L/A/H Insurance . C8.Tax Treatment of Life Insurance and Annuities . Questions

Death taxes assessed by the government upon the assets of a decedent are known as: A. Income Taxes B. Federal Estate Taxes C. Probate Fees D. Estate allocation taxes

B

TRUE statements regarding the taxation of a whole life insurance policy would include which of the following? A. Cash value growth is taxable in the year it is earned. B. Death benefits are taxable. C. Death benefits are received tax-free and cash value growth is tax-deferred. C. Death benefits are taxable and cash value growth is tax-deferred.

D A life insurance death benefit is always received tax-free. The cash value that grows inside a whole life policy grows on a tax-deferred basis.

Under what condition is the cash value in a MEC not taxable? A. When funds are distributed to the policyowner B. When the policy is surrendered for its cash value C. While it accumulates D. While proceeds are capitalized

C

In order to sell a variable product, an agent needs both an insurance license and a license issued by FINRA, formerly the NASD. How does the cash value grow inside a variable life policy? A. Tax-deferred B. Tax-free C. Gains are taxable in the year they are earned D. Tax-based adjusted

A

According to the Internal Revenue Code, premiums paid on life insurance policies are: A. tax-deductible. B. not tax-deductible. C. income taxable. D. not income taxable.

B

A qualified annuity provides an income that is: A. nontaxable upon withdrawal B. tax-free upon withdrawal C. taxable upon withdrawal D. taxable upon withdrawal on a local level only

C

The ____ pay test helps determine if a policy will be considered a modified endowment contract (MEC) or not. A. 3 B. 4 C. 7 D. 10

C

An annuity grows tax-deferred during: A. the annuity phase B. the pay-out period C. the distribution period D. the accumulation period

D

Can a whole life policy that is determined by the IRS to be a MEC, ever be considered a whole life policy again? A. Yes once the owner turns age 59 1/2 B. Yes, after 7 years C. Yes, upon the owner receiving SS benefits D. No

D

Mr. Gleason is covered by a $150,000 life insurance policy. Mrs. Gleason is the primary beneficiary. Following the death of Mr. Gleason, Mrs. Gleason leaves the death proceeds with the insurer but wishes to receive interest payments. During the current year she receives $500 per month in interest. Which of the following is going to be taxable? A. $500 B. $6,000 C. $150,000 D. $156,000

B

Tad surrenders his whole life policy and receives $10,000. His total premium paid during the past 15 years was $8,000. How much of the surrender value will be taxable? A. None B. $2,000 C. $8,000 D. $10,000

B

When the beneficiary of an annuity receives monthly payments considering of both principal and interest, which of the following will be taxable? A. Principal Only B. Interest Only C. Principal and Interest D. Neither Principal nor Interest

B

Which of the following is not true with regard to a 1035 Exchange? A. It allows for the transfer or assignment of an existing policy to the insurer who replaces it with another of like kind B. Once begun, the exchange must be completed within 30 days C. This involves the exchanging of less competitive policy with a more competitive one D. It is an IRS rule permitting the exchange of similar policies with no immediate tax consequences

B

Which of the following is not true with regard to a whole life insurance policy loan? A. a policy loan that is not repaid will be deducted from the face amount upon the death of the insured B. funds borrowed against the cash value are taxable income C. an unpaid loan may be subtracted from the cash surrender value D. an insurer may assess an interest charge on a policy loan

B

The continual increase of cash value in a whole life policy: A. May be subject to taxation when withdrawn if the policy fails the seven-pay test B. Will never be subject to taxation C. Will always be subject to taxation D. Will be subject to taxation as soon as the policy is classified as a MEC

A

Klondike has a policy that has been classified as a Modified Endowment Contract (MEC) because it has failed to meet the requirements of the 7 pay test. The policy has a $2,000,000 death benefit and $300,000 in cash value. Klondike, who is age 55, withdrawals $125,000 from the cash value as a loan. How much of this $125,000 will be subject to taxation? A. 10% B. 20% C. 90% D. 100%

A Generally, policy loans do not create a taxable event, unless the policy has been determined to be a MEC. If so, the entire amount of the loan will be taxable, as well as any other policy distribution. In addition, there will be a 10% IRS penalty because the money was taken prior to age 59 1/2.

All of the following statements are FALSE regarding the taxation of a whole life insurance policy EXCEPT: A. Cash value growth is taxable in the year it is earned B. Death benefits are taxable C. Death benefits are received tax-free and cash value growth is taxed-deferred D. Death benefits are taxable and cash value growth is tax-deferred.

