Federal Tax Considerations for Life Insurance
What is a profit-sharing plan?
where a portion of a company's profit is contributed to a plan that shares with employees.
How are life insurance death proceeds taxed?
tax free if lump-sum distribution is to beneficiary. principal is tax free interest is taxable if paid in installments
Which of the following statements is true concerning whole life insurance? A. policy loans are tax deductible B. lump-sum death benefits aren't taxable C. dividend interest isn't taxable D. premiums are tax deductible
B
Which type of retirement account allows contributions to continue beyond age 70.5 and doesn't force distributions to start at age 70.5 A. traditional IRA B. Roth IRA C. flexible IRA D. standard IRA
B
Which of the following is true regarding taxation of dividends in participating policies? A. dividends are taxable in some life insurance policies and nontaxable in others B. dividends are considered income for tax purposes C. dividends are not taxable D. dividends are taxable only after a certain amount is accumulated annually
C - dividends are not taxable because they're not considered to be income
Which of the following is NOT true regarding a nonqualified retirement plan? A. contributions are not currently tax deductible B. it can discriminate in benefits and selecting participants C. earning grow tax deferred D. it needs IRS approval
D
Which of the following terms is used to name the nontaxed return of unused premiums? a. surrender b. dividend c. premium return d. interest
b
What is a SIMPLE Plan?
for small businesses with < 100 employees whom receive at least $5000 annually. employers match contribution, dollar for dollar, up to 3% of annual compensation. taxation deferred on contributions and earnings until the funds are withdrawn.
How are contributions to a tax-sheltered annuity treated with regards to taxation? A. they are taxed as income for the employee B. they are taxed as income for the employee, but are tax free upon withdrawal. C. they aren't included as income for the employee, but are taxable upon distribution D. they are never taxed
C
What are the three options for how policyowners can receive living benefits from their policies?
cash value increases, dividends, or accelerated benefits.
When does a life insurance policy become a Modified Endowment Contract?
when it fails the seven-pay test.
An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n) A. SEP B. 403(b) plan C. Keogh Plan D. Roth IRA
B
A tax-sheltered annuity is a special tax-favored retirement plan available to A. anyone B. certain age groups only C. certain groups depending on factors such as race, gender, and age D. certain groups of employees only
D
For a retirement plan to be qualified, it must be designed for whose benefit? A. key employee B. employer C. IRS D. employees
D
What are the main differences between a traditional IRA and a Roth IRA?
traditional IRAs grow tax deferred, contributions are tax deductible, 10% penalty for early distributions, and payouts begin at 70.5 Roth IRAs grow tax free, contributions not tax deductible, distribution can't occur until 5 ears and owner is 59.5, and payouts don't have to begin by 70.5
What are the taxation rules on IRA contributions?
-tax-deductible contributions for year of contribution -contributions must be made in "cash" to be tax deductible -excess contributions taxed at 6% a year as long as it remains in IRA -tax deferred earnings aren't taxed until withdrawn
What are the tax advantages of qualified plans?
1. employee contributions are tax deductible, not taxed as income for employee 2. earnings accumulate tax deferred 3. lump sum distributions get favorable tax treatment
All of the following are general requirements of a qualified plan EXCEPT: A. the plan must be permanent, written and legally binding B. the plan must provide an offset for social security benefits C. the plan must be communicated to all employees D. plan must be for exclusive benefits of the employees and their beneficiaries
B
If a LIP 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
C
Who can contribute to a traditional IRA?
anyone with an earned income
What are the taxation rules for a Roth IRA?
contributions are not tax deductible and excess contributions are subject to 6% tax penalty
What are the consequences of withdrawing money from a traditional IRA prior to age 59.5? How can it be avoided?
subject to a 10% penalty for early distribution. can be avoided if the participant is age 59.5, they are totally disabled, they are using it to make a down payment on home, for secondary education expenses or catastrophic medical expenses
What is a Simplified Employee Pension (SEP)?
suited for small employers or self-employed. employee establishes and maintains individual retirement account to which the employer contributes. the difference between SEP & IRA is a much larger amount can be contributed to an SEP.
Explain rollovers and transfers.
tax-free distribution from one plan to another that must be done within 60 days of withdrawal tax-free transfer of funds from one retirement program to a traditional IRA, or transfer of interest in a traditional IRA from one trustee directly to another
What is a 401(k)?
when employees take a reduction in salary by deferring amounts into a retirement plan
What are the general requirements for qualified plans?
-contributions are tax deductible -approved by IRS -cannot discriminate -earnings grow tax deferred -all withdrawals are taxed
Explain the options for funding a 401(k).
1. pure salary reduction plan 2. bonus plan 3. thrift plan bonus and thrift plans are when employer contributes amount or percentage for each dollar contributed by the employee.
A 403(b) plan, commonly referred to as a TSA, is available to be used by A. teachers and not-for-profit organizations B. government workers C. postal employees D. self-employed persons
A
An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits? A. principal is tax free, but interest is taxed. B. the entire benefit will be received tax free. C. the entire living benefit is considered taxable income. D. a portion of the benefit up to a limit is tax free; the rest is taxable income
D
Employer contributions made to a qualified plan A. may discriminate in favor of highly paid employees B. are after-tax contribution C. are taxed annually as salary D. are subject to vesting requirements
D
When must an IRA be completely distributed when a beneficiary is not named? A. due date of beneficiary's tax return including extensions B. December 31 of year following the year of the owner's death C. due date of the deceased owner's final tax return including extensions D. December 31 of the year that contains the fifth anniversary of the owner's death
D
What are the two types of individual qualified plans?
IRA and Roth IRA
How are income payments from a 403(b) plan taxed?
excluded from personal income
Which of the following is true of a qualified plan? A. it may allow unlimited contributions B. it has tax benefit for employer and employee C. it doesn't need to have a vesting schedule D. it may discriminate in favor of highly paid employees
B
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 ROI 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
C
How are dividends taxed in participating policies?
not considered income for tax purposes because they're a return of unused premiums when left with insurer to accumulate interest, interest earned is subject to taxation as ordinary income, whether or not it is paid out to a policyowner.
