1. Bentley has paid $40,000 in premiums on a whole life policy with a $250,000 death benefit. The policy has paid a dividend of $1,000 per year for the past 10 years. If Bentley surrenders the policy today for its cash value of $55,000, what will be the amount of gain subject to taxation?

A. $55,000

B. $25,000

C. $0

D.$15,000

2. Which of the following statements is true regarding a Section 1035 exchange of life insurance policies?

A. Lucas can make a 1035 exchange of a policy on his life for a policy on the life of his spouse.

B. Athena can exchange her annuity for a life insurance policy under a Sec. 1035 exchange.

C. If Theo enters into a 1035 exchange of his whole life policy for a variable life policy there will be no tax on the exchange and the cost basis will carry over from the old policy to the new policy.

D. Apollo, who has surrendered his universal life policy, can accomplish a 1035 exchange by using the cash surrender value to purchase another life insurance policy within 60 days of surrender.

3. Which of the following statements regarding entity purchase buy-sell agreements is correct?

A. When an owner dies, the death benefit received by the business is income tax-free as long as the rules of IRC Sec. 101(j) have been followed.

B. The business entity will purchase a life insurance policy on each owner and will pay the premiums, which are tax deductible as a business expense.

C. When one of the owners dies, the surviving owners will have an increased cost basis in their share of the business.

D. If the business has five owners, 20 life insurance policies must be purchased.

4. All of the following statements concerning non-qualified deferred compensation are correct EXCEPT:

A. An employer is permitted to discriminate in favor of key executives in offering plan benefits.

B. A Rabbi trust provides the employee with protection against both a change in control and employer insolvency.

C. Nonqualified deferred compensation is frequently used as a tool to retain key employees (golden handcuffs).

D. A secular trust becomes taxable to the employee when there is no longer a substantial risk of forfeiture.

5. Redball Inc. would like to use key employee life insurance to provide protection in the event of the death of the owner and key employee, Red Baldwin. Which of the following is correct regarding the key employee insurance?

A. Red will own a policy on his own life and Redball, Inc. will pay the premiums and be the beneficiary of the policy.

B. Redball, Inc. will be the policy owner, premium payer, and beneficiary of a policy on Reds life.

C. Redball, Inc. will own a policy on Reds life and pay the premiums on the policy, and Reds spouse will be the beneficiary of the policy.

D. Red will own the policy on his own life, Redball, Inc. will pay the premium, and Reds spouse will be the beneficiary of the policy.