CH#7 Federal Tax Considerations for Life Insurance and Annuities Q&A

Withdrawals are not taxable

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE A) Distributions before age 59 1/2 incur a 10% penalty on policy gains. B) Policy loans are taxable distributions. C) Accumulations are tax deferred. D) Withdrawals are not taxable.

Spouse

An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the contract's interest NOT be taxable A) Charitable Organization B) Dependents C) Annuitant D) Spouse

$8,000, 60 days

An employee quits her job where she has a balance of $10,000 in her qualified plan. The balance was paid out directly to the employee in order for her to move the funds to a new account. If she decides to rollover her plan to a Traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover A) $10,000, 30 days B) $8,000, 60 days C) $8,000, 30 days D) $10,000, 60 days

Taxes are deferred

Which of the following best describes taxation during the accumulation period of an annuity A) The annuity is subject to state taxes only. B) The annuity is subject to both state and federal taxation. C) The growth is subject to immediate taxation. D) Taxes are deferred

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 A) 50% tax on the amount not distributed as required B) No penalties, since the owner is older than 59 ½ C) 10% for early withdrawal D) 15%

$3,000

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 A) $50,000 B) $18,000 C) $15,000 D) $3,000

The earnings in the plan accumulate tax deferred

Which of the following describes the tax advantage of a qualified retirement plan A) The earnings in the plan accumulate tax deferred. B) Distributions prior to age 59½ are tax deductible. C) Employer contributions are deductible as a business expense when the employee receives benefits. D) Employer contributions are not taxed when paid out to the employee

Only the premiums paid will be included in the estate

An insured had paid only part of her total number of IRA premiums before she died. What effect will this have on the insured's estate A) Only the premiums paid will be included in the estate. B) Any IRA funds will be directed to the state. C) IRAs have no effect on estates. D) Premiums left unpaid will be deducted from the estate

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 A) 1035 exchange. B) Qualified distribution. C) Premature distribution. D) Rollover.

At distribution, all amounts received by the employee are tax free

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT A) Employer contributions are tax deductible as ordinary business expense. B) Funds accumulate on a tax-deferred basis. C) Employee and employer contributions are not counted as income to the employee for income tax purposes. D) At distribution, all amounts received by the employee are tax free

Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½

During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal A) Both interest and principal are taxed; no other penalties are imposed. B) Neither interest nor principal is taxed, but penalties may be imposed. C) Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½. D) Nontaxable principal may be withdrawn first, but the 10% penalty will be imposed if under age 59 ½

Tax deductible

For an individual who is NOT covered by an employer-sponsored plan, IRA contributions are A) Never tax deductible. B) Partially tax deductible depending on the income level. C) Tax deductible. D) Deducted based on the income level

Settlement option

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a A) Nonforfeiture option. B) Rollover. C) Settlement option. D) Nontaxable exchange

Section 1035 Policy 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 A) Section 457 Deferred Compensation Plan B) Section 1035 Policy Exchange C) Modified Endowment Exchange D) 401(k) Plan

Surrendering the annuity for cash

What type of annuity activity will cause immediate taxation of the interest earned A) Changing a settlement option B) Failing to make a planned contribution C) Surrendering the annuity for cash D) Using the contract as collateral for a loan

Distributions are taxable

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions A) Distributions are taxable. B) Distributions are nontaxable. C) Distributions cannot begin prior to age 70½. D) There are no distributions

December 31 of the year that contains the fifth anniversary of the owner's death

When must an IRA be completely distributed when a beneficiary is not named A) December 31 of the year following the year of the owner's death. B) Due date of the deceased owner's final tax return including extensions. C) December 31 of the year that contains the fifth anniversary of the owner's death. D) Due date of beneficiary's tax return including extensions

