Unit 10: Taxation of Life Insurance & Annuities

24 months

Accelerated death benefits advance the payment of death benefits to a person if she has been diagnosed with a qualifying event that will lead to her death within

Amy will not be taxed

Amy received her father's $100,000 death benefit in a lump sum. How will Amy be taxed on the lump sum?

Exclusion ratio

Annuity payments are taxable to the extent that they represent interest earned rather than capital returned. What method is used to determine the taxable portion of each payment?

Archibald will receive his $26,000 cost basis tax-free and will be taxed on $6,000.

Archibald surrenders a life insurance policy and receives a lump-sum cash payment of $32,000. His premium payments up to the time of surrender amounted to $26,000. How is the surrender treated for tax purposes?

The portion of each payment consisting of interest is taxed; the remainder is tax free.

As a beneficiary, Kathryn receives $800 monthly from her deceased spouse's life insurance under a fixed-amount option. Each payment consists partly of principal (proceeds) and partly of interest. How is this income taxed?

neither life insurance nor annuity premiums is tax deductible

As a general rule, for federal tax purposes

No income tax is payable on the death proceeds

Bill names his church as the beneficiary of his $300,000 life insurance policy. When Bill dies, who is responsible for the income taxes payable on the lump-sum proceeds received by the church?

$25,000 of the loan is subject to income taxation plus an additional 10% penalty tax

Cal, age 57, owns a whole life insurance policy with a $750,000 face amount that was paid for with a single premium of $100,000. The current cash value is $125,000. If he were to borrow $30,000 from this policy today, what is the tax treatment this transaction will receive?

$85,000

Frank owns and insured by a participating whole life insurance policy with a death benefit of $85,000, including $35,000 of paid-up additions to the face amount. His basis in the policy is $30,000. The beneficiaries are his daughter and son, equally. If he were to die today, what amount of this policy would be valued in Frank's estate?

the gain

If a beneficiary chooses the lump sum option at the death of an annuity owner, what amount of money is taxable?

the original death benefit is not taxable; however, interest earned is taxable as ordinary income to Silvia

Juan names his sister, Silvia, as the beneficiary of his $250,000 life insurance policy. At Juan's death, if Silvia chooses to have the proceeds paid over time, rather than in a lump sum,

$5,000

Julie has a life insurance policy with a $20,000 cost basis. She makes a withdrawal for $25,000. How much of her withdrawal is considered excess and taxable?

There would be no income taxation on any portion of the amount borrowed, whether or not she repaid the policy loan.

Kelly, age 48, owns a universal life insurance policy (non-MEC) with a current death benefit of $270,000 and a cash value of $20,000. Her basis in the policy is $12,000. Kelly is interested in either borrowing or withdrawing $15,000 from this policy. What would be the tax consequences if she were to borrow the $15,000 through a policy loan

the proceeds are payable to the insured's estate or the insured had any incidence of ownership in the policy at time of death or transferred ownership within 3 years of death

Life insurance proceeds are included in the gross estate if

Mary will pay income tax each year on just a portion of the payments received, and when she has fully recovered her basis, all future payments will be taxable

Mary, age 70, recently purchased a non-qualified immediate annuity to supplement her retirement income, and through it will receive a lifetime income of $800 per month. How will this income be taxed?

$170,000 will be paid to the beneficiary, all of which is income tax-free

Maureen, age 62, owns a non-MEC whole life insurance policy with a death benefit of $200,000 and a cash value of $40,000. Her basis in the policy is $25,000. If she were to borrow $30,000 from this policy and then die immediately thereafter (without having repaid any portion of the loan), which of the following best describes the resulting tax treatment of the policy's death benefit.

- premiums paid in a buy-sale agreement - premiums paid for life insurance that ends up reimbursing the company - key person life insurance policy premiums

Premiums that are not tax deductible for a business include:

Ralph will receive $9,500 tax-free; the $5,500 balance is taxable as income.

Ralph owns a $50,000 nonparticipating whole life policy. Its cash value has accumulated to $15,000, and he has paid a total of $9,500 in premiums. If he surrenders the policy for its cash value, how will it be taxed?

10% penalty on interest

Samantha is 40 years old and wants to withdraw some of the interest earned on her annuity. What is the additional penalty that Samantha will have to pay above the regular tax due on amount received?

Of the cash value, $25,000 is payable to the beneficiary income-tax free and $12,000 is subject to income taxation

Sidney, age 58, owns a deferred variable annuity that he purchased 15 years ago and into which he has paid $25,000 in the form of periodic premiums. Today its cash value is $37,000. If he dies today, what is the type of tax treatment this transaction will receive?

taxable income for the employee

Under an executive bonus plan, the amount of premiums paid is

seven-pay test

What is the name of the test that is done on a life insurance policy to see if its premiums exceed those needed to fully pay up a death benefit with seven level annual payments?

a 1035 exchange

When a cash value life insurance policy is converted into an annuity in a nontaxable transaction, the event is generally known as

dividends

______ is considered to be a return of the portion of the premium paid for the policy

exclusion ratio

the amount of an annuity payout option or a life insurance settlement option that is taxable gain is determined by using the