Module 4 Review Questions — Nonqualified Plans — Wall Street Instructors

Group carve-out plans replace group term life insurance coverage in excess of $50,000 with individually owned universal life insurance policies for selected executives. The plan eliminates Table I imputed income costs, removes nondiscrimination concerns for the employer, and provides executives with portable, flexible coverage that continues beyond retirement.

Key tax principles: the group term premium is deductible by the employer as an employee benefit; the universal life premium is deductible as compensation to the executive and is included in the executive’s taxable income. Cash values grow tax-deferred, and FIFO withdrawal treatment applies as long as the policy is not a modified endowment contract.

The correct answer to each question is shown in green. Click any question to review the relevant section of the study text.

Review Questions

1

Tom is covered by a group carve-out plan. Which of the following statements about coverage under his universal life insurance policy are CORRECT?

Tom may continue insurance coverage after retirement

Tom may continue coverage if he leaves his job

Tom can make voluntary contributions to the universal life insurance policy that will grow tax-deferred

✓All of the above

2

What happens to an employer’s costs when it installs a group carve-out plan?

Costs may increase

✓Costs may decrease

Both A and B

Neither A nor B

3

Which of the following are employer benefits under group carve-out plans?I. No plan discrimination concerns II. Current income tax deduction for premiums III. Cost increase is offset by premium deductions

I only

✓I and II only

I and III only

II only

4

Under a group carve-out plan, which of the following is CORRECT?

The premiums paid for the group term life insurance are deductible by the employer as an employee benefit

The premiums paid for the universal life insurance policy are deductible by the employer as compensation

✓Both A and B

Neither A nor B

5

If Dan receives $150,000 of coverage under a group term life insurance plan, he must report the value of what amount as taxable income?

$50,000

✓$100,000

$150,000

None must be reported

6

Under a group carve-out plan, the Table I cost to the executive is:

Increased

Reduced

✓Eliminated

Maintained at the same level

7

Who owns the universal life insurance policy under a group carve-out plan?

✓The executive

The employer

Both the executive and the employer

Neither the executive nor the employer

8

What type of life insurance is normally used to replace excess group term life insurance in a group carve-out plan?

Term insurance

Whole life insurance

✓Universal life insurance

Endowment insurance

9

What is the government table on which excess group term insurance amounts are taxed?

P.S.58 rates

Table 2001 rates

✓Table I rates

P.S.38 rates

10

John Wilson’s employer pays $400/year for his group term life insurance and $600/year for his group carve-out universal life policy. If John is in a 25% tax bracket, how much additional income tax will he pay as a result of these premium payments?

$100

✓$150

$250

Nothing

11

Which of the following would NOT be an employee benefit of participation in a group carve-out plan?

Post-retirement death benefits

Portability

✓Tax-deferral of employer premium payments

Supplemental executive retirement income

12

What are the consequences if a group term life insurance plan is deemed discriminatory?

The employer is fined

✓Its tax advantages may be lost

The plan is disqualified

The employees are subject to tax audit

13

In a group carve-out plan, group term life insurance amounts in excess of ________ are replaced by individual life insurance policies.

✓$50,000

$75,000

$100,000

$250,000

14

The employer’s premium for group term life insurance is tax-deductible to the employer as:

Additional compensation

Bonus compensation

✓An employee benefit

A dividend

15

The employer’s premium for the individual life insurance policies issued in the group carve-out plan is tax-deductible to the employer as:

✓Compensation

An employee benefit

A dividend

A charitable contribution

16

What happens to the $50,000 of group term life insurance in a group carve-out plan if the executive terminates service with the employer?

✓The coverage terminates

The coverage is portable and stays with the executive

The coverage reduces by 50%

The coverage becomes fully paid-up for the executive

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