Life Insurance Chapter 8
Josie Joseph surrenders her existing whole life policy for the $36,000 in cash. During the time the policy was in force, she paid $29,000 in insurance premiums. What will the tax effect be, if any?
$29,000 is received tax-free and the $7,000 is taxable
Ted surrenders his whole life policy and receives $10k. His total premium paid during the past 15 years was $8k. How much of the surrender value will be taxable?
$2k
Klondike has a policy that has been classified as a Modified Endowment Contract (MEC) because it has failed to meet the requirements of the 7 pay test. The policy has a $2,000,000 death benefit and $300,000 in cash value. Klondike, who is age 55, withdrawals $125,000 from the cash value as a loan. How much of this $125,000 will be subject to taxation?
100%
What section of the Internal Revenue Code allows for the transfer of like policies without any taxation or penalty?
1035 Exchange
This IRS rule allows for a tax-free exchange of values between like policies.
1035 Exchange allows for nontaxable transfers between like policies
Prior to what age will a premature distribution from a Qualified plan be subject to both an IRS imposed 10% penalty as well as taxes?
59.5
The ____ Pay Test helps determine if a policy will be considered a Modified Endowment Contract (MEC) or not.
7
Which of the following was designed to reduce or prevent the purchase of whole life insurance for the purpose of short-term investment gain?
7-pay test
Federal and state death taxes must be paid within what period of time following the descendant's death:
9 months
An annuity grows tax deferred during:
Accumulation period
A MEC is an IRS classification of a life insurance policy meaning the contract has not satisfied the 7-pay test. All of the following are true regarding a MEC, EXCEPT: A. Any gain received is taxed first with the investment received after the gain B. The policy owner may receive distributions at any time without being penalized C. Funds received by the policy owner are considered to be excess amounts of cash value over premiums paid and are taxable D. Funds received by the policy owner are taxable in the year received
B
Albert transfers his life insurance policy to Walter 2 years before Albert's death. Which of the following is true with regard to this scenario? A. The interest paid on the cash value is taxable to Walter upon transfer B. The entire face amount will be included in Albert's estate C. The transfer of the policy is considered a 1035-A exchange D. Since the policy has been transferred, the value will not be included in the estate of either
B
Mr. Gleason is covered by a $150k life insurance policy. Mrs. Gleason is the primary beneficiary. Following the death of Mr. Gleason, Mrs. Gleason leaves the death proceeds with the insurer but wishes to receive interest payments. During the current year she receives $500/month in interest. Which of the following is going to be taxable? A. $500 B. $6k C. $150k D. $156K
B
When the beneficiary of an annuity receives monthly payments consisting of both principal and interest, which of the following is taxable? A. Principal only B. Interest only C. Principal and interest D. Neither principal nor interest
B
Which of the following is NOT TRUE with regard to a 1035 Exchange? A. It allows for the transfer or assignment of an existing policy to the insurer who replaces it with another of like kind B. Once begun, the exchange must be completed within 30 days C. This involves the exchanging of a less competitive policy with a more competitive one D. It is an IRS rule permitting the exchange of similar policies with no immediate tax consequences
B
Which of the following statements is NOT TRUE with regard to a whole life insurance policy loan? A. A policy loan that has not been repaid will be deducted from the face amount upon the death of the insured. B. Funds borrowed against the cash savings value are taxable income. C. An unpaid loan may be subtracted from the cash surrender value. D. An insurer may assess an interest charge on a policy loan.
B
Which of the following statements is NOT TRUE with regard to a whole life insurance policy loan? A. A policy loan that is not repaid will be deducted from the face amount upon the death of the insured B. Funds borrowed against the cash savings value are taxable income C. An unpaid loan may be subtracted from the cash surrender value D. An insurer may assess an interest charge on a policy loan
B
Section 1035 of the IRC allows for the exchange of certain life insurance or annuity products. All of the following would be permitted exchanges under IRS regulation, EXCEPT A. Exchanging variable life policy for another variable life policy B. Exchanging a life insurance policy for an annuity C. Exchanging an annuity for a life insurance policy D. Exchanging an endowment for an annuity
C
TRUE statements regarding the taxation of a whole life insurance policy would include which of the following? A. Cash value growth is taxable in the year it is earned. B. Death benefits are taxable. C. Death benefits are received tax-free and cash value growth is tax-deferred. D. Death benefits are taxable and cash value growth is tax-deferred.
C
Which of the following is income taxable as ordinary Income? A. Death Benefit B. Return of Principal C. Interest paid on life insurance proceeds D. Estate taxes
C
Which example below would require the death benefit to go through probate? A. Benefit is left to a wife B. Benefit is left to a child C. Benefit is left to the American Cancer Society D. Benefit is left to the deceased's estate
D
Which item(s) below would be included in the overall estate value of a deceased individual? A. Annuity values B. A retirement home C. Life insurance death benefit D. All of the above
D
Which of the following statements is TRUE concerning a life insurance contract being classified as a Modified Endowment Contract (MEC)? A. Withdrawals are taxed on a last in, first out basis. B. Distributions made prior to age 59 1/2 will receive a 10% penalty. C. All distributions become taxable. D. All the above are true
D
Which of the following statements is TRUE regarding taxation? A. Life insurance death benefits are taxable. B. Insurance dividends are both guaranteed and taxable as income. C. Cash value growth is taxable in the year it is earned. D. Interest is usually taxable
D
Which of the following types of property would NOT be included in an insured's estate for the purpose of determining federal estate taxes? A. Life insurance death benefit B. Value of personal residence C. The value of a personal retirement account D. Property that has been gifted 5 years prior to the insured's death
D
What taxation issues are present when a policyowner decides to leave dividends payable with the insurer to accumulate interest?
Dividends are received tax-free, any interest earned is taxable as ordinary income
Death taxes assessed by the government upon the assets of a descendant are known as:
Federal Estate Taxes
When the annuity phase commences, each payment made is comprised of a non-taxable return of principal and a taxable return of:
Interest
A corporation may purchase an annuity. However, it must identify a natural person as the annuitant. What will happen if the firm fails to do this?
Interest earned will be taxable to the firm
In most cases, a policy loan does not create any taxation issues unless the policy:
Is considered MEC
If a life insurance policy becomes an MEC, it may revert back to an ordinary life policy within how many years?
It is not allowed to revert back
When can a whole life policy, that is determined by the IRS to be a Modified Endowment Contract (MEC), become a whole life policy again?
Never, Once a MEC always a MEC
According to the Internal Revenue Code, premiums paid on life insurance policies are:
Not tax deductible
In order to sell a variable product, an agent needs both an insurance license and a license issued by FINRA, formerly the NASD. How does the cash value grow inside a variable life policy?
Tax Deferred
The continual increase of cash value in a whole life policy:
Taxable when withdrawn if the policy fails 7 pay test
Under what condition is the cash value in a MEC not taxable?
While it accumulates
If an annuity contract owner dies during the pay-in phase and prior to the pay-out phase, the beneficiary will receive the greater of the accumulated value of the annuity or the amount of contributions. Any amount received in excess of premiums paid is:
taxable as ordinary income