F: Federal Tax Considerations for Life Insurance
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?
$3000
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 true regarding taxation of the accelerated benefits?
A portion of the benefit up to a limit is tax free; the rest is taxable income. When accelerated benefits are paid to a chronically ill insured, they are tax free up to a certain limit. Any amount received in excess of this dollar limit must be included in the insured's gross income
_________________: The nontaxed return of unused premiums
Dividend
Are dividends taxable?
Dividends are not taxable. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums. The interest earned on the dividends, however, is subject to taxation as ordinary income
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
Interest only If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.
Withdrawals are ________, regarding Modified Endowment Contracts
NOT TAXABLE
Death benefits payable to a beneficiary under a life insurance policy are generally
NOT subject to income taxation by the Federal Government
Dividends in participating policies are...
NOT taxable
In life insurance policies, cash value increases...
grow tax deferred Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.
Taxation of accelerated benefits under a life insurance policy are...
tax free to terminally ill insured
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?
$3,000 Key word: settlement option. which is a settlement that is owed to you that will be paid for in a yearly amount of $13,000 and the payments will last for 10 years. The principle amount per year would be $10,000. The $3,000 extra each year is because it is interest, which is taxable.
Life insurance deaths proceeds are...
Generally NOT taxed as income
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. 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.
whole life insurance
Lump-sum death benefits are not taxable
What is the main purpose of the Seven-pay test?
It determines if the insurance policy is an MEC. Correct! The Seven-pay Test determines whether an insurance policy is "over-funded" or if it's a Modified Endowment Contract. In other words, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest
In life insurance policies, cash values increases....
Grow tax deferred Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.
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?
$3000 The difference between the premiums paid and the cash value would be taxable. In this example, the difference between the premiums paid ($15,000) and the cash value ($18,000) is $3,000
Dividends
Nontaxed return of unused premiums
If an immediate annuity is purchased with the face amount at death with the cash value at surrender, this would be considered a...
Settlement Option