Life Insurance - Chapter 10: Taxation of Life Insurance and Annuities - Premiums and Proceeds

Life insurance death proceeds are

Generally not taxed as income

What is the main purpose of the Seven-Pay Test?

It determines if the insurance policy is an MEC (modified endowment contract).

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 is

Modified endowment contract

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

Not subject to income taxation by the federal government

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 premiums paid by the employer in a business life insurance policy are

Tax deductible by the employer

During the accumulation period in a non-qualified annuity, what are the tax consequences of a withdrawal ?

Taxable interest will be withdrawn first and the 10% penalty will be imposed if under the age of 59 1/2

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

Taxes are deferred

Which describes the tax advantage of a qualified retirement plan?

The earnings in the plan accumulate tax deferred

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

This is true concerning whole life insurance

lump sum death benefits are not taxable

This is true concerning taxation of accelerated benefits under a life insurance policy

They are tax free to terminally ill insured and tax free up to a limit for chronically ill insured

A IRA uses immediate annuities to pay our 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

If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate?

Accumulated cash value

These are true regarding the taxation of Modified Endowment Contracts

-Accumulations are tax deferred -Distributions before age 59 1/2 incur a 10% penalty on policy gains -Policy loans are taxable distributions

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

A settlement option

Which concept is associated with "exclusion ratio?"

Annuity payments -A portion of an annuity payment is taxable while the other portion is not.

Which of the following statements regarding deferred compensation funds is incorrect? a. they generally provide additional retirement benefits b. they are usually qualified plans c. they can be established by employers d. they can be made with cash deposits to an annuity

B = not a qualified plan

This situation would cause the premium to be tax deductible

The premium paid by an employer on a $30,000 group term life insurance plan for employees. -Usually, premiums paid for life insurance are not tax deductible.