Chapter 8: Life Insurance Premiums & Proceeds

What section of the tax code allows an insurance product to be exchanged for another insurance product, or annuity and maintain the original cost basis?

1035 (1035 Exchange)

How long after an Endowment matures does the policy owner have before constructive receipt becomes effective?

60 days.

When a viatical company pays the original owner money and the owner assigns his policy to the viatical company, what kind of assignment is used?

Absolute assignment.

What provision allows the terminally ill to have access to some of their insurance proceeds while they are still living?

Accelerated benefits.

What 5 factors influence mortality tables?

Age, sex, health, occupation and habits.

What must a policy owner do to avoid constructive receipt?

Exercise an annuity option.

What is the settlement option called that pays the beneficiary at regular intervals only the interest earned on the proceeds?

Interest-only.

For a mortality table to be accurate, it must be based on what 2 things?

Large cross section of PEOPLE. Large cross section of TIME.

The legal reserve money set aside for each policy to pay future claims is invested and earns interest. Will a greater % on the reserve money result in a greater or lesser premium?

Lesser.

How do insurance companies treat the "reserves" on their books?

Liability.

What is the settlement option that pays the beneficiary a guaranteed income for life?

Life income.

What is the settlement option called that pays out in a single payment?

Lump-sum cash.

What are the different mods of premium payments?

Monthly, quarterly, semiannually or annually.

When calculating premiums, the insurance company assumes all premium payments are paid at the beginning of the year. Therefore, if you pay monthly or quarterly, will the total you pay be more or less b.c the insurance company wants to make up for the fact that they didn't have all the money all year to earn interest?

More.

What do insurance companies use to determine someone's chances of dying?

Mortality Table.

What are the 3 basic factors that determine a life insurance premium?

Mortality, interest and expenses.

Are accelerated death benefits taxable?

No.

What is the annuity rule?

Original principal is not taxable but the interest earned is, therefore if payments from proceeds are paid out over time, each payment is part proceeds and part interest.

What is the rule of constructive receipt?

Since the policy owner has the right to withdraw the endowed proceeds, so whether or not he does take the money, he will have to pay taxes on the interest earned.

What is this last settlement option similar to? (Or) how does the insurance company treat it?

Single payment immediate annuity.

If surrendering a policy, how can a policy owner figure out his cost basis?

Total premiums paid, less dividends, less loans, less extra premiums for riders i.e : waiver of premium, accidental death, etc.

Are premiums paid by an ex-spouse as part of an alimony decree deductible?

Yes, alimony-judge ordered.

If benefits are paid out in installment payments, is any portion of the payment taxable? If yes, why?

Yes, proceeds are not taxable but the interest they earn is.

In an endowment policy, which has matured, when a policy owner chooses an interest-only option, will the policy owner have to pay any taxes on the proceeds? If yes, why?

Yes, rule of constructive receipt.

Are premiums paid by an employer for employee group insurance deductible as a business expense?

Yes.

How does the insurance company handle such risks if they don't reject the applicant?

Extra percentage tables (rating).

While life insurance proceeds paid to a beneficiary are not income taxable, they are included in the value of a deceased's estate to determine if the estate will need to pay what kind of tax?

Federal estate tax (Note: Spouses can inherit an unlimited amount with no federal estate tax. Beneficiaries do not pay income tax)

What is the settlement option called that pays the beneficiary a specific amount of money at regular intervals until the proceeds are exhausted?

Fixed amount .

What is the settlement option called that pays the beneficiary equal amounts of money at regular intervals for a specified time?

Fixed period (remember each payment consists of principal and interest)

As a rule, are life insurance premiums tax deductible?

No.

Does a terminally ill person who sells her policy to a viatical company have to pay taxes on the money?

No.

If a corporation purchased life insurance on its president, can the corporation deduct the premiums paid?

No.

Is a lump sum payment to a beneficiary, taxable?

No.

What is it called if an applicant represents a higher than normal risk for the insurance company?

Substandard risk.

Are premiums paid by a business creditor for life insurance purchased as collateral security, deductible?

Yes.

Are premiums paid on life insurance owned by a charitable organization deductible?

Yes.

If a policy is surrendered for its cash value of $8,000 and the cost basis was $6,000, is this a taxable event?

Yes. $2,000 is treated as ordinary income.

What are companies called which purchase life insurance policies from the terminally ill?

Viatical Settlement companies.