Quiz: Federal Tax Considerations for Life Insurance

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase? A. Withdrawn amounts are taxed on a last in, first out basis. B. Withdrawn amounts are taxed on a first in, last out basis C. Taxes are deferred on withdrawn amounts, but a flat penalty is charged.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

Withdrawn amounts are taxed on a last in, first out basis. When money is withdrawn from the annuity during the accumulation phase the amounts are taxed on a last in first out basis (LIFO).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

An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits?

A portion of the benefit up to a limit is tax free; the rest is considered taxable income. When the accelerated benefits are paid to a chronically ill insured, they are tax free up to a certain limit. Any amount received in excess of this dollar limit must be included in the insured's gross income.

Which of the following is true regarding taxation of dividends in participating policies? A. Dividends are considered income for tax purposes. B. Dividends are not taxable. C. Dividend are taxable only after a certain amount is accumulated annually. D. Dividends are taxable in some life insurance policies and no taxable in others.

B. 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.

Life insurance death proceeds are A. Taxed as ordinary income B. Generally not taxed as ordinary income C. Taxable to the extent that they exceed 7.5% of the beneficiary's adjusted gross income D. Taxed as a capital gain

B. Generally not taxed as income. Life insurance death benefits are generally not taxed as income.

Which of the following statements is true concerning whole life insurance? A. Policy loans are tax deductible B. Lump-sum death benefits are not taxable C. Dividend interest is not taxable D. Premiums are tax deductible.

B. Lump-sun death benefits are not taxable Dividend interest is taxable; policy loans are not tax deductible, and premiums are not tax deductible.

When an accelerated benefits are paid under a life insurance policy, are the taxable or non taxable for someone who is terminally ill?

Accelerated benefits under a life insurance policy are received tax free by terminally I'll insureds, and tax free up to a limit for chronically ill insureds.

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

Dividend Dividends are the return of unused premiums. They are non taxed.

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

Dividends are not taxable. Not considered to be a source of income for tax purposes since they are a return of unused premiums. The interest earned on the premium is, however, subject to taxation as ordinary income.

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

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

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. 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.

What kind of policy allows withdrawals or partial surrenders?

Universal Life Universal life products allow the partial withdrawal, or surrender, of the policy cash value.

If a life insurance policy develops cash value faster than a 7 pay whole life contract, it becomes a/an

Modified Endowment Contract Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a modified Endowment Contract. It loses the benefits of a standard life contract

In life insurance policies, cash value increases are tax __________.?

Tax deferred Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.

What is the main purpose of the Seven-pay Test?

To determine if a life insurance policy is a Modified Endowment Contract (MEC) The seven-pay test determines whether an insurance policy is "over-funded" or if it's a Modified Endowment Contract. In other words, the cumulative premiums paid during the first seven years of a policy must not exceed the total amount of net level premiums that would be require to pay the policy up using guaranteed mortality costs and interest.

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?

$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 NOT true regarding policy loans? A. Policy loans can be repaid at death B. An insurer can charge interest on outstanding policy loans C. A policy loan may be repaid after the policy is surrendered D. Money borrowed from the cash value is taxable.

Money borrowed from the cash value is taxable. Money borrowed from the cash value is not taxable. Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy loans.