CFP512: Risk Management, Insurance, and
Employee Benefits Planning ACTUAL
UPDATED Questions and CORRECT
Answers
First-to-die policy - CORRECT ANSWER a. Pays upon the death of the first insured.
b. Used in buy-sell agreements and for mortgage protection, paying off debt, and education
expenses.
Second-to-die policy - CORRECT ANSWER a. Used for estate liquidity purposes. b.
Lower cost than first-to-die or single-life policies.
7-pay test - CORRECT ANSWER The accumulated amount paid under the life insurance
contract at any time during the first seven contract years that exceeds the sum of the net level
premiums which would have been paid on or before such time if the contract provided for paid-
up future benefits after the payment of seven level annual premiums.
Modified Endowment Contracts (MECs) - CORRECT ANSWER 1. Life insurance
policies are considered modified endowment contracts (MECs) if they fail the 7-pay test.
2. Most single premium policies fail the 7-pay test and are classified as MECs. Unlike other life
insurance contracts, withdrawals and loans from MECs are included in the policyowner's taxable
income to the extent that the cash value of the policy exceeds the premiums paid using LIFO
accounting.
3. Persons under age 591⁄2 may also be subject to an additional tax penalty of 10% on both
withdrawals and loans if there is a gain in the contract. There is neither a penalty nor tax due on
the return of basis in the contract.
4. Once an MEC, always an MEC.
Group Term Life Insurance - CORRECT ANSWER 1. Group term life insurance
premiums up to the first $50,000 of face value paid by the employer are tax exempt to the
employee.
, a. For any amount of group term coverage greater than $50,000, the scheduled premium per
Section 79 Table 1 cost is included in the employee's W-2 compensation income.
b. To qualify for favorable tax treatment, a group life plan must be nondiscriminatory.
Annuities - CORRECT ANSWER Annuities provide a periodic payment (fixed or
variable) for either a fixed period (term certain) or for someone's (could be more than one)
lifetime (life annuity)
Premium funding methods (Annuities) - CORRECT ANSWER Single premium deferred
annuity (SPDA)
Periodic premium deferred annuity (PPDA)
Single premium immediate annuity (SPIA)
Single premium deferred annuity (SPDA) - CORRECT ANSWER a lump-sum premium
with an annuitization period deferred until some point in the future. The premium earns interest
that accrues tax deferred.
Periodic premium deferred annuity (PPDA) - CORRECT ANSWER allows periodic,
variable contributions where earnings accumulate tax deferred and are distributed sometime in
the future.
Single premium immediate annuity (SPIA) - CORRECT ANSWER the annuity payments
to the annuitant begin one payment period following the premium payment (e.g., structured
settlements, retirement plan distributions).
Annuity Payout Options - CORRECT ANSWER 1. Fixed period—payments continue to
the annuitant for a specified term, and to a designee if the term exceeds the annuitant's life. The
insurer determines the amount of the payment based on the period selected.
2. Fixed amount—payments are made periodically in a fixed amount determined by the
annuitant. The insurer determines the length of time for which payments can be made.
3. Straight life annuity—payments continue until the death of the annuitant.
Employee Benefits Planning ACTUAL
UPDATED Questions and CORRECT
Answers
First-to-die policy - CORRECT ANSWER a. Pays upon the death of the first insured.
b. Used in buy-sell agreements and for mortgage protection, paying off debt, and education
expenses.
Second-to-die policy - CORRECT ANSWER a. Used for estate liquidity purposes. b.
Lower cost than first-to-die or single-life policies.
7-pay test - CORRECT ANSWER The accumulated amount paid under the life insurance
contract at any time during the first seven contract years that exceeds the sum of the net level
premiums which would have been paid on or before such time if the contract provided for paid-
up future benefits after the payment of seven level annual premiums.
Modified Endowment Contracts (MECs) - CORRECT ANSWER 1. Life insurance
policies are considered modified endowment contracts (MECs) if they fail the 7-pay test.
2. Most single premium policies fail the 7-pay test and are classified as MECs. Unlike other life
insurance contracts, withdrawals and loans from MECs are included in the policyowner's taxable
income to the extent that the cash value of the policy exceeds the premiums paid using LIFO
accounting.
3. Persons under age 591⁄2 may also be subject to an additional tax penalty of 10% on both
withdrawals and loans if there is a gain in the contract. There is neither a penalty nor tax due on
the return of basis in the contract.
4. Once an MEC, always an MEC.
Group Term Life Insurance - CORRECT ANSWER 1. Group term life insurance
premiums up to the first $50,000 of face value paid by the employer are tax exempt to the
employee.
, a. For any amount of group term coverage greater than $50,000, the scheduled premium per
Section 79 Table 1 cost is included in the employee's W-2 compensation income.
b. To qualify for favorable tax treatment, a group life plan must be nondiscriminatory.
Annuities - CORRECT ANSWER Annuities provide a periodic payment (fixed or
variable) for either a fixed period (term certain) or for someone's (could be more than one)
lifetime (life annuity)
Premium funding methods (Annuities) - CORRECT ANSWER Single premium deferred
annuity (SPDA)
Periodic premium deferred annuity (PPDA)
Single premium immediate annuity (SPIA)
Single premium deferred annuity (SPDA) - CORRECT ANSWER a lump-sum premium
with an annuitization period deferred until some point in the future. The premium earns interest
that accrues tax deferred.
Periodic premium deferred annuity (PPDA) - CORRECT ANSWER allows periodic,
variable contributions where earnings accumulate tax deferred and are distributed sometime in
the future.
Single premium immediate annuity (SPIA) - CORRECT ANSWER the annuity payments
to the annuitant begin one payment period following the premium payment (e.g., structured
settlements, retirement plan distributions).
Annuity Payout Options - CORRECT ANSWER 1. Fixed period—payments continue to
the annuitant for a specified term, and to a designee if the term exceeds the annuitant's life. The
insurer determines the amount of the payment based on the period selected.
2. Fixed amount—payments are made periodically in a fixed amount determined by the
annuitant. The insurer determines the length of time for which payments can be made.
3. Straight life annuity—payments continue until the death of the annuitant.
