Taxation Pt. 3

distribution of earnings from a MEC taken before the owner's age _____ are subject to a _____% tax penalty (penalty is waived if the policyowner is disabled or if the withdrawal is taken in substantially equal periodic payments over the owner's life expectancy)

59.5, 10

a life insurance contract becomes a modified endowment contract and subject to less favorable income tax treatment if it fails to meet the ____ _____ ______

7 pay test

before a ____ policy is issued, the business must obtain written consent from the employee whose life will be insured through this policy

COLI (corporate owned)

law states that accelerated benefits paid to the insured are not taxable if certain qualifications are met. These qualifications require the insured to meet the definition of terminally ill or chronically ill.

HIPAA (Health insurance portability and accountability act)

MEC withdrawals and policy loans are treated on a __________ basis. -meaning, they are considered to be distributions first of interest earnings (the "last in"), which are _______ -only after all interest has been distributed (and taxed) are amounts distributed from a MEC deemed a ________ return of paid premiums

LIFO, taxable, nontaxable

__________ benefits pay a portion of the policy's face amount if the insured becomes chronically ill or terminally ill.

accelerated

the accelerated benefit is available through an ____ _____ rider (or policy provision) or a ____-____ ____ rider

accelerated benefits, long-term care

-person who has a mental or physical impairment that requires significant medical supervision -accelerated benefits under a long-term care rider that are paid to a person certified as ______ _________ are received TAX FREE, up to certain dollar limits -limits set by the IRS and subject to change every year

chronically ill

______ ______ life insurance is any type of individual life insurance covering employees of all levels in which the corporate is both ______ and (typically) _________

corporate owned (COLI), owner, beneficiary

in a MEC, the ____ _____ is not taxable as income to the beneficiary if it is paid in a lump sum.

death benefit

if written consent is not obtained before the COLI policy is issued, _____ _____ will be taxable to the business whenever paid. (obtaining consent after the policy is issued will NOT reverse this taxable benefit status)

death benefits

_________ received under a MEC, except for those that are used to purchase paid-up additional insurance, are taxable as ______ to the extent that the policy's cash value, immediately before payment, exceeds the investment in the contract

dividends, income

an _________ is a type of contract that pays a lump-sum death benefit at the insured's death, but also pays a lump-sum benefit if the insured is alive upon reaching a stipulated age (which often was age ____)

endowment, 65

MEC is NOT a unique type of life insurance but a classification assigned to any permanent life insurance policy that violates excessive ______ _____ of the _____ _____

funding rules of the tax code

taxation of group term life insurance is covered by Section 79 of the ______ _______ ______

internal revenue code

endowment contracts purchased after 1986 no longer qualify as ____________ __________ and were grandfathered (therefore many continue in force today)

life insurance

those who are terminally ill receive tax-free treatment. this treatment applies to accelerated benefits provided through the provisions of the _______ _______ policy (or rider) OR a qualified _________ settlement

life insurance, viatical

To discourage people from using permanent life insurance to evade taxes, Congress added additional rules to the Tax Code that created a new category of life insurance for tax purposes: the ________________ ____________ _________

modified endowment contract (MEC)

premiums paid by the business to fund a COLI policy are usually ____ _____ _______ *they are usually paid with after-tax dollars, which helps to assure that the death benefit will be relieved income tax free by the business at the covered employee's death

not tax deductible

the 7 pay test applies to the __________ paid into a contract during its first seven years if, at any point during the first 7 policy years, the sum of premiums paid AT THAT POINT exceeds the sum of the premiums that would be required at that point to ____-____ the policy in 7 years, the policy is designed a MEC.

premiums, pay-up

an endowment's cash value does not enjoy ____-_____ status, meaning that each year's increase in cash value is reported as taxable income to the contract owner

tax-deferral

in a MEC, the cash value grows ___-____ as long as it stays in the contract

tax-deferred

a life insurance policy that is a MEC loses the benefit of ___-____ cash value distributions (loans as well as withdrawls)

tax-free

-person who must be certified by a doctor as having a condition that can be expected to result in death within 24 months -pays no income tax on accelerated death benefit payments, since death is relatively imminent and life insurance death benefits are usually income tax-free when paid at death

terminally ill