Federal Tax Considerations for Life Insurance and Annuities

Life insurance death proceeds are

Generally not taxed as income.

When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the Interest Settlement Option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on

$11,000.

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

A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called

1035 Exchange

Which of the following is NOT an allowable 1035 exchange?

A whole life insurance policy is exchanged for a term insurance policy.

Which of the following is NOT true regarding policy loans?

Money borrowed from the cash value is taxable.

For an individual who is NOT covered by an employer-sponsored plan, IRA contributions are

Tax deductible

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?

Interest only

Which of the following is true regarding taxation of dividends in participating policies?

Dividends are not taxable.

Which of the following is used to determine the annuity amounts that are not taxable?

Exclusion ratio

When must an IRA be completely distributed when a beneficiary is not named?

December 31 of the year that contains the fifth anniversary of the owner's death.

Which of the following statements is TRUE concerning whole life insurance?

Lump-sum death benefits are not taxable.

If taken as a lump sum, life insurance proceeds to beneficiaries are passed

Free of federal income taxation.

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement option

Which of the following best describes taxation during the accumulation period of an annuity?

Taxes are deferred