BLAW 480 Quiz on Ch.11 Life Insurance

Which of the following is NOT a major type of insurance used in estate planning?

• Universal life insurance

• Whole life insurance

• Term life insurance

• Custodial life insurance

Which of the following statements about insurance and annuities is FALSE?

• The beneficiary of a life insurance policy is the person who receives the proceeds of the policy after the insured life's death.

• The cash surrender value of a life insurance policy is the amount payable by the insurance company to the beneficiary.

• Term insurance does not have cash value.

• Annuities are contracts that pay income to someone yearly during their lifetime.

Answer explanation

The cash surrender value of an insurance policy is paid to the owner, not the beneficiary.

All other statements are true.

The beneficiary receives the proceeds after the insured's death.

Term insurance does not accumulate value and thus has no cash value to be paid to the owner.

Annuities are contracts that pay someone -- for us the grantor of property exchanged for the income payments -- during their lifetime.

Which of the following terms describes an insurance policy that covers the lives of two people and has proceeds paid out only after BOTH those insured lives have died?

• A variable life insurance policy.

• An indexed universal life insurance policy.

• A split-dollar life insurance policy.

• A second-to-die life insurance policy.

Answer explanation

A second-to-die life insurance policy pays only on the death of the second insured life's passing.

If a deceased insured life has "incidents of ownership" in a life insurance policy at the time of their death, the proceeds are included in the insured life's gross estate. When would the decedent NOT be found to have incidents of ownership?

• When the decedent is authorized to change beneficiaries.

• When the decedent assigned the policy proceeds as security for a loan.

• When the decedent can cancel the policy at any time during their lifetime.

• When the decedent did not pay any of the policy premiums.

Answer explanation

The payment of policy premiums by another person or entity who is NOT the insured life would be an argument against incidents of ownership.

All other choices here are incidents of ownership, which is bad juju.

In 2023, gifts of life insurance policies valued at $17,000 may qualify for the annual gift tax exclusion (which IRS has at $17,000 in 2023). Which of the following statements CORRECTLY describes a requirement to qualify for the exclusion.

• The gift must be made within three (3) years of the insured life's death or it will be included in the gross estate.

• The DONEE/RECIPIENT must survive for three years after the gift is made.

• The DONEE/RECIPIENT must have unrestricted right to use, possess, or enjoy the donated property after the gift is received.

• The DONOR must use a Crummey provision.

Answer explanation

All gifts of any property require that the recipient have unrestricted right use, possess, and enjoy the property -- specifically not restricted by the donor.

Justin is the grantor of an ILIT. When he dies, his estate needs cash for funeral costs, final medical expenses, death taxes, etc. How can the proceeds of a life insurance policy in the ILIT be made available to the executor?

• The ILIT terms may authorize the trustee to purchase assets from the estate, or authorize loans to the estate.

• The ILIT terms may only authorize the purchase of assets from the estate.

• The ILIT terms may only authorize loans to the estate.

• The ILIT terms may require that all proceeds be paid to the estate.

Answer explanation

The insurance policy's proceeds MAY NOT go to the estate as beneficiary; doing that would cause the ILIT assets to be included in the grantor's gross estate! However, the ILIT terms have either option -- purchase of assets or loans to the estate -- for making cash available to the executor. But we cannot REQUIRE the trustee to make cash available; doing that would also cause the trust assets to be included in the grantor's estate.

A buy-sell agreement must be funded with insurance or property, true or false?

• True

• False

In a cross-purchase buy-sell agreement funded with life insurance, the entity purchase life insurance on the lives of each owner.

• True

• False

Answer explanation

In a cross-purchase buy-sell agreement, the OWNERS purchase life insurance on the lives of other owners.

If an LLC has five members and must purchase life insurance under a buy-sell agreement, how many insurance policies must it purchase?

• 1

• 5

• 20

• 25

Which of the following statements regarding buy-sell agreements is FALSE?

• Term life insurance is the ideal type of policy used to fund a cross-purchase agreement

• An advantage of an entity agreement is that only one life insurance policy is required on each owner.

• An advantage of a cross-purchase agreement is the ability to increase the surviving owners' basis in their share of the business.

• A wait-and-see agreement is both an entity agreement and a cross-purchase agreement.

Answer explanation

Term vs. permanent depends on the facts surrounding each business and the owners.