Qualified Plans, and Federal Tax Considerations for Life Insurance and Annuities

Which of the following is NOT an allowable 1035 exchange? AA whole life insurance policy is exchanged for a Universal life insurance policy. BAn annuity is exchanged for another annuity. CA life insurance policy is exchanged for an annuity. DA whole life insurance policy is exchanged for a term insurance policy.

d The key is that the exchange may not be from a less tax-advantaged contract to a more tax-advantaged contract. "Same to same" is acceptable.

Who can make a fully deductible contribution to a traditional IRA? AA person whose contributions are funded by a return on investment BAn individual not covered by an employer-sponsored plan who has earned income CAnybody; all IRA contributions are fully deductible regardless of income level DSomeone making contributions to an educational IRA

b Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.

What method is used to determine the taxable portion of each annuity payment? AThe exclusion ratio BThe excise ratio CThe annuity to age ratio DThe marginal tax formula

a The ratio of the total investment in that contract to the expected return is developed to determine the portion of the annuity payment that will be taxable and nontaxable.

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? A$7,000 B$3,000 C$13,000 D$10,000

b If $100,000 of life insurance proceeds were used in a settlement option paying $13,000 per year for 10 years, $10,000 per year would be income tax free (as principal) and $3,000 per year would be income taxable (as interest).

What type of annuity activity will cause immediate taxation of the interest earned? AChanging a settlement option BFailing to make a planned contribution CSurrendering the annuity for cash DUsing the contract as collateral for a loan

c One-sum cash surrenders give rise to immediate taxation of the interest earned.

All of the following statements are true regarding tax-qualified annuities EXCEPT AWithdrawals are taxed. BEmployer contributions are not tax deductible. CAnnuity earnings are tax deferred. DThey must be approved by the IRS.

b Tax-qualified annuities must be approved by the IRS and allow for tax deductible employer contributions. All withdrawals are taxed and earnings grow tax deferred.

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

a The cash value of a surrendered policy is only considered to be taxable as income if the cash value exceeds the amount of premiums paid for the policy.

What is the tax consequence of amounts received from a Traditional IRA after the money was left in the tax-deferred account by the beneficiary? ACapital gains tax on distributions plus 10% penalty. BIncome tax on distributions and no penalty. CIncome tax on distributions plus 10% penalty. DCapital gains tax on distributions and no penalty.

b If the beneficiary chooses to leave the money in the tax-deferred account until the calendar year in which the owner would have attained age 72, the distributions would be subject to income taxation at the rate at the time of withdrawal.

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$8,000, tax on growth only B$10,000, tax on growth only C$10,000, no tax consequence D$8,000, no tax consequence

c During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other.

Which concept is associated with "exclusion ratio"? AHow exclusion riders affect an insurance premium BPolicy provisions CAnnuity payments DDividend distribution

c A portion of an annuity payment is taxable, while another portion is not. The return of the principal paid in is nontaxable. The portion that is taxable is the actual amount of payment, less the expected return of the principal paid in. This relationship is called the "exclusion ratio."

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 AQualified distribution. BPremature distribution. CRollover. D1035 exchange.

d In accordance with Section 1035 of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur as nontaxable exchanges.

What is the penalty for IRA distributions that are below the required minimum for the year? A10% B25% C50% D60%

c 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.

When must an IRA be completely distributed when a beneficiary is not named? ADue date of beneficiary's tax return including extensions. BDecember 31 of the year following the year of the owner's death. CDue date of the deceased owner's final tax return including extensions. DDecember 31 of the year that contains the fifth anniversary of the owner's death.

d If the owner dies before distributions have begun, the entire interest must be distributed in full on or before December 31 of the calendar year that contains the fifth anniversary of the owner's death, unless the owner named a beneficiary.

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur? AThe interest will become immediately taxable. BThe premiums will increase. CThe premiums will decrease. DThe interest will continue to accumulate tax deferred.

d If the contract holder dies before the annuity starting date, the contract's interest becomes taxable. If the beneficiary of the annuity is a spouse, the tax can continue to be deferred.

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a ANonforfeiture option. BRollover. CSettlement option. DNontaxable exchange.

c A settlement option is exercised when an immediate annuity is purchased with the face amount at death or with the cash value at surrender.