Life - Federal Tax - Quiz

Life insurance death proceeds are A) Generally not taxed as income. B) Taxable to the extent that they exceed 7.5% of the beneficiary's adjusted gross income. C) Taxed as a capital gain. D) Taxed as ordinary income.

A) Generally not taxed as income. Correct! Life insurance death benefits are generally not taxed as income.

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an A) Modified endowment contract. B) Accelerated benefit policy. C) Endowment. D) Nonqualified annuity.

A) Modified endowment contract. Correct! Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract.

An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable? A) Annuitant B) Spouse C) Charitable organization D) Dependents

B) Spouse If an annuities contract holder dies before the effective starting date, the contract's interest continues to be taxable, unless the beneficiary is a spouse. In that case, this tax can be deferred.

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 A) Premature distribution. B) Rollover. C) 1035 exchange. D) Qualified distribution.

C) 1035 exchange. Correct! In accordance with Section 1035 of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur as nontaxable exchanges.

An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true? A) He will not have to pay a penalty, regardless of his age. B) He cannot withdraw money from his MEC before age 59½. C) He will have to pay a penalty if he is younger than 59½. D) He will have to pay a penalty regardless of his age.

C) He will have to pay a penalty if he is younger than 59½. Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract. All withdrawals are subject to taxation on a LIFO basis, and if withdrawals are made earlier than the age of 59½, a 10% penalty is imposed.

An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable? A) $50,000 B) $18,000 C) $15,000 D) $3,000

D) $3,000 Correct! The difference between the premiums paid and the cash value would be taxable. In this example, the difference between the premiums paid ($15,000) and the cash value ($18,000) is $3,000.

If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate? A) No benefits B) Policy loans C) Accumulated cash value D) Full annuity benefit

C) Accumulated cash value If the annuitant died during the accumulation period, the insurer is obligated to return all or a portion of the annuity cash value (values accumulated in the annuity in accordance with contract terms), which will be included in the deceased annuitant's estate.

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 return on investment 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) An individual not covered by an employer-sponsored plan who has earned income Correct! Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level.

Which of the following is used to determine the annuity amounts that are not taxable? A) Pro rata ratio B) Exclusion index C) Market-adjusted annuities index D) Exclusion ratio

D) Exclusion ratio The "exclusion ratio" is used to determine the annuity amounts that should be excluded from taxes. During the accumulation phase, the contributions to the annuity have already been taxed. Therefore, the contributions are not taxed during the income period.

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? A) Section 1035 Policy Exchange B) Modified Endowment Exchange C) 401(k) Plan D) Section 457 Deferred Compensation Plan

A) Section 1035 Policy Exchange Correct! As long as the funds are transferred intact and the form is filed, taxation is deferred.

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur? A) The interest will continue to accumulate tax deferred. B) The interest will become immediately taxable. C) The premiums will increase. D) The premiums will decrease.

A) The interest will continue to accumulate tax deferred. If the contract holder dies before the annuity starting date, the contract's interest becomes taxable. If the beneficiary of the annuity is a spouse, the tax can continue to be deferred.

When must an IRA be completely distributed when a beneficiary is not named? A) Due date of the deceased owner's final tax return including extensions. B) December 31 of the year that contains the fifth anniversary of the owner's death. C) Due date of beneficiary's tax return including extensions. D) December 31 of the year following the year of the owner's death.

B) December 31 of the year that contains the fifth anniversary of the owner's death. Correct! If the owner dies before distributions have begun, the entire interest must be distributed in full on or before December 31 of the calendar year that contains the fifth anniversary of the owner's death, unless the owner named a beneficiary.

Which concept is associated with "exclusion ratio"? A) How exclusion riders affect an insurance premium B) Policy provisions C) Annuity payments D) Dividend distribution

C) Annuity payments A portion of an annuity payment is taxable, while another portion is not. The return of the principal paid in is nontaxable. The portion that is taxable is the actual amount of payment, less the expected return of the principal paid in. This relationship is called the "exclusion ratio."

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? A) Both principal and interest B) Neither principal nor interest C) Principal only D) Interest only

D) Interest only Correct! If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.

A 60-year-old 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? A) No taxes are due since the plan participant is over age 59 1/2. B) There is a 10% early withdrawal penalty. C) The amount distributed is subject to ordinary income tax. D) The amount of the distribution is reduced by the amount of a 20% withholding tax.

D) The amount of the distribution is reduced by the amount of a 20% withholding tax. Distributions from 401(k) plans are taxable as ordinary income in the year of the distribution. However, if the distribution is rolled over to a Traditional IRA, taxes are deferred until the required minimum IRA distributions begin. Since this client actually took a distribution (instead of making a trustee-to-trustee roll over), the distribution is subject to 20% withholding tax.