Chapter 10
if 100k of life insurance proceeds were used in a settlement option, which paid 13k per year for ten years, which of the following would be taxable annually?
3k
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 the premiums
Which of the following statements is true concerning whole life insurance
Lump sum death benefits are not taxable
Taxes must be paid either upon ________ or upon __________, NOT both (if taxed on one end, will not be taxed on the other).
contribution, distribution
When a policyowner surrenders a policy for cash value, some of the cash value received may be taxable as income if the cash surrender value .....
exceeds the amount of the premiums paid for the policy.
Death benefits generally are paid to the beneficiary_________
income tax free
Upon surrender or endowment, any cash value in excess of cost basis (premium payments) is .......
taxable as ordinary income.
All life insurance policies are subject to the _________, and any time there is a _________, a new 7-pay test is required.
7-pay test, material change to a policy (such as an increase in the death benefit
What is a 1035 exchange?
A 1035 exchange is a nontaxable exchange of cash value life insurance or an annuity on the same life.
What is a tax base?
A portion of the annuity benefit payment that is taxed
Which of the following is NOT an allowable 1035 exchange?
A whole life insurance policy is exchanged for a term insurance policy
If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitants estate?
Accumulated cash value
What is a split dollar plan?
An arrangement where employer and employee share the cost of a life insurance policy.
Which concept is associated with exclusion ratio?
Annuity payments
Which of the following is NOT true of section 1035 policy exchanges?
Any exchange made under section 1035 of the internal revenue code must be completed within 30 days
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?
He will have to pay a penalty if he is younger than 59 1/2
Life insurance proceeds paid to a named beneficiary are generally free of federal income taxation if taken as a lump sum. What is an exception of this rule?
If the benefit payment results from a transfer of value, meaning the insurance policy is sold to another party prior to the insureds death
A MEC is an overfunded life insurance policy = ________ Once a MEC, always a MEC!
failed the 7-pay test.
Cash surrender of an annuity results in .......
immediate taxation of the interest earned.
When an annuity is used to fund a traditional IRA, distributions are fully taxable if contributions were made with _______. If there are no distributions at the required age, or if the distributions are not large enough, the penalty is ______ of the shortfall from the required annual amount.
pretax dollars, 25%
If the annuity contract holder dies before the annuitization date, the interest accumulated in the annuity becomes taxable. If the beneficiary of the annuity is a _________, however, the tax can continue to be deferred.
spouse
The interest accumulated in an annuity is the _______, but the taxes are ______ during the accumulation period.
tax base, deferred
The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are ........
tax deductible to the employer as a business expense.
Deferred compensation funding falls into two major classes:
In-addition funding plans — designed to pay an amount in addition to the employee's qualified retirement plan; and Elective plans — permit the employee to defer part of their salary or bonus as a tax-deferred savings.
What portion of a nonqualified annuity payment would be taxed?
Interest earned on principal
If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?
Interest only
What happens if a life insurance policy fails the 7 pay test?
It loses the standard tax benefits of a life insurance contract.
Name 3 arrangements where premiums would not be tax deductible for a business?
Key ee insurance, stock redemption, and split dollar insurance.
When money is withdrawn from the annuity during the accumulation phase, the amounts are taxed on a ________
Last In, First Out basis (LIFO).
What is an endowment?
Life insurance policies that promise to pay the face amount if the insured survives until the end of a specified period ( e.g 20 years; 30 years; or until the insureds age 65) and if the insured dies within the same specified period.
How would a life insurance policy be forced into a MODIFIED ENDOWMENT CONTRACT (MEC)
When an insured pays a large portion of the premium to quickly
When are dividends taxed?
When dividends are left with the insurer to accumulate interest, the interest earned on the dividend account is subject to taxation as ordinary income each year interest is earned, whether or not the interest is paid out to the policyowner.
When would premiums paid for by a business not be tax deductible?
When the business is a named beneficiary, and has beneficial interest in the policy.
When would life insurance policy proceeds be included in the insured's taxable estate?
When there is an incident of ownership at the time of death
Which of the following statements regarding taxation of modified endowment contracts are false?
Withdrawal are not taxable
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
When the owner withdraws cash value from a universal life policy (partial surrender), both the __________ are reduced by the surrender.
cash value and the death benefit
Which of the following best describes taxation during the accumulation period of an annuity?
Taxes are deferred
Which of the following best describes the tax advantage of a qualified retirement plan?
The earnings in a qualified plan accumulate tax deferred
An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitants wife is the beneficiary, what will occur?
The interest will continute to accumulate tax deferred
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
They are tax free to terminally ill insured
What is the main purpose of the 7-pay Test?
To determine if a life insurance policy is a Modified Endowment Contract
What is the exclusion ratio?
