Federal Tax Considerations for Life Insurance and Annuities

What is the name for an overfunded life insurance policy?

A Modified Endowment Contract (MEC)

According to the taxation rules of life insurance policies, how are cash value increases taxed?

Cash value growth is tax deferred

What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?

Death benefits are generally not subject to income taxes

Why are dividends in life insurance policies not taxable?

Dividends are not considered income for tax purposes; they are a return of unused premium

In a direct rollover, how is the money transferred from one retirement plan to a new one?

From trustee to trustee

What portion of a nonqualified annuity payment would be taxed?

Interest earned on principal

If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?

Interest only

Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?

No, lump sum benefits are received tax free

Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

Only the portion in excess of the premium paid

What is the main purpose of the 7 pay test?

To determine if a life insurance policy is a Modified Endowment Contract

When would life insurance policy proceeds be included in the insured's taxable estate?

When there is an incident of ownership at the time of death