Federal Tax Considerations: Life Insurance
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
What type of annuity has zero cost basis, no after tax basis?
403(b) TSA
Qualified Retirement Plan
A retirement savings plan approved by the Internal Revenue Service that provides individuals with a tax benefit. See also 401(k), individual retirement account, Roth IRA.
Who can make a fully deductible contribution to a traditional IRA?
An individual not covered by an employer-sponsored plan who has earned income
Anything called a qualified plan needs to be
Approved by the IRS
Employer contributions made to a qualified plan
Are subject to vesting requirements
All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT? A Funds accumulate on a tax-deff B C At distribution, all amounts received by the employee are tax free D
At distribution, all amounts received by the employee are tax free
What is required to qualify an individual to contribute to a traditional IRA?
Earned income
What are the income tax benefits of a qualified plan?
Employer contributions are tax deductible and are not taxed as income to the employee. The earnings accumulate tax deferred.
What is taxable on whole/permanent life insurance policies?
Excess cash value/ growth earning and interest on dividends
In a direct transfer, how is money transferred from one retirement plan to a traditional IRA?
From trustee to trustee
What portion of a nonqualified annuity payment would be taxed?
Interest earned on principal
Modified Endowment Contract (MEC)
A life insurance policy under which the amount a policy owner pays in during the first years exceeds the sum of net level premiums that would have been payable to provide paid-up future benefits in seven years.
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Cash value growth is tax deferred
Which of the following is NOT true regarding a nonqualified Retirment plan?
It needs IRS approval
What are not tax deductible on whole/permanent life insurance policies?
Premiums and policy loans
An employer is sponsoring a qualified retirement plan for it's employees where the employer contributes money whenever the business has profit. What is this type of plan called?
Profit-sharing plan
If a Retirment plan is qualified, what does that mean?
The plan has favorable tax treatment
What is the main purpose of the 7-pay test?
To determine if a life insurance policy is a Modified Endowment Contract
When would life insurance policy proceeds be included in the insured's taxable estate?
When there is an incident of ownership at the time of death
When are distributions from an IRA taxed/
When they are received
Individual Retirement Account (IRA)
a tax-sheltered retirement plan in which people can annually invest earnings up to a certain amount
What is the name for an overfunded life insurance plan
MEC Modified endowment contract
TSA's
Nonprofit, educational, religious entities who are contributed by employer through salary.
When must an IRA be completely distributed when a beneficiary is not named?
On December 31st on 5th year anniversary of owners death
What are not taxable on whole/permanent life insurance policies?
Policy dividends and death benefit payouts
What is the primary purpose for a 401(k) plan?
Provide retirement income
What type of plan is 401(k)?
Qualified profit-sharing plan
Name the qualified plans
Roth IRA and IRA
Which of the following best describes the tax advantage of a qualified retirement plan?
The earnings in a qualified plan accumulate tox deferred
Which portion of an annuity benefit payment will be taxed?
The interest earned on the principal-tax base
Which of the following statements regarding the taxation of MEC is FALSE? A Distributions before age 59.5 incur a 10% penalty on policy gains B Policy loans are taxable distributions C Accumulations are tax deferred D Withdrawals are not taxable
Withdrawals are not taxable
What is taxable in an IRA
both the contributions and the growth or earnings
How do qualified plans need to be?
formally written and communicated
When would life insurance death benefits be tax free?
if paid as a lump sum to beneficiary
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
only the portion in excess of the premium paid
Vesting means
ownership
Qualified plans have what
tax advantages
