Federal Tax Considerations for Life Insurance and Annuities
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct Transfer from her plan to a traditional IRA how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer?
$10,000, no tax consequence
What is the general taxation rule for death benefit payable to the beneficiary of a life insurance policy?
Death benefits are generally not subject to income taxes.
When must an IRA be completely distributed when a beneficiary is not named?
December 31 of the year that contains the fifth anniversary of the owner's death.
Why are dividends in life insurance policies not taxable?
Dividends are not considered income for tax purposes; they are a return of unused premium.
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable.
In a direct rollover, how is the money transferred from one retirement plan to a new one?
From trustee to trustee
What portion of a nonqualified annuity payment would be taxed?
Interest earned on principal
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
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a
Settlement option
Traditional IRA Contributions are
Tax deductible
Which of the following best describes taxation during the accumulation period of annuity?
Taxes are deferred
An annuitant dies before the effective date of a purchase annuity. Assuming that the annuitants wife is the beneficiary what will occur?
The interest will continue to accumulate tax deferred.
What is the main purpose of the 7-pay Test?
To determine if a life insurance policy is a Modified Endowment Contract
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
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
Who can make a fully deductible contribution to a traditional IRA?
An individual not covered by an employer-sponsored plan who has earned income
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Cash value growth is tax deferred
If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?
Interest only
What is the main purpose of the 7-pay test
It determines if the insurance policy is a MEC.
A policy owner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This non taxable transaction is called
1035 exchange
What is the penalty For IRA distributions that are below the required minimum of the year?
50%
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is
Modified Endowment Contract
What is the name for an overfunded life insurance policy?
Modified Endowment Contract (MEC)
Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?
No, lump-sum benefits are received tax free
Death benefits payable to a beneficiary under a life insurance policy are generally
Not subject to income taxation by the Federal Government
When would life insurance policy proceeds be included in the insured's taxable estate?
When there are any incidents of ownership at the time of death