Federal Tax Considerations for Life Insurance and Annuities

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?

The interest will continue to accumulate tax deferred.

Life insurance death proceeds are

Generally not taxed as income

Which of the following terms is used to name the nontaxed return of unused premiums?

dividend

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

The entire face value of the policy will be included in J's taxable estate.

Which of the following is true regarding taxation of dividends in participating policies?

Dividends are not taxable

Which of the following is used to determine the annuity amounts that are not taxable?

Exclusion ratio

If taken as a lump sum, life insurance proceeds to beneficiaries are passed

Free of federal income taxation.

What is the tax consequence of amounts received from a Traditional IRA after the money was left in the tax-deferred account by the beneficiary?

Income tax on distributions and no penalty.

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement option.

What type of annuity activity will cause immediate taxation of the interest earned?

Surrendering the annuity for cash

Dividend

return of unused premiums

An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable?

spouse

In life insurance policies, cash value increases

Grow tax deferred.

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?

interest only

Who can make a fully deductible contribution to a traditional IRA?

An individual not covered by an employer-sponsored plan who has earned income

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Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½.

Which of the following best describes taxation during the accumulation period of an annuity?

Taxes are deferred.

When would life insurance policy proceeds be included in the insured's taxable estate?

When there are any incidents of ownership at the time of death

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.

Which of the following is NOT true of Section 1035 Policy Exchanges?

Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days.

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.

When must an IRA be completely distributed when a beneficiary is not named?

December 31 of the year that contains the fifth anniversary of the owner's death.

developed to determine the portion of the annuity payment that will be taxable and nontaxable.

The ratio of the total investment in that contract to the expected return

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?

the difference between the premiums paid and the cash value would be taxable = $3000

What method is used to determine the taxable portion of each annuity payment?

the exclusion ratio

When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the Interest Settlement Option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on

$11,000

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?

$3,000