Ch7

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________.

Income tax-free Death benefits paid in a lump sum to a named beneficiary are income tax-free.

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit?

Monthly The insurer is required to provide the report monthly.

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit must pay income tax on any gain from the policy at _________ tax rates.

Ordinary income When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit must pay income tax on any gain from the policy at ordinary income tax rates.

H has an annuity funded with pre-tax dollars. So far H has placed $10,000 into the policy and it is now worth $25,000. If H cashes out the annuity, how much is taxable?

$25,000 Since the contributions are pre-tax and the earnings are tax-deferred, the entire amount is taxable upon withdrawal.

A $500,000 policy is sold for $50,000. After the sale, the new owner pays $10,000 in life insurance premiums while the insured is alive. Upon death of the insured, how much of the death benefit is taxable?

$440,000 A $500,000 policy is sold for $50,000. After the sale the new owner pays $10,000 in life insurance premiums while the insured is alive. Upon death of the insured $60,000 ($50,000 + $10,000) of the death benefit is received income tax free to the beneficiary while $440,000 is taxable ($500,000 - $60,000).

The exception to the rule concerning the non-deductibility of life insurance premiums is:

All employer paid group life insurance premiums An employer may deduct 100% of the total group life premium it pays as a business expense, but the value of premiums for any employee's coverage in excess of $50,000 must be 'imputed' to the employee and income tax paid on that amount.

If dividends are left on deposit with an insurer to earn interest:

The dividend is tax-free, but the interest is taxable Interest paid by insurers on dividends left on deposit is taxable as income.

E has a $10,000 traditional whole life policy with a $4,000 cash value. Premiums paid to date are $3,500. If the policy lapses with a $4,000 loan outstanding, what amount will be taxable as income to E?

$500 If a policy lapses with an outstanding loan greater than the premium paid in, tax must be paid on the difference. In E's case, that's $500 ($4,000 - $3,500).

How are employer paid premiums on a group life insurance plan treated for tax purposes?

As an ordinary and necessary business expense Employer paid premiums on a group life insurance plan are treated as an ordinary and necessary business expense which is why it qualifies for tax deductibility.

If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes.

Federal Estate While the death benefit is income tax free, the amount in the deceased's estate may be subject to Federal Estate taxes.

When would a life insurance policy loan be subject to income taxation?

If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis Only the portion of an outstanding policy loan in excess of the policy's cost basis will be subject to income taxation if the policy lapses.

Withdrawals from a non-qualified annuity that is not part of an annuitization are taxed on which of the following methods?

Last-in, first-out basis (LIFO) A withdrawal is any amount distributed from the annuity that is not part of the annuitization process and will be taxed on a last-in, first-out basis (LIFO). That means for income tax purposes, the first money out of the annuity will be considered as earnings, not principal.

Any employee-paid group life insurance premiums are __________.

Not tax-deductible Any employee-paid group life insurance premiums are not tax-deductible.

All of the following regarding policy loans are true, except:

Policy loans are taxable if the policy remains in effect and the amount borrowed exceeds the premiums paid If the policy lapses with a loan outstanding, the excess borrowed over the premium paid becomes taxable as ordinary income.

H has an annuity funded with after-tax contributions. So far, H has placed $10,000 into the policy and it is now worth $25,000. If H cashes out the annuity, what is H's cost basis?

$10,000 The amount contributed is after tax dollars and is considered the cost basis.

If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period.

After-tax Only the after-tax investment is recovered income tax-free from an annuity that is annuitized. It represents a return of the cost basis.

For an individually purchased life insurance policy, the premiums are considered a __________.

Nondeductible personal expense The premiums paid for an individual life insurance policy are a personal expense and are not deductible.

Janelle is the beneficiary of a life insurance policy in which the insured has died. What is the only way she can receive the claim amount totally free from income taxes?

Receive the claim amount in a lump sum Any settlement option will generate taxable income to the beneficiary. The only way to be exempt from any income taxation is to receive the death benefit in a lump sum.

Generally, life insurance death proceeds are income tax free to the policy beneficiary, except:

When a transfer of ownership has taken place Life insurance proceeds are generally income tax free except when a transfer of ownership has taken place.

Unless an exception applies, life insurance proceeds are income taxable in which of the following circumstances?

When a transfer of ownership takes place while the insured was alive If a transfer of ownership takes place while the insured was alive the death benefit becomes income taxable unless an exception applies.

If an annuitant withdraws funds from their annuity prior to age 59 1/2 what is the tax consequence?

Tax and 10% penalty tax on the withdrawal that represents earnings The withdrawal that represents earnings will be taxed along with a 10% tax penalty.

H is employed by a company that provides group life insurance. The amount provided is $150,000. How much, if any, of the coverage is going to be reported as taxable income to H?H is employed by a company that provides group life insurance. How much of the employer-paid premiums for H's $150,000 coverage, if any, is going to be reported as taxable income to H?

The premium paid for $100,000 Employer paid premiums in connection with group life insurance does not constitute taxable income to the employee unless the death benefit paid for by the employer exceeds $50,000. All employer paid premiums for amounts above $50,000 are reported as taxable income to the employee.

_________ consist(s) of the amount of premium that is returned to the policyowner if the insurer achieves lower mortality and expense costs than expected.

A dividend A participating insurer's dividend consists of the amount of premium returned to the policyowner if the insurer achieves lower mortality and expenses than expected.

Which of the following best defines the 'Cost Recovery Rule'?

Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender The 'Cost Recovery Rule' stipulates that upon a partial withdrawal of cash or the surrender of a policy, the cash value in excess of premiums paid (cost basis) is subject to income tax.

In which of the following situations will the annuity's value be included in the deceased annuitant's estate?

If the annuitant dies during the annuity or payout phase with any remaining value If the annuitant dies during the payout phase of an annuity with any remaining values, those values will be included in the annuitant's estate. For all of the other answer choices, there would be zero remaining value and therefore nothing would be left to include in the estate.

Which of the following is NOT a taxable event for a Modified Endowment Contract (MEC)?

Lump sum death benefit paid to the beneficiary Which is: -Cash surrender of the policy -Taking out a policy loan -Withdrawal of cash value to pay for a daughter's wedding

The cost recovery rule states:

That the excess cash value over premiums paid is considered taxable income when withdrawn If the policyowner does surrender or withdraw funds from the policy, the difference between what is received and what had been paid in is generally taxed as ordinary income. This is the Cost Recovery Rule.

Clayton is asking his life insurance producer about any potential taxation issues related to his $100,000 personal Whole Life policy. All of the following are TRUE, except:

The interest that he pays on policy loans is tax-deductible The interest on policy loans is not tax-deductible.

Which of the following is the reason why premiums paid on personal life insurance are not deductible?

They are considered a personal expense For individuals, premiums are considered a personal expense and are not deductible. They are paid with after-tax dollars. This establishes a cost basis in the policy for tax purposes.

All of the following statements about Group Life Insurance are true, except:

Employees receive a tax deduction for employer paid premiums Employer, not employee, paid premiums are tax deductible. Only when the insurance benefit exceeds $50,000 does the employee have to report it as taxable income. True: -Employees are taxed on any premiums paid on insurance in excess of $50,000 -Employee paid premiums are not tax deductible -Employer paid premiums are tax deductible

If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC).

Life insurance policy When a life insurance policy does not pass the 7-pay test, it will be deemed a MEC.

By what means is a transfer for value made?

Through an absolute assignment To effect a transfer for value, an absolute assignment needs to take place.

What is the main purpose that IRC section 1035 was enacted?

To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one The main purpose of section 1035 is to allow for the continuation of tax-deferral from an old policy into a new policy.