A.D. Banker Ch. 7

H has an annuity funded with after-tax contributions. So far, H has placed $10,000 into the policy and it is now worth $25,000. If H cashes out the annuity, what is H's cost basis?

$10,000

To qualify for a tax-free accelerated death benefit, the insured must be given a prognosis of how many months or less life expectancy?

24

A qualified pension plan must meet ___________ requirements.

ERISA

The exclusion ratio states that once the entire cost basis has been recovered from a non-qualified annuity income benefit payout then any further payments are __________.

Fully taxable since the excess payments must represent only earnings

In which of the following situations will the annuity's value be included in the deceased annuitant's estate?

If the annuitant dies during the annuity or payout phase with any remaining value

During the accumulation phase of an annuity, if the contract owner dies and the annuitant is someone other than the owner, the value of the annuity is:

Included in the owner's estate for valuation

Cash values within an ordinary straight whole life insurance policy _______ over time.

Increase

All of the following transactions qualify for IRC Section 1035 exchange tax treatment, except:

Nonqualified tax deferred annuities may be exchanged for life insurance policies

If a taxable event occurs regarding the cash value of a permanent life insurance policy, in virtually every case, the taxable amount is taxed as:

Ordinary income

The cost basis of a life insurance policy is __________.

Premiums paid less dividends or withdrawals

If Charlotte wishes to cash out her annuity at age 58 after having it for over 20 years, what should she know about prior to doing it?

She will face income tax consequences and tax penalties

If an annuitant withdraws funds from their annuity prior to age 59 1/2 what is the tax consequence?

Tax and 10% penalty tax on the withdrawal that represents earnings

Under the Modified Endowment Contract rules the 7-Pay Test is defined as:

The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit

The life insurance policy cost basis consists of:

The premiums paid in

All of the following tax-free exchanges of life insurance and annuities are permitted, EXCEPT ____________.

Annuity to life insurance

When may an employer deduct the premiums it pays for an employee's life insurance benefit?

As long as the business does not derive a direct benefit from the policy

Qualified pension and profit-sharing plans were created by Congress to:

Help employees accumulate assets for retirement and provide tax advantages for contributions made by employers

Under what circumstance would a policy loan in a life insurance policy be taxable?

If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable

A permanent policy is surrendered for its cash value, and that sum is greater than the amount of premiums paid in. How is the excess taxed?

Taxed as ordinary income

Joe had $500,000 of life insurance at work. He has an additional $40,000 life insurance policy the company purchased on all employees. His wife is the primary beneficiary and their four children are contingent beneficiaries. Upon Joe's death, what are the tax consequences to his beneficiaries?

The $540,000 lump sum proceeds will be received income tax-free

In which of the following circumstances is an annuity's tax-deferral benefit lost?

The annuity is owned by a corporation

If a life insurance policy becomes a MEC, what was the cause?

The policy failed the 7-pay test

Generally, life insurance death proceeds are income tax free to the policy beneficiary, except:

When a transfer of ownership has taken place

Unless an exception applies, life insurance proceeds are income taxable in which of the following circumstances?

When a transfer of ownership takes place while the insured was alive