C

Federal and State Death taxes must be paid within what period of time following the decedent's death? A. 6 months B. 8 months C. 9 months D. 12 months

C

Handsome Harry surrenders his existing whole life policy for the $106,000 in cash value. During the time the policy was in force he paid $80,000 in insurance premiums. What will be the tax effect be, if any? A. There are no tax consequences B. the $106,000 is received tax-free C. The $80,000 is received tax-free and the $26,000 is taxable D. The $80,000 is taxable and the $26,000 is tax-free

C

Section 1035 of the IRC allows for the exchange of certain life insurance or annuity products. All of the following would be permitted exchanges under this IRS regulation, EXCEPT: A. Exchanging a variable life policy for another variable life policy B. Exchanging a life insurance policy for an annuity C. Exchanging an annuity for a life insurance policy D. Exchanging an endowment for an annuity

C

If a life insurance policy becomes a modified endowment contract, it may revert back to an ordinary life policy within: A. 1 year B. 3 Years C. 7 Years D. It is not allowed to revert back to an ordinary life contract

D

If an annuity owner dies during the pay-in phase and prior to the pay-out phase, the beneficiary will receive the greater of the accumulated value of the annuity or the amount of contributions. Any amount received in excess of premiums paid is: A. non-taxable B. taxable C. taxable in the year following receipt D. taxable as ordinary income

D

In most cases, a policy loan does not create any taxation issues unless the policy: A. less than 10 years old B. Is more than 7 years old C. Is less than 7 Years old D. is considered a MEC

D

Probate would be required in which example below? A. a death benefit is left to a child B. a death benefit is left to a life partner C. a death benefit is left to the insured's alma mater D. a death benefit is left to the deceased's estate

D

When can a whole life policy, that is determined by the IRS to be a modified endowment contract (MEC), become a Whole life policy again? A. After the owner turns age 59 1/2. B. After 7 years. C. Upon the owner receiving Social Security benefits. D. Never

D

Albert transfers his life insurance policy to Walter two years before Albert's death. Which of the following statements is true with regard to this scenario? A. The interest paid on the cash value is taxable to Walter upon transfer B. The entire face amount will be included in Albert's estate C. The transfer of the policy is considered a 1035-A exchange D. Since the policy has been transferred, the value will not be included in the estate if either.

B

Which of the following types of property would NOT be included in an insured's estate for the purpose of determining federal estate taxes? A. Life insurance death benefit B. Value of personal residence C. The value of a personal retirement account D. Property that has been gifted 5 years prior to the insured's death

D

Which of the following was designed to reduce or prevent the purchase of whole life insurance for the purpose of short-term investment gain? A. The tax reform act of 1987 B. Exclusion ratio C. The 1/6th rule D. 7-Pay test

D

Which of the following statements is TRUE regarding taxation? A. Life insurance death benefits are taxable. B. Insurance dividends are both guaranteed and taxable as income. C. Cash value growth is taxable in the year it is earned. D. Interest is taxable.

A Interest is always taxable. Also, the death benefit of a life insurance contract is not taxable to the beneficiary. Insurance dividends are never guaranteed, and since they are considered a return of an overpaid premium they are not taxable as an income. Finally, remember that the cash value that grows within a life insurance contract is tax-deferred. This means that the "gains" are not taxable until withdrawn.

Which of the following statements is FALSE with regard to a whole life insurance policy loan? A. A policy loan that has not been repaid will be deducted from the face amount upon the death of the insured. B. Funds borrowed against the cash value are considered taxable income C. An unpaid loan may be subtracted from the cash surrender value D. An insurer may assess an interest charge on a policy loan

B

The _______ Pay Test helps determine if a policy will be considered a MEC or not. A. 3 B. 4 C. 7 D. 10

C

What taxation issues are present when a policyowner decides to leave dividends payable with the insurer to accumulate at interest? A. If paid on dividends, the interest is not taxable B. Dividends are considered taxable, and so is the interest earned C. Dividends are received tax-free, but any interest earned will be taxable as ordinary income. D. The interest is tax-exempt because it was earned by investing a tax-free dividend

C

What taxation issues are present when a policyowner decides to leave dividends payable with the insurer to accumulate interest? A. If paid on dividends, the interest is not taxable. B. Dividends are considered taxable, and so is the interest earned. C. Dividends are received tax-free, but any interest earned will be taxable as ordinary income. D. The interest is tax-exempt because it was earned by investing a tax-free dividend.

