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

which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?

withdrawn amounts are taxed on a last in, first out basis

If an annuitant dies during the accumulation period, what will the beneficiary receive?

accumulated cash value

all of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT

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

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 a MEC

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 interest for spouse can be tax deferred

During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?

taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2

the advantage of qualified plans to employers is

tax-deductible contributions

which of the following statements regarding deferred compensation funds is INCORRECT?

they are usually qualified plans

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

1035 exchange

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

modified endowment contract

in which of the following instances would the premium be tax deductible?

premiums paid by an employer on a $30,000 group term life insurance plan for employees exception to premiums being tax deductible is when an employer buys a group term life insurance for their employees since it is considered a business expense

what type of annuity activity will cause immediate taxation of the interest earned?

surrendering the annuity for cash

which of the following best describes taxation during the accumulation period of an annuity?

taxes are deferred

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?

$3,000

in life insurance polices, cash value increases

grow tax deferred cash values are only taxed if the policy is surrendered and the cash value exceeds the premiums paid

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

not subject to income taxation by the Federal Government

what is the penalty for IRA distributions that are below the required minimum for the year?

50%

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

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?

distributions are taxable