Federal Tax Considerations for Life Insurance & Annuities (7)

Premiums

not tax deductible

An annuitant dies before the effective date of a purchase annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?

the interest will continue to accumulate tax deferred

Accumulation period

the period after an annuity has been purchases but before distributions begin

Rollover

a tax free distribution of cash from one retirement plan to another

Death benefits payable to a beneficiary under a life insurance policy are generally

not subject to income taxation by the federal government

Any cash value accumulation in the policy can

be borrowed against by the policy owner or may be paid to the policy owner upon surrender of the policy

7-pay test

determines if an insurance policy is overfunded

Endowment policy is an

investment instrument

Lump sum death benefit is

not income taxable

Money borrowed against the cash value is

not income taxable

Upon surrender or endowment, any cash value in excess of cost basis (premium payments) is

taxable as ordinary income

The portion nontaxable in an annuity benefit is

the interest earned on the principal paid in

The cost basis is

the principal amount, or the amount that was paid into the annuity

The exclusion ratio

used to determine the annuity amounts to be excluded from taxes

When must an IRA be completely distributed when a beneficiary is not named?

December 31 of the year that contains the fifth anniversary of the owner's death

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

The entire face value of the policy will be included in J's taxable estate

Life insurance death proceeds are

generally not taxed as income

Corporate-owned annuities have different tax implications than individual annuities:

growth in the annuity is not tax deferred; interest income is taxed annually unless the corporation owns a group annuity for its employees and each employee receives a certificate of participation

Cash value exceeding premium paid is

taxable at surrender

Dividend interest is

taxable in the year earned

Direct rollover

distribution is made directly from the first plan to the trustee or administrator/custodian of the new IRA plan

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

distributions are taxable

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

from trustee to trustee

Any life insurance policy that fails a 7-pay test is classified as a ________ and loses the standard tax benefit of a life insurance contract

modified endowment contract (MEC)

If an IRA annuitant pays the entire fund's premiums before her death, what effect will this have on her estate when she dies?

the entire value of the premiums and benefits will be included

What method is used to determine the taxable portion of each annuity payment?

the exclusion ratio

Endowment life insurance policies

promise to pay the face amount if the insured survives until the end of a specified period and if the insured dies within the same specified period

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 that amount paid for premiums

Endowments require

premiums far in excess of the amount required to fund the death benefit

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

50%

Transfer

a tax free transfer of funds from one retirement program to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another

When the owner withdraws cash value from a universal life policy,

both the cash value and the death benefit are reduced by the surrender

Since dividends are a return of unused premiums, they are not

considered income for tax purposes

What is used to determine the annuity amounts that are not taxable?

exclusion ratio

An insured has a MEC. He wants to withdraw some money in order to pay medical bills. What is true?

he will have to pay a penalty if he is younger than 59.5

Cash surrender of an annuity results in

immediate taxation of the interest earned

3 situations that will result in life insurance being included in the insured's taxable estate

incident of ownership, estate as beneficiary, transfer of ownership

What is the tax consequence of amounts received from a Traditional IRA after the money was left in the tax-deferred account by the beneficiary?

income tax on distributions and no penalty

Whats is true concerning whole life insurance?

lump-sum death benefits are not taxable

Policy loans are

not income taxable

Premiums are

not tax deductible

Regarding whole life insurance, policy loans are

not tax deductible

Policy dividends are

not taxable

When a policy owner exchanges a cash value life insurance policy for another cash value life insurance policy, or a cash value life policy for an annuity, or an annuity for an annuity, the policies or annuities must be

on the same life

When a policy owner surrenders a policy for cash value

some of the cash value received may be taxable as income if the cash surrender value exceeds the amount of the premium paid for the policy

Dividends are not

taxable

The death benefit or face amount of a life insurance policy may be included in the insured's ___________ at death and subject to the _____

taxable estate, federal estate tax

Taxes are deferred during

the accumulation period

A 60 year old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. What is true?

the amount of the distribution is reduced by the amount of a 20% withholding tax

When money is withdrawn from the annuity during the accumulation phase

the amounts are taxed on a Last in, First out basis (LIFO)

If a life insurance policy develops cash value faster than a 7-pay whole life contract, it is

a modified endowment contract

Death benefit

tax free if taken as a lump-sum distribution to a named beneficiary; principal is tax free; interest is taxable if paid in installments

Settlement options

when the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is taxable as income

What best 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 there are no distributions at the required age, or if the distributions are not large enough, the penalty is

50% of the shortfall from the required annual amount

Who can make a fully deductible contribution to a traditional IRA?

an individual not covered by an employer-sponsored plan who has earned income

Life insurance proceeds paid to a named beneficiary are generally

free of federal income taxation if taken as a lump sum