Federal Tax Considerations for Life Insurance & Annuities

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT

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

In life ins policies, cash value increases

Grow tax deferred

In life insurance policies, cash value increases

Grow tax deferred.

Policy Proceeds

in life insurance, the death benefit

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?

$10,000, no tax consequence

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?

50% tax on the amount not distributed as required

Which concept is associated with "exclusion ratio"?

Annuity Payments

Earned Income

Any income (wages/salary) that is generated by working

When must an IRA be completely distributed when a beneficiary is not named?

December 31 of the year that contains the 5th anniversary of the owner's death

Which of the following is true regarding taxation of dividends in participating policies?

Dividends are not taxable

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?

Income tax on distributions and no penalty

nonprofit organization

Institution that functions much like a business, but does not operate for the purpose of generating profits

When a beneficiary received payments consisting of both principal and interest portions, which parts are taxable income?

Interest Only

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is

Modified Endowment Contract

Traditional IRA contributions are tax deductible based on which of the following?

Owner's income

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement Option

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?

Spouse

What type of annuity activity will cause immediate taxation of the interest earned?

Surrendering the annuity for cash

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

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

When would life ins policy proceeds be included in the insured's taxable estate?

When there are any incidents of ownership at the time of death

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?

Withdrawn amounts are taxed on a last in, first out basis

Policy endowment

maturity date

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

1035 Exchange

If an annuitant dies before accumulation period, what benefit will be included in the annuitant's estate?

Accumulated cash value

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions

Distributions are taxable

Which of the following terms is used to name non taxed return of unused premiums

Dividend

What is the main purpose of Seven-pay test?

It determines if the insurance policy is an MEC.

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

It is only taxable if the cash value exceeds the amount paid for premiums

The advantage to qualified plans to employers is

Tax-deductible contributions

Which of the following best describes taxation during the accumulation period of an annuity?

Taxes are deferred

Which method is used to determine the taxable portion of each annuity payment?

The exclusion ratio

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?

The interest will continue to accumulate tax deferred

Pretax contribution

contribution made before federal and/or state taxes are deducted from earnings

Rollover

the process of moving a retirement account balance to another qualified account without incurring a tax penalty

Gross Income

the total amount of income from wages before any payroll deductions

Amounts Available to Policyowner

Any cash value accumulations in the policy can be borrowed against the policy owner, or be paid to the policy owner upon surrender of the policy

a 60 yo participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true?

The amount of the distribution is reduced by the amount of a 20% withholding tax.

If taken as a lump sum, life ins proceeds to beneficiaries are passed

Free of federal income taxation

Surrender

early termination of a policy by the policyowner

LIFO (last in, first out)

principle applied to asset management in life insurance products, under which it is assumed that the funds paid into the policy last will be paid out first

FIFO (first in, first out)

principle under which it is assumed that the funds paid into the policy first will be paid out first

Which of the following is used to determine the annuity amounts that are not taxable?

Exclusion ratio

Life ins death proceeds are

Generally not taxed as income

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?

$3,000

Policy loans can be repaid in any of the following ways

By the owner while the policy is in force, at policy surrender, or at insured's death