chapter 6
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
Life insurance death proceeds are
Generally not taxed as income
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income
interest only
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
interest only
Which of the following is TRUE of a qualified plan?
it has a tax benefit for both employer and employee
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
Employer contributions made to a qualified plan
Are subject to vesting requirements
In life insurance policies, cash value increases
Grow tax deferred.
During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?
taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2
All of the following would be different between qualified and nonqualified retirement plans EXCEPT
taxation of accumulation
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?
$3,000
What is the penalty for IRA distributions that are below the required minimum for the year?
50%
Which of the following is NOT an allowable 1035 exchange?
a whole life insurance policy is exchanged for a term insurance policy
Who can make a fully deductible contribution to a traditional IRA?
an individual not covered by an employer-sponsored plan who has earned income
Which concept is associated with "exclusion ratio"?
annuity payments
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?
$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 distributed as required
When must an IRA be completely distributed when a beneficiary is not named?
december 21 of the year that contains the fifth anniversary of the owner's death
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 the nontaxed return of unused premiums?
dividend
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
Which of the following is NOT true regarding a nonqualified retirement plan?
it needs IRS approval
Which of the following is NOT true regarding policy loans?
money borrowed from cash value is taxable
Death benefits payable to a beneficiary under a life insurance policy are generally
not subject to income taxation by the federal government
Traditional IRA contributions are tax deductible based on which of the following?
owner's income
Which type of retirement account does not require the owner to start taking distributions at age 72?
roth IRA
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
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
Which of the following best describes taxation during the accumulation period of an annuity?
taxes are deferred
What 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
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
