Taxation of Life Insurance & Annuities

Choose the payments from an insurance policy which are not subject to federal income taxes:

the death benefit paid to a beneficiary in a lump sum

What is used to determine the amount of an annuity distribution that is exempt from taxation?

the exclusion ratio

A person has paid $50,000 into a fixed annuity over 20 years. When he decides to begin income payments the insurer calculates that he will receive $4000 per year for life, which means that e will receive a total of $100,000. In the first 10 years of payments how much is taxable each year?

$2000

How much employer-provided group term life insurance is exempt from income taxation?

$50,000

A person has a $100,000 life insurance contract. He passed away after having paid $500 in premium. How much tax will the beneficiary need to pay?

0%

Tax laws have established the Modified Endowment Contract or "MEC". Select the correct response:

Taxing their living benefit is not like a non-MEC

A person invests $10,00 in a single premium annuity and another $10,000 in a Certificate of Deposit (CD). Both pay 10% interest annually. The person is in a 31% income tax bracket. For 40 years, this person does not touch his annuity and reinvests all income from the CD at 10%. Which of the following statements is true?

The annuity would be worth several hundred thousand more because of the tax deferral of the earnings.

All of the following are true statements concerning the treatment of federal income tax on life insurance, EXECPT:

Annuity death benefit proceeds are exempt from all taxation

How does the cost recovery rule apply when a life insurance policy is surrendered for its cash value?

The cost basis of the policy is exempt from taxation

What are the tax consequences when an employer provides an employee with more than $50,000 of coverage under the employer's group life insurance plan?

The cost of the coverage in excess of the first $50,000 will be included as income and appear on the employee's W-2

When an employee has group term life insurance provided by his employer, how will the policy proceeds paid to the employee's beneficiary be taxed?

The policy proceeds will generally be tax-free to the beneficiary

A life insurance policy written after 1988 that fails to meet the seven-pay test is known as

a modified endowment contract