Federal Tax considerations for Life Insurance

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

Surrendering an annuity for cash

The advantage of qualified plans to employers are:

Tax-deductible contributions

During the accumulation period in a non-qualified annuity, what are the tax consequences of withdrawal?

Taxable interest will be withdrawn first, and 10% penalty if the person if under age 59&1/2

An IRA uses immediate annuities to pay out benefits. An IRA owner is nearly 75 years old and wants to collect distributions. What penalty would be pay?

50% tax on the amount not distributed as required

Who would be the insured under a COLI (corporate owned life insurance) policy?

All employees

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is:

A modified endowment contract

When contributions to an immediate annuity are made before tax dollars, what is true of distributions?

Distributions are taxabe

What is not true of whole life insurance?

Policy loans are tax deductible

An applicant buys a non-qualified annuity and dies before the start date. Which beneficiary would the contracts interest not be taxable?

Spouse (for him or her, taxes are deferred)

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?

The amount of the distributions is reduced by the amount of a 20% withholding tax.

What statement about taxation of Modified Endowment contracts is false?

Withdrawals are not taxible

An employee quits her job where she has a balance of $10,000 in her qualified plan. The Balance is paid out to the employee so she can move the money to a new account. If she rolls over the plan to a traditional IRA, how much money will she receive from the plan administrator, and how long does she have to complete a tax free rollover?

$8,000 and 60 days (20% of the distributed money is withheld by the payor)

An employee quits her job. She has a balance of $10,000 in her qualified plan. If she directly transfers the money to a traditional IRA, how much is transferred and what is the consequence?

$10,000 and no tax consequences

What is not an allowable 1035 exchange?

A whole life policy is exchanged for a term insurance policy

What is not true of section 1035 policy exchanges?

Any exchange made under section 1035 if the internal revenue code must be completed within 30 days. In actuality, there is no specific time period for exchanges

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

December 31st of that year that contains the 5th anniversary of the owner's death

When a beneficiary gets payments for both principal and interest, which are taxable as income?

Interest only

What is true concerning whole life insurance?

Lump-sum death benefits are not taxable

Death benefits payable to a beneficiary under a life insurance policy are generally:

Not subject to income taxation by the federal government

What describes the taxation of annuity when money is withdrawn during the accumulation phase?

Withdrawn amounts are taxed on a last in, first out basis

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000/ year for 10 years, what would be taxable annually?

$3,000

An insured decides to surrender his $100,000 whole life policy. Premiums paid into the policy equal $15,000 and the surrender cash value is $18,000. What part of the surrender value is income taxable?

$3,000 is taxable (it is the difference between the premiums paid into the policy and the cash value)

Who can make fully deductible contributions to a traditional IRA?

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

What concept is associated with the "Exclusion Ratio"?

Annuities payments

What is true of taxation of dividends in participating policies?

Dividends are not taxable

What is used to determine the annuity amounts that are not taxable?

Exclusion Ratio

Life insurance proceeds are:

Generally not taxed as income

J transferred his life insurance policy to his son 2 years before his death. What is true?

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

If an IRA annuitant pays the entire funds premiums before death, what happens to their estate at death?

The entire value of premiums and benefits will be included

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

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

What is not true of federal tax advantages of a qualified plan?

At distribution, all amount received by the employee are tax free/

If an immediate annuity is purchased with a face amount at death or with a cash value at surrender. This would be considered a:

Settlement option

For an individual, who is not covered by an employer-sponsored plan, IRA contributions are:

Tax deductible

What is correct of taxation during the accumulation period of an annuity?

Taxes are deferred

What is not true of policy loans?

Money borrowed from cash value is taxable

For an individual who is not covered by an employer sponsored plan, IRA contributions are:

Tax deductible

What is a tax advantage of a qualified retirement plan?

The earnings in the plan accumulate tax deferred

A policy owner cancels his life insurance policy, but wants the cash value transferred to an annuity. This nontaxable transaction is called:

1035 Exchange

What is the penalty for IRA distributions that are below the required minimum for the year?

50%

What is the term used to name the nontaxed return of unused premiums?

Dividend

If taken as a lump sum, life insurance proceeds to the beneficiary are passed:

Free of federal income taxation

In a direct rollover, how is the money transferred from one plan to a new plan?

From trustee to trustee

In life insurance policies, cash value increases

Grow tax deferred

An insured has a modified endowment contract. He wants to withdraw money for medical bills. What is true?

He will have to pay a penalty if he is not younger than 59&1/2

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

Income tax on distributions and no penalty

An annuitant dies before the effective date. If the wife is the beneficiary, what will happen?

Interest will continue to accumulate tax deferred.

What is the main purpose of the seven-pay test?

It determines whether an insurance policy is an MEC.

If an insured surrenders his life insurance policy, what is true of the cash value of the policy?

It is only taxable if the value of the policy is more than the amount that was paid for premiums.

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

The exclusion ratio

An insured had paid only part of her total number of IRA premiums before she died. What will happen to the insured's estate?

Only the premiums paid will be included in the estate