FEDERAL TAX CONSIDERATIONS FOR LIFE INSURANCE & ANNUITIES 0820

What type of annuity activity will cause immediate taxation of the interest earned? A Surrendering the annuity for cash B Using the contract as collateral for a loan C Changing a settlement option D Failing to make a planned contribution

A Surrendering the annuity for cash One-sum cash surrenders give rise to immediate taxation of the interest earned.

To attain currently insured status under Social Security, a worker must have earned at least how many credits during the last 13 quarters? A 4 credits B 6 credits C 10 credits D 40 credits

B 6 credits To be considered currently (or partially) insured, an individual must have earned 6 credits during the last 13-quarter period.

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 A Premature distribution. B Rollover. C 1035 exchange. D Qualified distribution.

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

If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate? A No benefits B Premiums paid C Accumulated cash value D Full annuity benefit

C Accumulated cash value If the annuitant died during the accumulation period, the insurer is obligated to return all or a portion of the annuity cash value (values accumulated in the annuity in accordance with contract terms), which will be included in the deceased annuitant's estate.

What is the number of credits required for fully insured status for Social Security disability benefits? A 4 B 10 C 30 D 40

D 40 The term "fully insured" refers to someone who has earned 40 quarters of coverage (10 years of work times 4 maximum annual credits).

If taken as a lump sum, life insurance proceeds to beneficiaries are passed A Tax-deductible. B Part tax-free and part taxable. C Without interest. D Free of federal income taxation.

D Free of federal income taxation. Life insurance proceeds to beneficiaries are passed free of federal income taxation if taken as a lump sum distribution. If the proceeds are taken as other than lump sum, part of the proceeds will be tax-free and part will be taxable. When paid in installments, part of the proceeds contains principal and some interest, so the interest portion is subject to federal income taxation.

When would life insurance policy proceeds be included in the insured's taxable estate? A When there are any incidents of ownership at the time of death B If the insured's spouse is the policyowner C If the insured transfers ownership of the policy or makes a gift of the policy 5 years prior to his or her death D When the beneficiary is named in the policy

A When there are any incidents of ownership at the time of death If the insured were the owner of the policy at the time of death or possessed any incidents of ownership at the time of death, the value of the policy will be included in the insured's taxable estate. If the insured, as policyowner, assigns or transfers ownership of the policy or makes a gift of the policy within 3 years prior to his or her death, the entire face amount of the policy will be included in his or her taxable estate.

When do full Social Security retirement benefits begin? A When the worker has earned the required credits. B When the worker reaches age 65 and has earned the required amount of work credits. C When the worker reaches 65. D When the worker reaches 59 1/2.

B When the worker reaches age 65 and has earned the required amount of work credits. Social Security retirement benefits begin when a worker who has earned the required work credits (40 calendar quarters or 10 years of work) reaches age 65.

Which of the following is true regarding taxation of dividends in participating policies? A Dividends are taxable in some life insurance policies and nontaxable in others. B Dividends are considered income for tax purposes. C Dividends are not taxable. D Dividends are taxable only after a certain amount is accumulated annually.

C 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.

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

C 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.

If an IRA annuitant dies after the annuity has been paid up, what effect will this have on the annuitant's estate? A Only partial value of the contributions will be included. B IRA funds will be redirected to the federal government. C The IRA must be converted to an annuity policy for the listed beneficiary. D The entire value of the contributions and benefits will be included.

D The entire value of the contributions and benefits will be included. If a person dies after paying all IRA contributions, the entire value of the contributions and benefits would be included in the gross estate. If only part of the contributions were paid, the partially paid amount would be directed to the gross estate.

What method is used to determine the taxable portion of each annuity payment? A The exclusion ratio B The excise ratio C The annuity to age ratio D The marginal tax formula

A The exclusion ratio 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.

What is the penalty for IRA distributions that are below the required minimum for the year? A 10% B 25% C 50% D 60%

C 50% 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.

If an insured worker has earned 40 quarters of coverage, the worker's status under Social Security disability is A Correctly insured. B Permanently insured. C Fully insured. D Partially insured.

C Fully insured. A worker is fully insured under Social Security if the worker has accumulated the required number of credits based on his/her age.

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase? A Taxes are deferred on withdrawn amounts, but a flat penalty is charged. B Taxes are deferred on withdrawn amounts. C Withdrawn amounts are taxed on a last in, first out basis. D Withdrawn amounts are taxed on a first in, last out basis.

C Withdrawn amounts are taxed on a last in, first out basis. When money is withdrawn from the annuity during the accumulation phase the amounts are taxed on a last in first out basis (LIFO). Therefore, all withdrawals will be taxable until the owner's cost basis is reached. After all of the interest is received and taxed the principal will be received with no additional tax consequences.

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions? A Distributions are taxable. B Distributions are nontaxable. C Distributions cannot begin prior to age 70½. D There are no distributions.

A Distributions are taxable. If contributions are made with before-tax dollars, contributions to this fund are fully taxable. Distributions must begin no later than age 70½ in order for the annuitant to avoid penalties. The penalty is 50% of the shortfall from the required annual amount.

Which of the following is an eligibility requirement for all Social Security Disability Income benefits? A Have attained fully insured status B Be disabled for at least 1 year C Have permanent kidney failure D Be at least age 50

A Have attained fully insured status Although Social Security offers many benefits, such as retirement, survivors and Medicare, only those who have attained fully insured status are eligible for Disability Income benefits. Contributing to Social Security for 40 quarters (10 years) attains fully insured status.

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? A Interest only B Both principal and interest C Neither principal nor interest D Principal only

A Interest only If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.

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? A $50,000 B $18,000 C $15,000 D $3,000

D $3,000 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.

Which of the following is used to determine the annuity amounts that are not taxable? A Pro rata ratio B Exclusion index C Market-adjusted annuities index D Exclusion ratio

D Exclusion ratio The "exclusion ratio" is used to determine the annuity amounts that should be excluded from taxes. During the accumulation phase, the contributions to the annuity have already been taxed. Therefore, the contributions are not taxed during the income period.