Federal Tax Considerations: Life Insurance

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When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the Interest Settlement Option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on

$11,000

What type of annuity has zero cost basis, no after tax basis?

403(b) TSA

Qualified Retirement Plan

A retirement savings plan approved by the Internal Revenue Service that provides individuals with a tax benefit. See also 401(k), individual retirement account, Roth IRA.

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

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

Anything called a qualified plan needs to be

Approved by the IRS

Employer contributions made to a qualified plan

Are subject to vesting requirements

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT? A Funds accumulate on a tax-deff B C At distribution, all amounts received by the employee are tax free D

At distribution, all amounts received by the employee are tax free

What is required to qualify an individual to contribute to a traditional IRA?

Earned income

What are the income tax benefits of a qualified plan?

Employer contributions are tax deductible and are not taxed as income to the employee. The earnings accumulate tax deferred.

What is taxable on whole/permanent life insurance policies?

Excess cash value/ growth earning and interest on dividends

In a direct transfer, how is money transferred from one retirement plan to a traditional IRA?

From trustee to trustee

What portion of a nonqualified annuity payment would be taxed?

Interest earned on principal

Modified Endowment Contract (MEC)

A life insurance policy under which the amount a policy owner pays in during the first years exceeds the sum of net level premiums that would have been payable to provide paid-up future benefits in seven years.

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

Cash value growth is tax deferred

Which of the following is NOT true regarding a nonqualified Retirment plan?

It needs IRS approval

What are not tax deductible on whole/permanent life insurance policies?

Premiums and policy loans

An employer is sponsoring a qualified retirement plan for it's employees where the employer contributes money whenever the business has profit. What is this type of plan called?

Profit-sharing plan

If a Retirment plan is qualified, what does that mean?

The plan has favorable tax treatment

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

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

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

When there is an incident of ownership at the time of death

When are distributions from an IRA taxed/

When they are received

Individual Retirement Account (IRA)

a tax-sheltered retirement plan in which people can annually invest earnings up to a certain amount

What is the name for an overfunded life insurance plan

MEC Modified endowment contract

TSA's

Nonprofit, educational, religious entities who are contributed by employer through salary.

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

On December 31st on 5th year anniversary of owners death

What are not taxable on whole/permanent life insurance policies?

Policy dividends and death benefit payouts

What is the primary purpose for a 401(k) plan?

Provide retirement income

What type of plan is 401(k)?

Qualified profit-sharing plan

Name the qualified plans

Roth IRA and IRA

Which of the following best describes the tax advantage of a qualified retirement plan?

The earnings in a qualified plan accumulate tox deferred

Which portion of an annuity benefit payment will be taxed?

The interest earned on the principal-tax base

Which of the following statements regarding the taxation of MEC is FALSE? A Distributions before age 59.5 incur a 10% penalty on policy gains B Policy loans are taxable distributions C Accumulations are tax deferred D Withdrawals are not taxable

Withdrawals are not taxable

What is taxable in an IRA

both the contributions and the growth or earnings

How do qualified plans need to be?

formally written and communicated

When would life insurance death benefits be tax free?

if paid as a lump sum to beneficiary

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

Vesting means

ownership

Qualified plans have what

tax advantages


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