Chapter Quiz: Life Insurance/Federal Tax Considerations for Life Insurance & Annuities

In a direct transfer, how is money transferred from one retirement plan to a traditional IRA? A) from the original plan to the original custodian B) from trustee to trustee C) from trustee to participant D) from the participant to the new plan

B) from trustee to trustee In a direct transfer, the distribution is made directly from the trustee of the first plan to the trustee or administrator/custodian of the new IRA plan.

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation period? A) taxes are deferred on withdrawn amounts, but a flat penalty is charged B) taxes are deferred on withdrawn amounts C) withdrawn amounts are taxed on a last in, first out basis D) withdrawn amounts are taxed on a first in, last out basis

C) withdrawn amounts are taxed on a last in, first out basis When money is withdrawn from the annuity during the accumulation phase the amounts are taxed on a last in, first out basis (LIFO).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.

In life insurance policies, cash value increases: A) are income taxable immediately B) are taxed annually C) are only taxed when the owner reaches age 65 D) grow tax deferred

D) 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.

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

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

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) $50k B) $18K C) $15K D) $3K

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

Traditional IRA contributions are tax deductible based on which of the following: A) IRA limit B) owner's income C) how long the plan has been in force D) owner's age

B) owner's income Traditional IRA contributions are tax deductible, but may be limited if the owner's income exceeds a certain level

J transferred his life insurance policy to his son two years before his death. Which of the following is true? A) because the policy has been transferred, it will not be included in J's taxable estate B) the entire face value of the policy will be included in J's taxable estate C) the interest portion of the policy will be included in J's taxable estate D) the unpaid premiums on the policy will be deducted from J's taxable estate

B) 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 their death, the entire face amount of the policy will be included in their taxable estate.

During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal? A) nontaxable principal may be withdrawn first, but the 10% penalty will be imposed if under age 59 1/2 B) both interest and principal are taxed; no other penalties are imposed C) neither interest nor principal is taxed, but penalties may be imposed D) taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2

D) taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2 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.

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 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 premiums will decrease B) the interest will continue to accumulate tax deferred C) the interest will become immediately taxable D) the premiums will increase

B) 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.

Who can make a fully deductible contribution to a traditional IRA? A) anybody; all IRA contributions are fully deductible regardless of income level B) someone making contributions to an educational IRA C) a person whose contributions are funded by a return on investment D) an individual not covered by an employer-sponsored plan who has earned income

D) an individual not covered by an employer-sponsored plan who has earned income Individuals who are not covered by an employer-sponsored plan may deduct the amount of their IRA contributions regardless of their income level

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 If the owner dies before distributions have begun, the entire estate 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 of the following best describes taxation during the accumulation period of an annuity? A) the growth is subject to immediate taxation B) taxes are deferred C) the annuity is subject to state taxes only D) the annuity is subject to both state and federal taxes

B) taxes are deferred The interest accumulated in an annuity is the tax base, but the taxes are deferred during the accumulation period. The cost base is the premium dollars that have already been taxed and will not be taxed again when withdrawn from the contract.

What is the penalty for IRA distributions that are below the required minimum for the year? A) 10% B) 25% C) 50% D) 60%

C) 50% If there are no distributions at the required age, or if the distributions are not large enough, the penalty is 50% of the shortfall from the required annual amount.

Which of the following is true regarding taxation of dividends in participating policies? A) dividends are taxable in some life insurance policies and nontaxable in others B) dividends are considered income for tax purposes C) dividends are not taxable D) dividends are taxable only after a certain amount is accumulated annually

C) dividends are not taxable Dividends are not considered income for tax purposes, since they are a return of unused premiums. The interest earned on the dividends, however, is subject to taxation as ordinary income