C

Which of the following is income taxable as ordinary income? A. Death benefit B. Return of Principal C. Interest paid on life insurance proceeds D. Estate taxes

C

Which of the following statements is TRUE concerning a life insurance contract being classified as a MEC? A. Withdrawals are taxed on a last in, first out basis B. Distributions made prior to age 59 1/2 will receive a 10% penalty C. all distributions become taxable. D. All the above are true.

D

Which of the following statements is TRUE concerning a life insurance contract being classified as a modified endowment contract (MEC)? A. Withdrawals are taxed on a last in, first out basis. B. Distributions made prior to age 59 1/2 will receive a 10% penalty. C. All distributions become taxable. D. All the above are true

D

Which of the following statements regarding taxation is TRUE? A. Life Insurance death benefits are taxable. B. Insurance dividends are guaranteed C. Cash value interest is taxed in the year it is earned D. Interest earned is taxable

D

A corporation may purchase an annuity. However, it must identify a natural person as the annuitant. If the firm fails to do this, which of the following will occur? A. Interest earned during the year will be taxable to the firm B. Distributions may not be made until an annuitant is named C. Funds in the account will be forfeited to the insurance company D. An annuitant need not be named if the contract is owned by a corporation

A

How does the cash value grow inside a variable life policy? A. Tax-Deferred B. Tax-Free C. Gains are taxable in the year they are earned D. Tax-based adjusted

A

This IRS rule allows for a tax-free exchange of values between like policies. A. 1035 exchange B. IRS 1040/W-2 C. WD 40 D. The IRS does not allow these exchanges.

A

A modified endowment contract is not a type of a life insurance policy. It is an IRS classification of a life insurance policy meaning that the contract has not satisfied the 7 pay test. All of the following statements are true regarding a MEC, EXCEPT: A. any gain received is taxed first with the investment received after the gain B. the policyowner may receive distributions at any time without being penalized C. funds received by the policyowner are considered to be excess amounts of cash value over premiums paid and are taxable D. Funds received by the policyowner are taxable in the year received.

B

According to the Internal Revenue Code, premiums paid on life insurance policies are: A. Tax-Deductible B. Non Tax-Deductible C. Income Taxable D. Not Income Taxable

B

Premiums paid on life insurance are: A. Tax-Deductible B. Not Tax-Deductible C. Income Taxable D. Not Income Taxable

B

Prior to what age will a premature distribution from a qualified plan be subject to both an IRS imposed 10% penalty as well as taxes? A. Age 55 B. Age 59 1/2 C. Age 60 D. Age 65

B

Which of the following statements is NOT TRUE with regard to a Whole life insurance policy loan? A. A policy loan that has not been repaid will be deducted from the face amount upon the death of the insured. B. Funds borrowed against the cash savings value are taxable income. C. An unpaid loan may be subtracted from the cash surrender value. D. An insurer may assess an interest charge on a policy loan.

B

Josie Joseph surrenders her existing Whole life policy for the $36,000 in cash. During the time the policy was in force, she paid $29,000 in insurance premiums. What will the tax effect be, if any? A. There are no tax consequences. B. $36,000 is received tax-free. C. $29,000 is received tax-free and the $7,000 is taxable. D. $29,000 is taxable and $7,000 is tax-free

C

What section of the IRC allows for the transfer of assets between like policies without incurring any taxation or premature distribution penalties? A. 401(k) B. 1067 Exchange C. 1035 Exchange D. 403(b)

C

What section of the Internal Revenue Code allows for the transfer of like policies without any taxation or penalty? A. Rollover B. 1067 exchange C. 1035 exchange D. 403(b)

C

When the annuity phase commences, each payment made is comprised of a non-taxable return of principal and a taxable return of: A. periodic benefits B. premiums C. interest D. expenses

C

In most cases, a policy loan does not create any taxation issues unless the policy: A. Is less than 1 year old. B. Is less than 7 years old. C. Is less than 10 years old D. Is considered a MEC

D

Which example below would require the death benefit to go through probate? A. Benefit is left to a wife. B. Benefit is left to a child. C. Benefit is left to the American Cancer Society. D. Benefit is left to the deceased's estate.

D

Which item below would be included in the overall estate value of a deceased individual? A. Annuity values B. A retirement home C. Life Insurance Death Benefit D. all of the above

D

Which item(s) below would be included in the overall estate value of a deceased individual? A. Annuity values B. A retirement home C. Life insurance death benefit D. All of the above

D