Life Insurance Chapter 9 Federal Tax Considerations for Life insurance and Annuties
In life insurance policies, cash value increases A Grow tax deferred. B Are income taxable immediately. C Are taxed annually. D Are only taxed when the owner reaches age 65.
Grow tax deferred. - Generally life insurance cash values are only income taxed if the policy is surrendered (totally or partially) and the cash value exceeds the premiums paid.
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a A Rollover. B Settlement option. C Nontaxable exchange. D Nonforfeiture option.
Settlement option. - A settlement option is exercised when an immediate annuity is purchased with the face amount at death or with the cash value at surrender.
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? A $8,000, 30 days B $10,000, 60 days C $10,000, 30 days D $8,000, 60 days
$8,000, 60 days - 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.
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to do a direct transfer from her plan to a Traditional IRA, how much will be transferred from one plan administrator to another and what is the tax consequence of a direct transfer? A $10,000, no tax consequence B $8,000, no tax consequence C $8,000, tax on growth only D $10,000, tax on growth only
$10,000, no tax consequence - During an IRA direct transfer (or direct rollover), the full amount gets reinvested from one plan to the other.
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? A Income tax on distributions plus 10% penalty. B Capital gains tax on distributions and no penalty. C Capital gains tax on distributions plus 10% penalty. D Income tax on distributions and no penalty.
Income tax on distributions and no penalty. - If the beneficiary chooses to leave the money in the tax-deferred account until the calendar year in which the owner would have attained age 70½, the distributions would be subject to income taxation at the rate at the time of withdrawal.
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? A Interest only B Both principal and interest C Neither principal nor interest D Principal only
Interest only - If a beneficiary receives payments that contain both principal and interest portions, only the interest is taxable as income.
J transferred his life insurance policy to his son two years before his death. Which of the following is true? A The unpaid premiums on the policy will be deducted from J's taxable estate. B Because the policy has been transferred, it will not be included in J's taxable estate. C The entire face value of the policy will be included in J's taxable estate. D The interest portion of the policy will be included in J's taxable estate.
The entire face value of the policy will be included in J's taxable estate. - If a policyowner transfers or gives away a life insurance policy within 3 years prior to his/her death, the entire face amount of the policy will be included in his or her taxable estate.
If taken a lump sum, life insurance proceeds to beneficiaries are passed? A. Free of Federal Income Taxation B Tax-Deductible C Part tax free and part taxable D. Without interest
Free of Federal Income Taxation
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? A Dependents B Annuitant C Spouse D Charitable Organization
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
Who assumes control over an insurance company's funds and management if they become insolvent? A. State attorney General B National Association of Insurance Commissioners C. Department of Insurance D. The policyholders or stock owners of the company
Department of Insurance
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 premiums will decrease. B The interest will continue to accumulate tax deferred. C The interest will become immediately taxable. D The premiums will increase.
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.
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
$3,000 - 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.
Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase? A Withdrawn amounts are taxed on a first in, last out basis. B Taxes are deferred on withdrawn amounts, but a flat penalty is charged. C Taxes are deferred on withdrawn amounts. D Withdrawn amounts are taxed on a last in, first out basis.
Withdrawn amounts are taxed on a last in, first out basis. - Incorrect! When money is withdrawn from the annuity during the accumulation phase the amounts are taxed on a last in first out basis (LIFO). Therefore, all withdrawals will be taxable until the owner's cost basis is reached. After all of the interest is received and taxed the principal will be received with no additional tax consequences.
If taken as a lump sum, life insurance proceeds to beneficiaries are passed A Tax-deductible. B Part tax-free and part taxable. C Without interest. D Free of federal income taxation.
Free of federal income taxation. - Life insurance proceeds to beneficiaries are passed free of federal income taxation if taken as a lump sum distribution. If the proceeds are taken as other than lump sum, part of the proceeds will be tax-free and part will be taxable. When paid in installments, part of the proceeds contains principal and some interest, so the interest portion is subject to federal income taxation.
Which of the following is used to determine the annuity amounts that are not taxable? A Exclusion ratio B Pro rata ratio C Exclusion index D Market-adjusted annuities index
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.
Traditional IRA contributions are A Never tax deductible. B Partially tax deductible depending on the income level. C Tax deductible. D Deducted based on the income level.
Tax deductible - The following taxation rules apply to contributions made to traditional IRA plans: tax-deductible contributions for the year of the contribution (based on the person's income); contributions must be made in "cash" in order to be tax deductible; excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA; and tax-deferred earnings are not taxed until withdrawn.
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 457 Deferred Compensation Plan B Section 1035 Policy Exchange C Modified Endowment Exchange D 401(k) Plan
Section 1035 Policy Exchange - As long as the funds are transferred intact and the form is filed, taxation is deferred.