Federal Tax Considerations for Life Insurance and Annuities

Which of the following statements is TRUE concerning whole life insurance? A. Premiums are tax deductible B. Policy loans are tax deductible C Lump sum death benefits are not taxable D Dividend interest is not taxable

Lump sum death benefits are not taxable

What method is used to determine the taxable portion of each annuity payment? A. The marginal tax formula B. The exclusion ratio C. The excise ratio D. The annuity to age ratio

The exclusion ratio

Which of the following statements regarding the taxation of modified Endowment Contracts is FALSE? A. Accumulations are tax deferred B. Withdrawals are not taxable C. Distributions before age 59 1/2 incure a 10% penalty on policy gaines D. Policy loans are taxable distributions

Withdrawals are not taxable

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase? A. Taxes deferred on withdrawn amounts B. Withdrawn amounts are taxed on a last in, first out basis C. Withdrawn amounts are taxed on a first in, last out basis D. Taxes are deferred on withdrawn amounts, but a flat penalty is charged

Withdrawn amounts are taxed on a last in, first out basis

When would life insurance policy proceeds be included in the insured's taxable estate? A. When the beneficiary is named in the policy B. When there are any incidents of ownership at the time of death C. If the insured's spouse is the policy owner. D. If the insured transfers ownership of the policy or makes a gift of the policy 5 years prior to his or her death

When there are any incidents of ownership at the time of death

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? A. $10000 tax on growth only B. $10000 no tax consequence C. $8000 no tax consequence D. $8000 tax on growth only

$10000 no tax consequence

If taken as a lump sum, life insurance proceeds to beneficiaries are passed

Free of federal income taxation

Death benefits payable to a beneficiary under a life insurance policy are generally A. Not subject to income taxation by the Federal Government B. Subject to income taxation by the Federal Government C. Exempt from income taxation if under $10,000 D. Exempt from income taxation if over $10,000

Not subject to income taxation by the Federal Government

Traditional IRA contributions are tax deductible based on which of the following? A. Owners income B. How long the plan has been in force C. Owners age D. IRA limit

Owners income

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? A. Spouse B. Charitable organization C. Dependents D. Annuitant

Spouse

What type of annuity activity will cause immediate taxation of the interest earned? A. Using the contract as collateral for a loan B. Changing a settlement option C. Failing to make a planned contribution D. Surrendering the annuity for cash

Surrendering the annuity for cash

A 60 year old participan in a 401K plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true? A. There is a 10% early withdrawal penalty B. The amount distributed is subject to ordinary income tax C. The amount of the distribution is reduced by the amount of a 20% withholding tax D. No taxes are due since the plan participant is over age 59 1/2

The amount of the distribution is reduced by the amount of a 20% withholding tax

Tax Deductible

a reduction of taxable income, resulting in lower tax liability

What is the penalty for IRA distributions that are below the required minimum for the year? A. 10% B. 25% C. 50% D. 60%

50% If there are no distributions at the required age, or if the distributions are not large enough, the penalty is 50% of the shortfall from the required annual amount

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? A. 10% for early withdrawal B. 15% for early withdrawal C. 50% tax on the amount not distributed as required D. No penalties, since the owner is older than 59 1/2

50% tax on the amount not distributed as required

What type of tax is associated with death proceeds from a life insurance policy? A Income Tax B Federal Estate Tax C Personal Tax D State Tax

Federal Estate Tax

Life insurance death proceeds are A. Taxed as a capital gain B. Taxed as ordinary income C. Generally not taxed as income D. Taxable to the extent that they exceed 7.5% of the beneficiarys adjusted gross income

Generally not taxed as income

When contributions to an immediate annuity are made with before tax dollars, which of the following is true of the distributions? A. Distributions are taxable B. Distributions are nontaxable C. Distributions cannot begin prior to age 72 D. There are no distributions

Distributions are taxable

When a beneficiary recieves payments consisting of both principal and interest portions, which parts are taxable as income? A. Principal only B. Interest only C. Both principal and interest D. Neither Principal nor Interest.

Interest only

Surrender

early termination of a policy by the policyowner

Vesting

the right of a participant in a reitirement plan to retain part or all of the benefits

After what age could a ROTH IRA distribution be classified as "qualified"? A. 50 B. 59 1/2 C. 70 D. 70 1/2

59 1/2

If an annuitant dies during the accumulation period, what benefit will be included in the annuitant's estate? A. Policy loans B. Accumulated cash value C. Full annuity benefit D. No benefits

Accumulated cash value

Which concept is associated with "exclusion ratio"? A. Policy Provisions B. Annuity Payments C. Dividend Distribution D. How exclusion riders affect an insurance premium

Annuity Payment

Exclusion ratio

Calculation method used to determine the annuity amounts to be excluded from taxes

What is the main purpose of the Seven pay test? A. It determines if the insurance policy is a MEC B. It requires level premium payments for 7 years C. It ensures that the policy benefits are paid out in 7 years D. It guarantees the minimum interest

It determines if the insurance policy is a MEC

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? A. It is automatically taxable B. It is only taxable if the cash value exceeds the amount paid for premiums C. It is not considered to be taxable D. It is taxable only if it exceeds the amounts paid for premiums by 50%

It is only taxable if the cash value exceeds the amount paid for premiums.

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. Nontaxable exchange B. Nonforfeiture option C. Rollover D. Settlement option

Settlement option

J transferred his life insurance policy to his son two years before his death. Which of the following is true? A. The entire face value of the policy will be included in J's taxable estate. B. The interest portion of the policy will be included in J's taxable estate C. The unpaid premiums on the policy will be deducted from J's taxable estate D. Because the policy has been transferred, it will not be included in J's taxable estate

The entire face value of the policy will be included in J's taxable estate

When would life insurance policy proceeds be included in the in the insured's taxable estate? A. When the beneficiary is named in the policy B. When there are any incidents of ownership at the time of death C. If the insured's spouse is the policy owner. D. If the insured transfers ownership of the policy or makes a gift of the policy 5 years prior to his or her death

When there are any incidents of ownership at the time of death

Policy Proceeds

in life insurance, the death benefit

Policy Endowment

maturity date

LIFO(Last in, First Out)

principle applied to asset management in life insurance products, under which it is assumed that the funds paid into the policy last will be paid out first

Taxable

subject to taxation, payable to state and federal government

Which of the following best describes taxation during the accumulation period of an annuity? A. Taxes are deferred B. The annuity is subject to state taxes only C. The annuity is subject to both state and federal taxation D. The growth is subject to immediate taxation

Taxes are deferred

FIFO(first in first out)

principle under which it is assumed that the funds paid into the policy first will be paid out first.

Tax deferred

taxes on investments or gains are paid at a future date instead of in the period in which they are incurred tax