Chapter 6 Federal Tax Considerations for Life Insurance and Annuities

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?

$3,000

What is taxable?

excess cash value and interest on dividends

Exclusion ratio

method of determining which part of an annuity payment is taxable

What is not taxed in permanent life products?

policy dividends and death benefit

A tax sheltered annuity is a special tax-favored retirement plan available to

certain groups of employees only

Which of the following is true regarding dividends in participating policies? Dividends are taxable only after a certain amount is accumulated naturally Dividends are taxable in some life insurance policies and nontaxable in others Dividends are considered income for tax purposes Dividends are not taxable

Dividends are not taxable

What concept is associated with exclusion ratio?

annuities payments

Modified Endowment Contract

any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract

If an insured surrenders his life insurance policy, what is true regarding the cash value of the policy?

it is only taxable if the cash value exceeds the amount paid for premiums

What is not tax deductible in permanent life products?

premiums and policy loans

In life insurance policies, cash value increase grow

tax deferred

Which of the following is not an allowable 1035 exchange? A life insurance policy is exchanged for an annuity A whole life insurance policy is exchanged for term policy A whole life insurance policy is exchanged for a universal life insurance policy An annuity is exchanged for another annuity

A whole life insurance policy is exchanged for a universal life insurance policy

An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true? He will have to pay a penalty regardless of his age He will not have to pay a penalty, regardless of his age He cannot withdraw money from his MEC before age 59 1/2 He will have to pay a penalty if he is younger than 59 1/2

He will have to pay a penalty if he is younger than 59 1/2

What is the tax consequence of amounts received from a Traditional IRA after the money was left in the tax-deferred account by the beneficiary?

Income tax on distributions and no penalty

What type if retirement account does not require the owner to start taking distributions at age 72?

Roth IRA

What part of the Internal Revenue code allows the owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?

Section 1035 Policy Exchange

What type of annuity activity will cause immediate taxation of the interest earned

Surrendering the annuity for cash

All of the following employees may use a 403(b) plan except A part time classroom aide The vice president of a charitable organization The CEO of a private corporation A school bus driver

The CEO of a private corporation