Quiz 6 Federal Tax Considerations for life Insurance & Annuities

An IRA uses immediate annuities to pay out benefits; the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay?

50% tax on the amount not distributed as required

During the accumulation period in a non-qualified annuity, what are the tax consequences of a withdrawal?

Taxable interest will be withdrawn first and the 10% penalty will be imposed if under 59 and a half

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?

Distributions are taxable

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 if he is younger than 59 and a half

What is the main purpose of the Seven-pay Test?

It determines if the insurance policy is a MEC

Which concept is associated with "exclusion ratio"?

Annuity payments

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

Dividends are not taxable

In life insurance policies, cash value increases

Grow tax deferred

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

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

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an

Modified endowment contract

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

Surrendering the annuity for cash

What is the penalty for IRA distributions that are below the required minimum for the year?

50%

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

Section 1035 Policy Exchange - As long as the funds are transferred intact and the form is filed, taxation is deferred

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

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?

Withdrawals are not taxable