Which of the following best describes the seven pay test?
Asked by: Miss Adelia Streich MD | Last update: February 11, 2022Score: 4.5/5 (61 votes)
The seven-pay test is best described as: The seven-pay test assures that life insurance policies meet the legal definition of life insurance and do not become MECs. The correct answer is: Premiums paid in a seven-year period cannot be more than the total annual premiums in a seven-year paid-up policy.
What is the purpose of 7-pay test?
The 7-pay test compares the cumulative premium paid with the net level premium (the amount necessary to pay up the policy). A policy will fail the test if, at any time during the first seven contract years, the cumulative amount paid under the contract exceeds the sum of the net level premiums.
What is the main purpose of the 7-pay test quizlet?
What is the main purpose of the Seven-pay Test? It is a test to determine a life insurance policy is funded properly and therefore qualifies for the favorable tax treatment that is provided to life insurance policies.
When a life insurance policy becomes a MEC What are the tax consequences quizlet?
Withdrawals are taxed similarly to those of a non-qualified annuity. For withdrawals before the age of 59 1/2, a penalty of 10% may apply. As with traditional life insurance policies, MEC death benefits aren't subject to taxation.
Who pays tax on personal life insurance given as a gift?
Terms in this set (165) Who pays tax on personal life insurance given as a gift? Life insurance given as a gift may be subject to a federal gift tax, which is paid by the giver of the gift.
Series 7 Exam Prep Practice Test 2 125 questions EXPLICATED.
Which of the following best describes the seven pay test quizlet?
The seven-pay test is best described as: The seven-pay test assures that life insurance policies meet the legal definition of life insurance and do not become MECs. The correct answer is: Premiums paid in a seven-year period cannot be more than the total annual premiums in a seven-year paid-up policy.
Can I transfer my life insurance policy to my child?
When gifting a life insurance policy to children, keep in mind that you'll be responsible for keeping the policy active by making regular premium payments. Once the child is an adult, you can transfer ownership of the policy to them.
When a life insurance policy becomes a MEC What are the tax consequences?
When a permanent life insurance policy becomes an MEC, you can no longer make tax-free withdrawals from the cash value. Before age 59 ½ you'll pay taxes and a 10% fee to access your money. After age 59 ½ you'll still pay taxes, but with no additional penalty.
How is a life insurance policy affected when it becomes a MEC?
When your life insurance policy gets turned into an MEC, its tax treatment changes. Your withdrawals from the policy are treated like a nonqualified annuity Opens in new window. Like nonqualified annuities, MECs act as investment products that are funded with after-tax dollars.
What is a life insurance policy dividend?
A dividend is a return of a portion of the premiums paid on your policy. Because our participating life policies may pay dividends, their value is enhanced.
Which of the following best describes what the annuity period is?
Which of the following best describes what the "annuity period" is? The "annuity period" is the time during which accumulated money is converted into an income stream.
Which of the following best describes taxation during the accumulation period of an annuity?
Which of the following best describes taxation during the accumulation period of an annuity? Taxes are deferred.
What is the mode of premium payment?
Your mode of premium payment determines the frequency with which payments are made. It also determines the way in which you make payments, such as by cash, check, credit card, or another option.
How is the 7 pay test calculated?
The 7-pay test examines the cumulative amount paid under a contract during the first seven policy years. This amount is compared to the sum of the net level premiums that would have been paid on a guaranteed seven-year pay whole life policy providing the same death benefit.
What does MEC mean in insurance?
Minimum Essential Coverage (MEC) Any insurance plan that meets the Affordable Care Act requirement for having health coverage.
What is the 7 pay limit?
The 7 Pay Test essentially says that in order for a life insurance policy to remain life insurance, it cannot receive a premium larger than the premium necessary to make it paid-up after seven years.
What is the 7-pay test for life insurance?
The 7-pay premium limit is a level annual amount of money that can be put into a cash value life insurance policy during each of the first seven policy years (or the first seven years after a material change in the policy, e.g. an increase in the face amount).
When a life insurance policy does not pass the <UNK> pay test it becomes classified as a MEC?
D. When a life insurance policy does not pass the 7-pay test, it will be deemed a MEC.
What are the disadvantages of MEC?
There are some cons of a MEC that you will want to avoid if your policy is not currently considered a Modified Endowment Contract. If your policy becomes a MEC, this advantage (FIFO) goes away and the policy is treated like a typical retirement vehicle, such as a non qualified annuity.
How much taxes do you pay on a life insurance policy?
In general, life insurance proceeds are not taxable. There are a few exceptions where the death benefit may be subject to estate tax or gift tax, but this only applies if the overall value of your estate exceeds federal or state limits.
How are MEC policy loans taxed?
Taxation of MECs
Any loans or withdrawals from an MEC are taxed on a last-in-first-out basis (LIFO) instead of FIFO. Therefore, any taxable gain that comes out of the contract is reported before the nontaxable return of principal.
What type of life insurance incorporates flexible premiums?
What type of life insurance incorporates flexible premiums and an adjustable death benefit? Universal Life is designed to provide flexible premiums and an adjustable death benefit.
Can owner and beneficiary be same person?
The owner of a life insurance policy has control over the policy. ... The policyowner and beneficiary can also be the same person, but the insured and beneficiary cannot be the same person.
Can I gift LIC policy?
“In the case of the life assured being an adult, you cannot directly gift a life policy,” she added. ... Nominating your immediate family — spouse, children or dependent parents — in your life insurance policy is also a way to secure the financial future of the family in your absence.
Is life insurance considered a gift?
If you transfer a life insurance policy to a beneficiary, tax authorities regard the transaction as a gift. Under current gift tax rules, if you transfer a policy with a present value of more than $16,000 to another person, gift taxes will be assessed.