Federal Tax Considerations for Life Insurance and Annuities / Life Insurance
1035 exchange
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?
cash value growth is tax deferred
According to the taxation rules of life insurance policies, how are cash value increases taxed?
the interest will continue to accumulate tax deferred
An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?
$3,000
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?
accumulated cash value
If an annuitant dies during the accumulation period, what benefit will be included in the annuitants estate?
settlement option
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a what?
grow tax defered
In life insurance policies, cash value increase how?
tax free
In settlement options, the interest is taxable, and the principal is taxed how?
tax free
Life insurance death proceeds are taxed how?
owner's income
Traditional IRA contributions are tax deductible based on what?
taxable
Traditional IRA's are taxed how?
only the portion in excess of the premium paid
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
1035
What exchange is a nontaxable exchange of cash value life insurance or an annuity on the same life?
7-pay test
What test does a life insurance have to fail in order to become a MEC?
federal estate tax
What type of tax is associated with death proceeds from a life insurance policy?
distributions are taxable
When contributions to an immediate annuity are made with before-tax dollars, what is true of the distributions?
December 31 of the year that contains the fifth anniversary of the owner's death
When must an IRA be completely distributed when a beneficiary is not named?
fully taxable
Withdrawals, policy loans, and distributions of a MEC is taxed how?
59 1/2
You need to wait til what age to take out withdrawals from a MEC to avoid penalties?
the amount of the distribution is reduced by the amount of a 20% withholding tax
A 60-year-old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. What is true about the tax?
spouse
An applicant buys a non-qualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity not be taxable?
$10,000
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer?
$10,000, no tax consequence
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer?
taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2
During the accumulation period in a non-qualified annuity, what are the tax consequences of a withdrawal?
$3,000
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?
it is only taxable if the cash value exceeds the amount paid for premiums
If an insured surrenders his life insurance policy, how is the tax handled?
from trustee to trustee
In a direct transfer, how is money transferred from one retirement plan to a traditional IRA?
tax free
Lump-sum cash payments of life policy proceeds are taxed how?
not taxed
Money borrowed from the cash value of a life insurance policy, is taxed how?
tax free
Policy loans from the cash value are taxed how?
tax free
Roth IRA are taxed how?
taxes are deferred
What best describes taxation during the accumulation period of an annuity?
Withdrawn amounts are taxed on a last in, first out basis
What describes the taxation of an annuity when money is withdrawn during the accumulation phase?
1035 exchange
What exchange can not be from a less tax advantaged contract to a more tax advantaged contract?
Modified Endowment Contract (MEC)
What is an overfunded life insurance policy?
Modified Endowment Contract (MEC)
What is the name for an overfunded life insurance policy?
50%
What is the penalty for IRA distributions that are below the required minimum for the year?
50%
What is the penalty if a immediate annuity is not starting distribution before age 70 1/2?
exclusion ratio
What is used to determine the amount of an annuity distribution that is exempt from taxation?
1035 exchange
What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?
interest earned on principal
What portion of a nonqualified annuity payment would be taxed?
70 1/2
When immediate annuities are used to pay IRA benefits, distributions must begin no later than what age?
