TOOLS & TECHNIQUES OF LIFE INSURANCE PLANNING



TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING

11th Edition

College Course Materials

Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®

Associate Professor

CFP® Program Director

Personal Financial Planning Department

University of Missouri-Columbia

Please Note: Correct answers for each question are indicated in bold type. After each question, the number of the page containing information relevant to answering the question is given. When a calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale for the correct answer is also given.

Part B: Employee Benefit Planning

Life Insurance Plans

Chapter 44: Death Benefit Only (DBO) Plan

True/False

44.1 A death benefit only plan can replace a split dollar plan when an employee’s share of insurance protection increases rapidly due to age.

44.2 Benefits in a death benefit only plan can be based on an employee’s average compensation over a specified period of time

44.3 Benefits paid to the employee’s beneficiary under a death benefit only plan are taxable in full to the beneficiary as ordinary income

Answers:

44.1 True [p. 337]

44.2 True [p. 338]

44.3 True [p. 337]

Multiple Choice

44.4 Disadvantages of a death benefit only plan include all of the following except:

a. entire benefit is taxed as ordinary benefit when received by beneficiary

b. keeping the death benefit out of the insured’s gross estate requires careful and complex planning

c. ways of structuring the plan’s benefit formula are quite limited

d. employer’s tax deduction is delayed until funds are paid to a beneficiary

e. advance funding of the plan does not change the need for employer to wait for the tax deduction

Answer: C [pp. 337-338]

44.5 The benefit formula of a death benefit only plan can be:

a. a fixed dollar amount for each employee covered under the plan

b. based on average compensation over a period of time

c. tied dollar for dollar to a life insurance policy

d. all of the above

e. only a and b

Answer: E [p. 338]

44.6 Alternatives to a death benefit only plan include which of the following?

a. employer provided group-term life insurance

b. life insurance in a qualified plan

c. individually owned life insurance

d. all of the above

e. only a and b

Answer: D [p. 339]

Application

44.7 Arthur Beech turned 67 this year. Arthur has a split dollar plan with his employer, Seashore Rental Properties. Arthur could replace this split dollar plan with a death benefit only plan and reduce his expenditures for insurance while still retaining a death benefit.

a. true

b. false

Answer: A [p. 337]

44.8 Astro Corporation is considering whether or not to finance its death benefit only plan obligation in advance. Astro Corp. wants to avoid having to meet ERISA requirements. Astro Corp. should use

a. a formally funded plan

b. an informally funded plan

Answer: B [p. 339]

44.9 Zeta Corporation is using life insurance to provide a $200,000 death benefit to the beneficiary or estate of T. A. Gordon, a key executive. Zeta Corp. expects to be in a 34% tax bracket when the benefit is paid, so a $132,000 policy has purchased on Gordon’s life. Zeta Corp. is the owner and beneficiary of the policy and pays the premiums. When Gordon dies, which of the following is true?

a. Zeta Corp. pays out $200,000 to beneficiary and deducts $200,000 as compensation

b. The transaction saves $68,000 in taxes

c. death proceeds from the policy are tax free to the corporation (if there is no alternative minimum tax)

d. all of the above

e. only a and b

Answer: D [p. 340]

44.10 Howard Bigwig has a death benefit only plan with his employer. Which of the following situations would cause Howard’s death benefit to be included in Howard’s estate?

a. If Howard has the right to change the beneficiary

b. if the beneficiary is a revocable trust established by Howard who also retains the right to change terms of the trust

c. Howard has a controlling interest (greater than 50% shareholder) in the company

d. all of the above

e. only a and b

Answer: D [p. 340]

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