Federal Tax considerations for Life Insurance
What type of annuity activity will cause immediate taxation of interest earned?
Surrendering an annuity for cash
The advantage of qualified plans to employers are:
Tax-deductible contributions
During the accumulation period in a non-qualified annuity, what are the tax consequences of withdrawal?
Taxable interest will be withdrawn first, and 10% penalty if the person if under age 59&1/2
An IRA uses immediate annuities to pay out benefits. An IRA owner is nearly 75 years old and wants to collect distributions. What penalty would be pay?
50% tax on the amount not distributed as required
Who would be the insured under a COLI (corporate owned life insurance) policy?
All employees
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is:
A modified endowment contract
When contributions to an immediate annuity are made before tax dollars, what is true of distributions?
Distributions are taxabe
What is not true of whole life insurance?
Policy loans are tax deductible
An applicant buys a non-qualified annuity and dies before the start date. Which beneficiary would the contracts interest not be taxable?
Spouse (for him or her, taxes are deferred)
A 60 year old participant in a 401 (K) plan takes a distribution and rolls it over to an IRA within 60 days. What is true?
The amount of the distributions is reduced by the amount of a 20% withholding tax.
What statement about taxation of Modified Endowment contracts is false?
Withdrawals are not taxible
An employee quits her job where she has a balance of $10,000 in her qualified plan. The Balance is paid out to the employee so she can move the money to a new account. If she rolls over the plan to a traditional IRA, how much money will she receive from the plan administrator, and how long does she have to complete a tax free rollover?
$8,000 and 60 days (20% of the distributed money is withheld by the payor)
An employee quits her job. She has a balance of $10,000 in her qualified plan. If she directly transfers the money to a traditional IRA, how much is transferred and what is the consequence?
$10,000 and no tax consequences
What is not an allowable 1035 exchange?
A whole life policy is exchanged for a term insurance policy
What is not true of section 1035 policy exchanges?
Any exchange made under section 1035 if the internal revenue code must be completed within 30 days. In actuality, there is no specific time period for exchanges
When must an IRA be completely distributed when a beneficiary is not named?
December 31st of that year that contains the 5th anniversary of the owner's death
When a beneficiary gets payments for both principal and interest, which are taxable as income?
Interest only
What is true concerning whole life insurance?
Lump-sum death benefits are not taxable
Death benefits payable to a beneficiary under a life insurance policy are generally:
Not subject to income taxation by the federal government
What describes the taxation of annuity when money is withdrawn during the accumulation phase?
Withdrawn amounts are taxed on a last in, first out basis
If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000/ year for 10 years, what would be taxable annually?
$3,000
An insured decides to surrender his $100,000 whole life policy. Premiums paid into the policy equal $15,000 and the surrender cash value is $18,000. What part of the surrender value is income taxable?
$3,000 is taxable (it is the difference between the premiums paid into the policy and the cash value)
Who can make fully deductible contributions to a traditional IRA?
An individual not covered by an employer sponsored plan but has earned income
What concept is associated with the "Exclusion Ratio"?
Annuities payments
What is true of taxation of dividends in participating policies?
Dividends are not taxable
What is used to determine the annuity amounts that are not taxable?
Exclusion Ratio
Life insurance proceeds are:
Generally not taxed as income
J transferred his life insurance policy to his son 2 years before his death. What is true?
The entire face value of the policy will be included in J's taxable estate
If an IRA annuitant pays the entire funds premiums before death, what happens to their estate at death?
The entire value of premiums and benefits will be included
When would life insurance policy proceeds be included in an insured's taxable estate?
When there are any incidents of ownership at the time of death
What is not true of federal tax advantages of a qualified plan?
At distribution, all amount received by the employee are tax free/
If an immediate annuity is purchased with a face amount at death or with a cash value at surrender. This would be considered a:
Settlement option
For an individual, who is not covered by an employer-sponsored plan, IRA contributions are:
Tax deductible
What is correct of taxation during the accumulation period of an annuity?
Taxes are deferred
What is not true of policy loans?
Money borrowed from cash value is taxable
For an individual who is not covered by an employer sponsored plan, IRA contributions are:
Tax deductible
What is a tax advantage of a qualified retirement plan?
The earnings in the plan accumulate tax deferred
A policy owner cancels his life insurance policy, but wants the cash value transferred to an annuity. This nontaxable transaction is called:
1035 Exchange
What is the penalty for IRA distributions that are below the required minimum for the year?
50%
What is the term used to name the nontaxed return of unused premiums?
Dividend
If taken as a lump sum, life insurance proceeds to the beneficiary are passed:
Free of federal income taxation
In a direct rollover, how is the money transferred from one plan to a new plan?
From trustee to trustee
In life insurance policies, cash value increases
Grow tax deferred
An insured has a modified endowment contract. He wants to withdraw money for medical bills. What is true?
He will have to pay a penalty if he is not younger than 59&1/2
What is the tax consequence of amounts received from a traditional IRA after money is left in a tax deferred account by the beneficiary?
Income tax on distributions and no penalty
An annuitant dies before the effective date. If the wife is the beneficiary, what will happen?
Interest will continue to accumulate tax deferred.
What is the main purpose of the seven-pay test?
It determines whether an insurance policy is an MEC.
If an insured surrenders his life insurance policy, what is true of the cash value of the policy?
It is only taxable if the value of the policy is more than the amount that was paid for premiums.
What method is used to determine the taxable portion of each annuity payment?
The exclusion ratio
An insured had paid only part of her total number of IRA premiums before she died. What will happen to the insured's estate?
Only the premiums paid will be included in the estate