Federal Tax Consideration for Life Insurance and Annuities

Policy Loan

A nonforfeiture value in which an insurer loans a part or all of the cash value of the policy assigned as security for the loan to the policyowner.

nonqualified retirement plan

A retirement plan that does not meet requirements established by the Internal Revenue Code for favorable tax treatment. they don't need to approve by RIS

1035 Contract Exchange

A tax-free exchange of one annuity contract for another, one life insurance policy for another, or one life insurance policy for an annuity. The contracts do not have to be issued by the same company

Seven-Pay Test

Determines whether a life insurance policy is a modified endowment contract, which it is if cumulative amounts paid under the contract at any time during the first seven contract years exceeds the cumulative amount that would have been paid had the policy's annual premium equaled the net level premium for a seven-pay life policy of the same type, using certain required assumptions

Accelerate Benefit (Option) Rider

allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and is certified by a physician as expected to die within 1-2 years.

Tax-qualified annuities

are required to be approved by the IRS, provide tax deductible employer contributions, and all tax accumulation is deferred.

Exclusion Ratio

investment in the contract/expected return

Modified Endowment Contract (MEC)

taxable including withdrawals and policy loans any cash value life insurance that develops cash value faster than a seven-pay whole life contract

Taxation on accumulation

taxes are deferred

Settlement Options (Life Insurance)

when an immediate annuity is purchased with he face amount at death or with cash value at surrender