Federal tax Considerations for Life Insurance Annuities

Traditional IRA contributions are

Tax deductible

A policy-owner 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 during the accumulation period, what benefit will be included in the annuitants estate?

Accumulated cash value

Life insurance death proceeds are

Generally not taxed as income

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?

Withdrawn amounts are taxed on a last in, first out basis.

In life insurance policies, cash value increases

Grow tax deferred

What is the tax consequences 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 penalties

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

Settlement option

Which of the following terms is used to name the nontaxed return of unused premiums?

The return of unused premiums is called a dividend. Dividends are not considered to be income for tax purposes, since they are the return of unused premiums.

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

December 31 of the year that contains the fifth anniversary of the owners death.

If a life insurance policy develops cash value faster than a seven pay whole life contract, it becomes a/an

Modified endowment contract

What is the penalty for IRA distributions that are below the required minimum for the year?

50%

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?

Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor.

Death benefits payable to a beneficiary under a life insurance policy are generally

Not subject to income taxation by the Federal Government

An applicant buys a non qualified annuity, but dies before the starting date. For which of the following beneficiaries would the contracts interest not be taxable?

Spouse

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

Taxes are deferred.

Which of the following statements regarding taxation of Modified Endowment Contracts is false?

Withdraws are not taxable

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?

Withdraws are not taxable

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

The entire face value of the policy will be included in J's taxable estate. If a policy owner transfers or gives away a life insirance policy within 3 years prior to his/her death, the entire face amount of the polict will be i cluded in his or her taxable esate.

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.

1035 exchange

In accordance with section 1035 of the internal revenue code, certain exchanges of life insurance policies and annuities may occur as nontaxable exchanges.

What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?

Section 1035 policy exchange As long as the funds are transferred intact and the form is filed, taxation is deferred

IRA direct transfer

During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other.