Ch. 10: Taxation of Life Insurance Annuities- Premiums & Proceeds
Which of the following is NOT true regarding policy loans?
Money borrowed from the cash value is taxable.
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
When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?
Distributions are taxable
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable.
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.
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
They are tax free to terminally ill insured
Which of the following is NOT true of Section 1035 Policy Exchanges?
Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days.
What is the penalty for IRA distributions that are below the required minimum for the year?
50%
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?
50% tax on the amount not distributed as required
If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate?
Accumulated cash value
Which concept is associated with "exclusion ratio"?
Annuities payments
In life insurance policies, cash value increases
Grow tax deferred.
What type of annuity activity will cause immediate taxation of the interest earned?
Surrendering the annuity for cash
Which of the following statements regarding deferred compensation funds is INCORRECT?
They are usually qualified plans.
Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?
Withdrawals are not taxable
Which of the following best describes taxation during the accumulation period of an annuity?
Taxes are deferred
An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?
The interest will continue to accumulate tax deferred.
Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?
Withdrawn amounts are taxed on a last in, first out basis.
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
Which of the following is NOT an allowable 1035 exchange?
A whole life insurance policy is exchanged for a term insurance policy. The key is that the exchange may not be from a less tax-advantaged contract to a more tax-advantaged contract. "Same to same" is acceptable
Which of the following is used to determine the annuity amounts that are not taxable?
Exclusion ratio. The "exclusion ratio" is used to determine the annuity amounts that should be excluded from taxes. During the accumulation phase, the contributions to the annuity have already been taxed. Therefore, the contributions are not taxed during the income period.
What method is used to determine the taxable portion of each annuity payment?
Exclusion ratio. The ratio of the total investment in that contract to the expected return is developed to determine the portion of the annuity payment that will be taxable and nontaxable.
If taken as a lump sum, life insurance proceeds to beneficiaries are passed
Free of federal income taxation.
The premiums paid by the employer in a business life insurance policy are
Tax deductible by the employer
During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?
Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½.
Which of the following describes the tax advantage of a qualified retirement plan?
The earnings in the plan accumulate tax deferred.
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an
Modified endowment contract
All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT
At distribution, all amounts received by the employee are free of taxes.
Life insurance death proceeds are
Generally not taxed as income
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
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?
Section 1035 Policy Exchange
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a
Settlement option
An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true?
He will have to pay a penalty if he is younger than 59 1/2
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
Interest only
In which of the following instances would the premium be tax deductible?
Premiums paid by an employer on a $30,000 group term life insurance plan for employees
An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable?
Spouse
Which of the following terms is used to name the nontaxed return of unused premiums?
dividend
