7 - 02232023 - Review Chapter - Federal Tax Considerations for Life Insurance and Annuities
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 take a distribution and rolls it over to an IRA without 60 days. Which of the following is true?
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
50% tax on the amount not distributed as required
An IRA uses immediate annuities to pay out benefits; the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay?
$3000
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?
Cash Value Increases
Any cash value accumulations in the policy can be borrowed against by the policyowner, or may be paid to the policyowner upon surrender of the policy. Cash value GROWS TAX DEFERRED. Upon death, the face amount is paid, and there is no more cash value. Death benefits generally are paid to the beneficiary income tax free.
Modified Endowment Contract (MEC)
Any distributions from MECs are taxable, including withdrawals and policy loans. All of the other statements are true.
Taxation of Business Life Insurance
Any time a business is the named beneficiary of a life insurance policy, or has a beneficiary interest in the policy, any premiums that the business pays for such insurance are NOT TAX DEDUCTIBLE.
Premiums paid for life insurance are not tax deductible.
As a general rule, premiums paid for life insurance are NOT tax deductible. The exception to this rule is when an employer buys group term life insurance for his employees since it is considered a business expense.
Rollovers and Transfers
Distributions from 401(k) plans are taxable as ordinary income in the year of the distribution. However, if the distribution is rolled over to a Traditional IRA, taxes are deffered until thr required minimum IRA distributions begin. Since this client acutally took a distribution (instead of making a trustee-to-trustee roll over), the distribution is subject to 20% withholding tax.
Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 and a half.
During the accumulation period in a Non-Qualified Annuity, what are the tax consequences of a withdrawal?
Settlement Options
If $100,000 of life insurance proceeds were used in a settlement option paying $13,000 per year for 10 years, $10,000 per year would be income tax free (as principal) and $3,000 per year would be income taxable (as interest).
$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?
Interest Only
If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.
Taxation of Individual Retirement Annuities (IRAs)
If contributions are made with BEFORE-TAX dollars, contributions to this fund are FULLY TAXABLE. Distributions must begin no later than age 72 in order for the annuitant to avoid penalties. The penalty is 50% of the shortfall from the required annual amount.
50% Penalty
If there are no distractions at the required are, or if the distractions are not large enough, the penalty is 50% of the shortfall from the required annual amount.
Settlement Options
In ____________ Options, the PRINCIPAL IS TAX FREE, but the INTEREST IS TAXABLE.
1035 Exchange
In accordance with section 1035 of the Internal Revenue Code certain exchanges of life insurance policies and annuities may occur in a NONTAXABLE EXCHANGES. A 1035 exchange is a nontaxable exchange of cash value life insurance or an annuity on the same life.
Grow tax deferred
In life insurance policies, cash value increases...
Premiums paid by an individual on a $30,000 group term life insurance plan for employees.
In which of the following instances would the premium be tax deductible?
Cash value GROWS TAX DEFERRED
Life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.
Modified Endowment Contract (MEC)
Taxation rules that apply to MECs cash value: - Tax-deferred accumulations - Any distributions are taxable, including withdrawals and policy loans - Distributions are taxed on LIFO bases (Last In, First Out) or interest-first rule - Distributions before age 59 and a half are subject to a 10% penalty
Taxation of Personal Life Insurance
The death benefit is not income taxable; any interest earned is income taxable.
Surrenders
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.
1035 Exchange
The following are allowable exchange: - A life policy for another life insurance policy, an endowment contract, or an annuity contract - An endowment contract for another endowment contract or an annuity contract; or - An annuity contract for another annuity contract
Taxation of Personal Life Insurance
The following taxation rules apply to life insurance policies: - Premiums are NOT TAX DEDUCTIBLE - Death Benefits: Tax free if taken as a lump-sum distribution to a named beneficiary; and Principal is tax free; interest is taxable if paid on installments (other than lump sum)
Tax deductible by the employer
The premiums paid by the employer in a business life insurance policy are
Taxation of Business Life Insurance
The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are TAX DEDUCTIBLE to the employ as a business expense.
50%
What is the penalty for IRA distributions that are below the required minimum for the year?
Interest Only
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
Surrenders
When a policy owner surrenders a policy for cash value, some of the cash value received may be taxable as income if the cash surrender value EXCEEDS the amount of the premiums paid for the policy.
Distributions are taxable
When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?
Taxation of Individual Retirement Annuities (IRA)
When immediate annuities are used to pay IRA benefits, distributions must begin no later than age 70 and a half in order for the annuitant to avoid penalties. The penalty is 50% of the shortfall from the required annual amount.
Withdrawal of Interest and Principal
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 withdrawals will be taxable until the owner's cost basis is reached. After all of the interest is received and taxed, the principal will be received with no additional tax consequences.
Settlement Options
When the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is taxable as income. In settlement options, the principle is tax free, but the interest is taxable.
$11,000
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
Dividend are not taxable
Which of the following is TRUE regarding taxation of dividends in participating policies?
Withdrawals are not taxable
Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE
Dividends
____________ are not considered to be income for tax purposes, since they are the reigns of unused premiums. The interest earned on the dividends, however, is subject to taxation as ordinary income.
