Taxation of Life Insurance and Annuities- Premiums and Proceeds
Which of the following statements is TRUE concerning whole life insurance?
Lump sum death benefits are not taxable
Which of the following describes the tax advantage of a qualified retirement plan?
The earnings in the plan accumulate tax deferred
If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitants estate?
Accumulated cash value
In life insurance policies, cash value increases
Grow tax deferred.
What is the main purpose of the Seven-pay test?
It determines if the insurance policy is an MEC
Death benefits payable to a beneficiary under a life insurance policy are generally
Not subject to income taxation by the Federal Government
What type of annuity activity will cause immediate taxation of the interest earned?
Surrendering the annuity for cash
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
They are tax free to terminally ill insured
Which of the following statements regarding deferred compensation funds is INCORRECT?
They are usually qualified plans
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
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
When contributions to an immediate annuity are made before tax dollars, which of the following is true of the distributions?
Distributions are taxable
Which of the following terms is used to name the nontaxed return of unused premiums?
Dividend
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable
What part of the Internal Revenue Code allows an 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
An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the contract's interest NOT be taxable?
Spouse
The advantage of qualified plans to employers is
Tax-deductible contributions
What method is used to determine the taxable portion of each annuity payment?
The exclusion ratio
An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?
The interest will continue to accumulate tax deferred
Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?
Withdrawn amounts are taxed on a last in, first out basis
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
During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?
Taxable interest will be withdrawn first, but the 10% penalty will be imposed if under age 59 1/2
Which of the following best describes taxation during the accumulation period of an annuity?
Taxes are deferred
An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits?
A portion of the benefit up to a limit is tax free; the rest is taxable income
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
Which of the following is NOT true regarding policy loans?
Money borrowed from the cash value is taxable
What is the penalty for IRA distributions that are below the required minimum for the year?
50%
Which of the following is NOT an allowable 1035 exchange?
A whole life insurance policy is exchanged for a term insurance policy
Which concept is associated with "exclusion ratio"?
Annuities payments
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
Interest only
In which of the following instances would the premium be tax deductible?
Premiums paid by an employer on a $30,000 group term life insurance plan for employees
Which if the following statements regarding the taxation of Modified Endowment Contracts is FALSE?
Withdrawals are not taxable
Life insurance death proceeds are
Generally not taxed as income