Used to determine the annuity amounts to be excluded from taxes
List the following permanent life features tax treatment 1) Premiums 2) Cash Value exceeding premiums paid 3) Policy loans 4) Policy dividends 5) Dividend interest 6) Lump sum death benefit
1) Not tax deductible 2) Taxable at surrender 3) Not income taxable 4) Not taxable 5) Taxable in the year earned 6) Not income taxable
The _______ of a business owned life insurance policy or an employer provided policy accumulates on a tax-deferred basis and is taxed in the same manner as an individually owned policy.
Cash value
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Cash value growth is tax deferred.
What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?
Death benefits are generally not subject to income taxes.
Which of the following terms is used to name the nontaxed return of unused premiums
Dividend
Why are dividends in life insurance policies not taxable?
Dividends are not considered income for tax purposes; they are a return of unused premium.
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable
What is the cost base?
For an annuity benefit payment , its the portion that is non taxable
Policy loans from the cash value are ______ income taxable.
NOT
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
When the owner of a 250k life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the interest settlement option. If at the time of withdrawal the interest paid was 11k, the beneficiary would be required to pay income tax on
11k
What is the penalty for IRA distributions that are below the required minimum for the year
25%
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?
25% tax on the amount not distributed at the required minimum age
An insured decides to surrender his 100k whole life policy. The premiums paid into the policy addded up to 15k. At policy surrender, the cash value was 18k. What part of the surrender value would become income taxable?
3k
What is the name for an overfunded life insurance policy?
A Modified Endowment Contract (MEC)
An indivdual has been diagnosed with alzheimers 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 portion of the benefit up to a limit is tax free; the rest is taxable income
In life insurance policies , cash value increases
Grow tax deferred.
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
If the general requirements for qualified plans are met, the following tax advantages apply:
Employer contributions are tax deductible to the employer, and are not taxed as income to the employee; The earnings in the plan accumulate tax deferred; and Lump-sum distributions to employees are eligible for favorable tax treatment.
If taken as a lump sum, life insurance proceeds to beneficiaries are passed
Free of federal income taxation
In a direct rollover, how is the money transferred from one retirement plan to a new one?
From trustee to trustee
Life insurance death proceeds are
Generally not taxed as income
Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?
No, lump-sum benefits are received tax free.
Death benefits payable to a beneficiary under a life insurance policy are generally
Not subject to income taxation by the federal government
Corporate owned annuities: Growth in the annuity is _______ tax deferred; and Interest income is ________ annually unless the corporation owns a group annuity for its employees, and each employee receives a certificate of participation.
Not, taxed
What happens if an ee dies during a split dollar plan?
The er RECOVERS the total of its premium payments made from the policy and the proceeds with the balance being paid to the ees beneficiary.
What method is used to determine the taxable portion of each annuity payment ?
The exclusion ratio
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
Only the portion in excess of the premium paid
__________ paid under a business owned or an employer provided life insurance policy are received income tax free by the beneficiary (in the same manner as in individually owned policies).
Policy death benefits
_______ are not taxable to a business. Unlike an individual taxpayer, a corporation may deduct interest on a life insurance policy loan for loans up to $50,000.
Policy loans
Generally speaking, the following taxation rules apply to life insurance policies: Premiums are...... and death benefit is....
Premiums are not tax deductible and death benefits are tax free if taken as a lump sum distribution to a named beneficiary and principal is tax free; interest is taxable if paid in installments (other than lump sum)
Which of the following instances would the premium be tax deductible?
Premiums paid by an er on a 30k group term life insurance plan for ees
What is deferred compensation funding?
Refers to any er retirement, savings, or other deferred compensation plan that is not a qualified retirement plan.
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 interest accumulated in the annuity NOT be taxable?
Spouse
What type of annuity activity will cause immediate taxation of the interest earned?
Surrendering the annuity for cash
When accelerated benefits are paid under a life insurance policy to a terminally ill insured, the benefits are received
Tax Free
Regarding annuity benefit payments, the interest earned on the principal is known as
Tax base
The premiums paid by the er in a business life insurance policy are
Tax deductible by the er
The advantage of qualfiied plans to the er is:
Tax deductible contributions
Cash values grow.....
Tax deferred
In settlement options, the principal is ________, but the interest is _________.
Tax free, taxable
Any unpaid annuity benefits following the death of an annuitant are paid to the beneficiary and are ______
Taxable
If the annuity has been paid up, and the annuitant dies during the annuity period, the annuity benefits will be _________ and will be included in the deceased annuitant's estate.
Taxable
What does an ee have to do if the group life policy coverage is $50,000 or less?
The employee does not have to report the premium paid by the er as income.