Federal Tax Considerations for Life Insurance and Annuities

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An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct Transfer from her plan to a traditional IRA how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer?

$10,000, no tax consequence

What is the general taxation rule for death benefit payable to the beneficiary of a life insurance policy?

Death benefits are generally not subject to income 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.

Why are dividends in life insurance policies not taxable?

Dividends are not considered income for tax purposes; they are a return of unused premium.

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

Dividends are not taxable.

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

From trustee to trustee

What portion of a nonqualified annuity payment would be taxed?

Interest earned on principal

Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

Only the portion in excess of the premium paid

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

Traditional IRA Contributions are

Tax deductible

Which of the following best describes taxation during the accumulation period of annuity?

Taxes are deferred

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

The interest will continue to accumulate tax deferred.

What is the main purpose of the 7-pay Test?

To determine if a life insurance policy is a Modified Endowment Contract

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

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

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

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

According to the taxation rules of life insurance policies, how are cash value increases taxed?

Cash value growth is tax deferred

If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?

Interest only

What is the main purpose of the 7-pay test

It determines if the insurance policy is a MEC.

A policy owner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This non taxable transaction is called

1035 exchange

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

50%

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

Modified Endowment Contract

What is the name for an overfunded life insurance policy?

Modified Endowment Contract (MEC)

Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?

No, lump-sum benefits are received tax free

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

Not subject to income taxation by the Federal Government

When would life insurance policy proceeds be included in the insured's taxable estate?

When there are any incidents of ownership at the time of death


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