POL California Life: Taxation of Life Insurance and Annuities - Premiums and Proceeds
A policy-owner 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
When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?
Distributions are taxable
In life insurance policies, cash value increases...
Grow tax deferred.
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
Interest only
which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?
Withdrawn amounts are taxed on a last in, first out basis.
An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true?
He will have to pay a penalty if he is younger that 59 1/2.
What is the main purpose of the Seven-pay Test?
It determines if the insurance policy is a MEC.
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is...
A Modified Endowment Contact
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...
Not subject to income taxation by the Federal Government
Which of the following best describes taxation during the accumulation period of an annuity?
Taxes are deferred
Which concept is associated with "exclusion ratio"?
Annuities payments
Which of the following is INCORRECT regarding whole life insurance?
Policy loans are tax deductible
In which of the following instances would the premium be tax deductible?
Premiums paid by and employer on a $30,000 group term life insurance plan for employees.
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
What type of annuity activity will cause immediate taxation of the interest earned?
Surrendering the annuity for cash.
When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the interest Settlement Option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on...
$11,000
An insured decides to surrender his $100,000 Whole life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?
$3,000
If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per ten years, which of the following would be taxable annually?
$3,000
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 ld when he decides to collect distributions. What kind of penalty would the IRA owner pay?
50% tax on the amount not distributed as required
Which of the following is NOT an allowable 1035 exchange?
A whole life insurance policy is exchanged for a term insurance policy.
Which of the following terms is used to name the non-taxed return of unused premiums?
Dividend
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable
Which of the following is used to determine the annuity amounts that are not taxable?
Exclusion ratio
What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?
Section 1035 Policy Exchange
The premiums paid by the employer in a business life insurance policy are...
Tax deductible by the employer
The advantage of qualified plans to employers is...
Tax-deductible contributions
Which of the following describes the tax advantage of a qualified retirement plan?
The earnings in the plan accumulate tax deferred.
If an IRA annuitant pays the entire fund's premiums before her death, what effect will this have on her estate when she dies?
The entire value of the premiums and benefits will be included.
What method is used to determine the taxable portion of each annuity payment?
The exclusion ratio
Which of the below statements is FALSE concerning a Modified Endowment Contract (MEC)?
The policy-holder can receive distributions at any time without being penalized.
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
They are tax free to terminally ill insured.
Which of the following statements regarding deferred compensation funds is INCORRECT?
They are usually qualified plans
An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits?
A portion of the benefit up to a limit is tax free; the rest is taxable income.
Which of the following is NOT true regarding policy loans?
Money borrowed from the cash value is taxable
Which of the following is NOT true of Section 1035 Policy Exchanges?
Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days.
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?
It is only taxable if the cash value exceeds the amount paid for premiums
An applicant buys a non-qualified annuity, but dies before the starting date. For which of the following beneficiaries would the contract's interest NOT be taxable?
Spouse
During the accumulation period in a non-qualified 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.
Which of the following statements is TRUE concerning whole life insurance?
Lump-sum death benefits are not taxable.
An insured had paid only part of her total number of IRA premiums before she died. What effect will this have on the insured's estate?
Only the premiums paid will be included in the estate.
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.