The entire value of the premiums and benefits will be included

If an IRA annuitant pays the entire fund's premiums before her death, what effect will this have on her estate when she dies A) The IRA must be converted to an annuity policy for the listed beneficiary. B) The entire value of the premiums and benefits will be included. C) Only partial value of the premiums will be included. D) IRA funds will be redirected to the federal government

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

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 first in, last out basis. B) Taxes are deferred on withdrawn amounts, but a flat penalty is charged. C) Taxes are deferred on withdrawn amounts. D) Withdrawn amounts are taxed on a last in, first out basis

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

J transferred his life insurance policy to his son two years before his death. Which of the following is true A) The interest portion of the policy will be included in J's taxable estate. B) The unpaid premiums on the policy will be deducted from J's taxable estate. C) Because the policy has been transferred, it will not be included in J's taxable estate. D) The entire face value of the policy will be included in J's taxable estate

50%

What is the penalty for IRA distributions that are below the required minimum for the year A) 10% B) 25% C) 50% D) 60%

A whole life insurance policy is exchanged for a term insurance policy

Which of the following is NOT an allowable 1035 exchange A) A whole life insurance policy is exchanged for a Universal life insurance policy. B) An annuity is exchanged for another annuity. C) A life insurance policy is exchanged for an annuity. D) A whole life insurance policy is exchanged for a term insurance policy

Generally not taxed as income

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

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

Who can make a fully deductible contribution to a traditional IRA A) Someone making contributions to an educational IRA B) A person whose contributions are funded by a return on investment C) An individual not covered by an employer-sponsored plan who has earned income D) Anybody: all IRA contributions are fully deductible regardless of income level

The interest will continue to accumulate tax deferred

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur A) The interest will become immediately taxable. B) The premiums will increase. C) The premiums will decrease. D) The interest will continue to accumulate tax deferred

$10,000, no tax consequence

An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer A) $10,000, no tax consequence B) $8,000, no tax consequence C) $8,000, tax on growth only D) $10,000, tax on growth only

He will have to pay a penalty if he is younger than 59½

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 A) He will not have to pay a penalty, regardless of his age. B) He cannot withdraw money from his MEC before age 59½. C) He will have to pay a penalty if he is younger than 59½. D) He will have to pay a penalty regardless of his age

Not subject to income taxation by the Federal Government

Death benefits payable to a beneficiary under a life insurance policy are generally A) Exempt from income taxation if over $7,000. B) Not subject to income taxation by the Federal Government. C) Subject to income taxation by the Federal Government. D) Exempt from income taxation if under $7,000

$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 A) $3,000 B) $13,000 C) $10,000 D) $7,000

A Modified Endowment Contract

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is A) An endowment. B) A Multiplicative Policy. C) A Modified Endowment Contract. D) An Accelerated policy

From trustee to trustee

In a direct rollover, how is the money transferred from one plan to the new one A) From the participant to the new plan B) From the original plan to the original custodian C) From trustee to trustee D) From trustee to the participant

Grow tax deferred

In life insurance policies, cash value increases A) Are only taxed when the owner reaches age 65. B) Grow tax deferred. C) Are income taxable immediately. D) Are taxed annually

It determines if the insurance policy is an MEC

What is the main purpose of the Seven-pay Test A) It ensures that the policy benefits are paid out in 7 years. B) It guarantees interest minimum. C) It determines if the insurance policy is an MEC. D) It requires level premium payments for 7 years

Income tax on distributions and no penalty

What is the tax consequence of amounts received from a Traditional IRA after the money was left in the tax-deferred account by the beneficiary A) Capital gains tax on distributions plus 10% penalty. B) Income tax on distributions and no penalty. C) Income tax on distributions plus 10% penalty. D) Capital gains tax on distributions and no penalty

Interest only

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income A) Both principal and interest B) Neither principal nor interest C) Principal only D) Interest only

Money borrowed from the cash value is taxable

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

Dividend

Which of the following terms is used to name the nontaxed return of unused premiums A) Dividend B) Premium return C) Interest D) Surrender