I have no idea what corridor test is....and I have no idea what pure insurance is...and what is cash value test? Let me do some research on the web.
The corridor test relates to the amount of pure insurance in a contract. If a policy fails to meet the cash value test, the tax implications are significant.
All of the following statements are true EXCEPT:
1) Correct: The corridor test deals with the relationship between the cash value and death benefit at a point in time.
2) Correct: If an insured is 35 years old, the total death benefit cannot be less than 250% of the cash value. ????? Where this come from?
3) Correct: If the cash value of a 40-year-old insured's policy is $100,000, the death benefit must be at least $250,000. ????? Why?
4) Not correct: After age 60 the cash value ratio begins to scale down.
Correct answer is: After age 40 the cash value ratio begins to scale down. By the time the insured reaches 95 years of age, the cash value may be equal to the death benefit. The difference between the cash value and the death benefit is the corridor.
DEFINITION of 'Guideline Premium And Corridor Test (GPT)' BREAKING DOWN 'Guideline Premium And Corridor Test (GPT)' Being able to pass the guided premium and corridor test is incredibly important to a policyholder as well as the insurer. If an insurance product fails to pass the test, it is no longer considered an insurance product, and is thus taxed like an investment. Insurance policies are able to grow in value on a tax-deferred basis, with death benefits being exempt from income tax. Most other investments are taxed as ordinary income, meaning that failing to pass the test will lead to a higher tax rate.
The GPT method is used when the policyholder wants to pay the maximum amount of premiums while maintaining a variable death benefit, or wants to maximize the amount of cash that he or she can accumulate in the policy more so than he or she is interested in maximizing the death benefit. Rather than focusing on the death benefit available at life expectancy, the GPT is used when the policyholder wants to maximize benefits at a much later age (such as 100).
In addition to the guided premium and corridor test, an insurer has the option of designing a policy so that it passes the cash value accumulation test, or CVAT. The CVAT limits the cash value relative to the death benefit, unlike the GPT, which limits the premiums relative to the death benefit. The insurer must indicate which test is going to be used on the issue date, and once the policy is issued the insurer cannot decide to use the other test option instead.
The choice of test can determine what the policy premiums, cash value, and benefits will be. A test used to determine whether an insurance product can be taxed as an insurance rather than as an investment. The guideline premium and corridor test, or GPT, limits the amount of premiums that can be paid into an insurance policy relative to the policy’s death benefit.
The corridor test relates to the amount of pure insurance in a contract. If a policy fails to meet the cash value test, the tax implications are significant.
All of the following statements are true EXCEPT:
1) Correct: The corridor test deals with the relationship between the cash value and death benefit at a point in time.
2) Correct: If an insured is 35 years old, the total death benefit cannot be less than 250% of the cash value. ????? Where this come from?
3) Correct: If the cash value of a 40-year-old insured's policy is $100,000, the death benefit must be at least $250,000. ????? Why?
4) Not correct: After age 60 the cash value ratio begins to scale down.
Correct answer is: After age 40 the cash value ratio begins to scale down. By the time the insured reaches 95 years of age, the cash value may be equal to the death benefit. The difference between the cash value and the death benefit is the corridor.
DEFINITION of 'Guideline Premium And Corridor Test (GPT)' BREAKING DOWN 'Guideline Premium And Corridor Test (GPT)' Being able to pass the guided premium and corridor test is incredibly important to a policyholder as well as the insurer. If an insurance product fails to pass the test, it is no longer considered an insurance product, and is thus taxed like an investment. Insurance policies are able to grow in value on a tax-deferred basis, with death benefits being exempt from income tax. Most other investments are taxed as ordinary income, meaning that failing to pass the test will lead to a higher tax rate.
The GPT method is used when the policyholder wants to pay the maximum amount of premiums while maintaining a variable death benefit, or wants to maximize the amount of cash that he or she can accumulate in the policy more so than he or she is interested in maximizing the death benefit. Rather than focusing on the death benefit available at life expectancy, the GPT is used when the policyholder wants to maximize benefits at a much later age (such as 100).
In addition to the guided premium and corridor test, an insurer has the option of designing a policy so that it passes the cash value accumulation test, or CVAT. The CVAT limits the cash value relative to the death benefit, unlike the GPT, which limits the premiums relative to the death benefit. The insurer must indicate which test is going to be used on the issue date, and once the policy is issued the insurer cannot decide to use the other test option instead.
The choice of test can determine what the policy premiums, cash value, and benefits will be. A test used to determine whether an insurance product can be taxed as an insurance rather than as an investment. The guideline premium and corridor test, or GPT, limits the amount of premiums that can be paid into an insurance policy relative to the policy’s death benefit.
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