What are common risk classes?
Preferred, standard, substandard (rated)
What is substandard risk?
Higher risk; pays higher premiums
What is policy delivery?
Process of giving policy to the insured and explaining it
When does coverage begin if premium was not paid with application?
When policy is delivered and premium is collected
What must agent do upon delivery?
Explain policy, collect premium (if not paid), get delivery receipt
What is a Statement of Good Health?
Confirms insured's health has not changed since application
When is a Statement of Good Health required?
If policy is delivered after application and no premium was initially paid
What happens if insured's health has changed before delivery?
Insurer may delay or deny coverage
What is the Free Look period?
Time to review and return policy for full refund
When does Free Look begin?
Upon policy delivery
What is backdating a policy?
Setting policy date earlier to save age
What is the limit for backdating?
Usually up to 6 months
Why is backdating used?
To obtain a lower premium based on younger age
What is the agent's responsibility regarding premiums?
, Collect and remit premiums promptly
What is rebating?
Giving something of value as an inducement to purchase insurance
Is rebating legal in NJ?
No
What is twisting?
Inducing policy replacement through misrepresentation
Is twisting legal?
No
What is churning?
Replacing policies to generate commissions
What is the USA PATRIOT Act requirement?
Verify identity to prevent money laundering
What is AML (Anti-Money Laundering)?
Procedures to detect and prevent illegal financial activity
Are life insurance death benefits taxable?
No, generally received income tax-free by beneficiaries
Are life insurance premiums tax deductible?
No, premiums are not tax deductible for individuals
How is cash value in life insurance taxed?
Tax-deferred growth
How are policy loans taxed?
Not taxable as long as policy remains in force
What happens if a policy with a loan lapses?
Loan amount may become taxable
What is a Modified Endowment Contract (MEC)?
A life policy that fails the 7-pay test and loses tax advantages
How are MEC withdrawals taxed?
LIFO (last in, first out) and may incur penalty if under age 59½
What is the exclusion ratio?
Determines taxable vs non-taxable portion of annuity payments
Are annuity premiums tax deductible?
No, not for qualified plans (already tax-advantaged)
What is a qualified retirement plan?
Plan that meets IRS requirements and offers tax advantages
What is a nonqualified plan?
Does not meet IRS guidelines; funded with after-tax dollars
What is a Traditional IRA?
Tax-deferred retirement account; contributions may be tax deductible
What is a Roth IRA?
After-tax contributions; qualified withdrawals are tax-free
What is the contribution limit penalty?
6% penalty for excess IRA contributions
When can IRA withdrawals begin without penalty?
Age 59½
What is Required Minimum Distribution (RMD)?
& Rationales (Brooklyn College)
How are annuities taxed during accumulation phase?
Tax-deferred
How are annuity withdrawals taxed?
Earnings taxed as ordinary income
What is LIFO taxation in annuities?
Earnings are withdrawn before principal
What is the penalty for early annuity withdrawal?
10% penalty before age 59½
What is annuitization?
Conversion of annuity into periodic income payments
What is the 1035 exchange?
Tax-free exchange of one life policy or annuity for another
What can be exchanged in a 1035 exchange?
Life to life, life to annuity, annuity to annuity (not annuity to life)
What is the purpose of the life insurance application?
To provide information about the applicant for underwriting and risk assessment
Who is responsible for completing the application accurately?
The agent and the applicant
Are statements in an insurance application considered representations or warranties?
Representations
What is material misrepresentation?
False information that affects underwriting decision
What can an insurer do if there is material misrepresentation?
Rescind the policy
What is the Agent's Report?
Agent's personal observations about the applicant
Can the applicant see the Agent's Report?
No
What is a conditional receipt?
Coverage begins if conditions are met (usually passing underwriting)
What is a binding receipt?
Provides immediate temporary coverage until underwriting decision
What determines if coverage is effective with a conditional receipt?
If the applicant is insurable as applied for
What is premium receipt?
Proof that initial premium has been paid
What is underwriting?
Process of evaluating risk to determine eligibility and premium
What factors are considered in underwriting?
Age, gender, health, occupation, lifestyle
What is a Medical Information Bureau (MIB)?
,Organization that shares medical information among insurers
What is the purpose of MIB?
To detect fraud and misrepresentation
What is a Fair Credit Reporting Act (FCRA)?
Regulates use of consumer reports in underwriting
What must insurer do under FCRA if adverse action is taken?
Notify applicant and provide reporting agency info
What is a consumer report?
Information about applicant's credit, character, and reputation
What is an investigative consumer report?
Includes interviews with neighbors, friends, associates
What must be done before ordering an investigative report?
Applicant must be notified in writing
What is a HIPAA authorization?
Allows access to applicant's medical records
What is HIV consent?
Applicant must give written consent before HIV testing
What is risk classification?
Grouping applicants based on risk level
What are common risk classes?
Preferred, standard, substandard (rated)
What is substandard risk?
Higher risk; pays higher premiums
What is policy delivery?
Process of giving policy to the insured and explaining it
When does coverage begin if premium was not paid with application?
When policy is delivered and premium is collected
What must agent do upon delivery?
Explain policy, collect premium (if not paid), get delivery receipt
What is a Statement of Good Health?
Confirms insured's health has not changed since application
When is a Statement of Good Health required?
If policy is delivered after application and no premium was initially paid
What happens if insured's health has changed before delivery?
Insurer may delay or deny coverage
What is the Free Look period?
Time to review and return policy for full refund
When does Free Look begin?
Upon policy delivery
What is backdating a policy?
Setting policy date earlier to save age
What is the limit for backdating?
Usually up to 6 months
Why is backdating used?
To obtain a lower premium based on younger age
What is the agent's responsibility regarding premiums?
, Collect and remit premiums promptly
What is rebating?
Giving something of value as an inducement to purchase insurance
Is rebating legal in NJ?
No
What is twisting?
Inducing policy replacement through misrepresentation
Is twisting legal?
No
What is churning?
Replacing policies to generate commissions
What is the USA PATRIOT Act requirement?
Verify identity to prevent money laundering
What is AML (Anti-Money Laundering)?
Procedures to detect and prevent illegal financial activity
Are life insurance death benefits taxable?
No, generally received income tax-free by beneficiaries
Are life insurance premiums tax deductible?
No, premiums are not tax deductible for individuals
How is cash value in life insurance taxed?
Tax-deferred growth
How are policy loans taxed?
Not taxable as long as policy remains in force
What happens if a policy with a loan lapses?
Loan amount may become taxable
What is a Modified Endowment Contract (MEC)?
A life policy that fails the 7-pay test and loses tax advantages
How are MEC withdrawals taxed?
LIFO (last in, first out) and may incur penalty if under age 59½
What is the exclusion ratio?
Determines taxable vs non-taxable portion of annuity payments
Are annuity premiums tax deductible?
No, not for qualified plans (already tax-advantaged)
What is a qualified retirement plan?
Plan that meets IRS requirements and offers tax advantages
What is a nonqualified plan?
Does not meet IRS guidelines; funded with after-tax dollars
What is a Traditional IRA?
Tax-deferred retirement account; contributions may be tax deductible
What is a Roth IRA?
After-tax contributions; qualified withdrawals are tax-free
What is the contribution limit penalty?
6% penalty for excess IRA contributions
When can IRA withdrawals begin without penalty?
Age 59½
What is Required Minimum Distribution (RMD)?
