Chapter 7-Federal Tax considerations and Retirement Plans

Qualifications for Accelerated Death Benefits

-A physician must give a prognosis of 24 months or less life expectancy for the named insured -The amount of the benefit must at least be equal to the present value of the reduced death benefit remaining after payment of the accelerated benefit -The insurer provides a monthly report for the insured showing the amount paid and the amount of benefit remaining in the life insurance policy

dividend

A participating policy's ________ consists of the amount of premium that is returned to the policyowner if the insurance company achieves lower mortality and expense costs than expected.

60

A policy can avoid being deemed a MEC if the policyowner receives a refund of excess premiums by the insurer within _____ days of the end of the contract year.

$50,000

All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee.

Taxation of MEC Policies

Any withdrawals taken from the policy will be considered earnings and taxed as ordinary income

No

Are employee paid premiums in a group insurance plan tax deductible?

deductible

As long as the insurance death benefit is not payable to the employer when an employee dies, the premiums paid for the life insurance are __________ to the business.

The cost basis in this scenario is $20,000. Only the amount withdrawn that exceeds the cost basis is taxable. Therefore, of the $30,000 withdrawn, $10,000 is taxable.

C paid $20,000 in premiums into a $100,000 universal life insurance policy. The accumulated cash value was $35,000 when C received a cash withdrawal of $30,000. How much of the cash withdrawal was taxable?

beneficiary

If no __________ is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate.

penalty

If the contract is a MEC, all cash value transactions are subject to taxation and _________.

Cost Basis

Life insurance policy premiums establish a _________ in the policy for tax purposes.

life

Once a policy is classified as a MEC, it will maintain that classification for the ______ of the policy

All of the following are characteristics of a qualified retirement plan:

-Employee contributions are either pre-tax or tax deductible -Employer contributions are immediately tax deductible to the employer -The penalty for premature distributions may be waived for death, disability, qualified education costs, medical expenses and first -time homebuyers

Qualified Plans characteristics

-Entire amount of withdrawal is taxable to the employee upon distribution -Must meet ERISA minimum standards -Contributions made by employee are tax-deductible or pre-tax

ERISA qualified plans requirements

-Must benefit employees and beneficiaries -May not discriminate in favor of highly compensated employees -Must be approved by the IRS -Have a vesting requirement

Non-qualified plans characteristics

-Upon withdrawal, only the earnings are taxable -Employee contributions paid with after-tax dollars (not tax-deductible) -Usually not funded by the employer until the employee actually retires

7 Pay Test

A limitation on the total amount that can be paid into a policy in the first 7 years. It compares premiums paid for the policy during the first 7 years with the net level premiums that would have been paid on a 7-year Pay Whole Life policy providing the same death benefit.

Income tax free

Death benefit proceeds from a group life insurance plan to an employee's named beneficiary are received _______ ______ ________.

True

Distributions made on or after 59 ½ and distributions paid out due to death or disability are not subject to the penalty.-MEC (True or False)

No, automatically be deemed a MEC.

Does a single-premium life insurance policy pass the 7-Pay test?

$50,000

Employer paid premiums in connection with group life insurance do not constitute taxable income to the employee, unless the death benefit paid for by the employer exceeds $___________.

Federal Estate Taxes

If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes.

Taxation of Personal Life Insurance (Premiums)

For individuals, premiums are considered a personal expense and are not deductible. They are paid with after-tax dollars. All contributions made with after-tax dollars are considered to be the policy's cost basis for tax purposes.

10%

Funds are subject to a _____% penalty on gains withdrawn prior to age 59 ½. (MEC)

Deductible

Group Term Life premiums paid by an employer are tax _________ to the business as an ordinary and necessary business expense

Settlement

If a __________ option is used instead of a lump sum payment, any interest or earnings component of each payment would be taxable as ordinary income.

Last-in, first-out

If a contract is deemed to be a MEC, any funds that are distributed are subject to a "_____-____,______-_____" (LIFO) tax treatment, rather than the normal "first-in, first-out" tax treatment.

taxable

If a policyowner takes out a loan against the cash value of a life insurance policy, the amount of the loan is not ___________. This is true even if the loan is larger than the amount of the premiums paid in

taxable

Interest paid by insurers on dividends left on deposit is _________ as income.

yes, taxable.

Is Interest earned on policy dividends taxable?

Cost

The ____ basis is the amount contributed using after-tax dollars and is always the first amount withdrawn from the policy.

Remember these****

Policy loans, cash dividends, and withdrawal of cost basis are not subject to taxation. Interest paid as part of a death benefit settlement option is taxed as ordinary income.

ERISA (employee retirement income security act)

Qualified plans must meet the requirements of __________ (____________ _______________ ______________ Act), which is a federal law that sets minimum standards for pension plans in private industry.

Cost Recovery Rule

The amount of withdrawals up to the policy's cost basis will not be taxable. Any withdrawals in excess of the cost basis will be taxed as ordinary income. This is known as the ________ ___________ __________.

Income tax-free

The death benefit (face amount) of both individual and group policies received in a lump sum by a named beneficiary(s) is ________ _____-____.

Lump

The death benefit, or face amount, of the policy is generally not considered taxable income when paid as a ____ sum to a named beneficiary

taxable

The dividends themselves are not _________, since dividends are considered a return of unearned premium.

Employer paid group life insurance premium up to $50,000 of coverage

The exception to the rule concerning the non-deductibility of life insurance premiums is:

deferred

The interest earnings in the cash value grow on a tax-________ basis until the policy is surrendered, sold, transferred for value, or matures.

not tax-deductible

The interest paid on a policy loan is ___ ______-_____

Having the policy lapse with a loan outstanding in excess of cost basis

The only time a policy loan is taxable is in which of the following situations?

Universal and variable universal

The other types of policies that could be classified as MECs are flexible premium policies such as ______________ and _________ __________ Life. The flexible premium feature allows the owner to pay premiums on their own schedule.

tax free

The payment of an accelerated death benefit is __________ ________to a recipient if the benefit payment is qualified

Modified Endowment Contract (MEC), MEC

Under current law, if a policy is overfunded in the early years (funded too quickly) it will be classified as a __________ _________ _________ _____. ______ rules impose stiff penalties to eliminate the use of life insurance as a short term savings vehicle.

7-Pay

When a contract does not pass the ____-____ Test, it will be deemed a MEC

taxable

When the dividend received exceeds the total premium paid for the life insurance policy, the excess dividends are then considered ________ income.

They are considered a personal expense

Which of the following is the reason why premiums paid on personal life insurance are not deductible?

A dividend

_________ consist(s) of the amount of premium that is returned to the policyowner if the insurer achieves lower mortality and expense costs than expected.