Taxation of Life Insurance and Annuities- Premiums and Proceeds
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
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 what?
1035 exchange
What is false regarding policy loans?
Money borrowed from the cash value is taxable
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, his would be considered a what?
Settlement option
Which of the following best describes taxation during the accumulation period of the annuity?
Taxes are deferred
Which statement is false regarding a Modified Endowment Contract?
The policyholder can receive distributions at any time without being penalized
What concept is associated with "exclusion ratio"?
Annuities payments
What type of annuity activity will cause immediate taxation of the interest earned?
Surrendering the annuity for cash
Finish this sentence- Premiums paid by the employer in a business life insurance policy are..
Tax deductible by the employer
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?
50% tax on the amount not distributed as required
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 an allowable 1035 exchange?
A whole life insurance policy is exchanged for a term insurance policy
What is the main purpose of the Seven pay test?
It determines whether an insurance policy is "over funded" or if it's a Modified Endowment Contract.
Which of the following statements is true concerning whole life insurance?
Lump sum death benefits are not taxable
Are life insurance death proceeds generally taxed as income?
No
Finish this statement- Death benefits payable to a beneficiary under a life insurance policy are generally..
Not subject to income taxation by the Federal Government
What is false about whole life insurance?
Policy loans are tax deductible
What term is used to name the nontaxed return of unused premiums?
Dividend
What happens if a person dies after paying all IRA premiums?
The entire value of the premiums and benefits would be included in the gross estate
What is true about taxation of dividends in participating policies?
Dividends are not taxable
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable
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 insured paid only part of her total number of IRA premiums before she died. What effect will this have on the insureds estate?
Only premiums paid will be included in the estate
What method is used to determine the taxable portion of each annuity payment?
The exclusion ratio
An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitants wife is the beneficiary, what will occur?
The interest will continue to accumulate tax deferred
What is true about policy loans regarding whole life insurance?
They can be repaid at any time, including surrender and death, an insurer can charge interest on outstanding policy loans and money borrowed from the cash value IS NOT taxable
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 (LIFO)
During the accumulation period in a nonqualified 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 of e statements is false concerning a Modified Endowment Contract?
The policyholder can receive distributions at any time without being penalized.
Which of the following statements regarding deferred compensation funds is INCORRECT?
They are qualified plans
An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the contracts interest NOT be taxable?
Spouse
