Federal Tax Considerations for Life Insurance & Annuities (7)
Premiums
not tax deductible
An annuitant dies before the effective date of a purchase annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?
the interest will continue to accumulate tax deferred
Accumulation period
the period after an annuity has been purchases but before distributions begin
Rollover
a tax free distribution of cash from one retirement plan to another
Death benefits payable to a beneficiary under a life insurance policy are generally
not subject to income taxation by the federal government
Any cash value accumulation in the policy can
be borrowed against by the policy owner or may be paid to the policy owner upon surrender of the policy
7-pay test
determines if an insurance policy is overfunded
Endowment policy is an
investment instrument
Lump sum death benefit is
not income taxable
Money borrowed against the cash value is
not income taxable
Upon surrender or endowment, any cash value in excess of cost basis (premium payments) is
taxable as ordinary income
The portion nontaxable in an annuity benefit is
the interest earned on the principal paid in
The cost basis is
the principal amount, or the amount that was paid into the annuity
The exclusion ratio
used to determine the annuity amounts to be excluded from taxes
When must an IRA be completely distributed when a beneficiary is not named?
December 31 of the year that contains the fifth anniversary of the owner's death
J transferred his life insurance policy to his son two years before his death. Which of the following is true?
The entire face value of the policy will be included in J's taxable estate
Life insurance death proceeds are
generally not taxed as income
Corporate-owned annuities have different tax implications than individual annuities:
growth in the annuity is not tax deferred; interest income is taxed annually unless the corporation owns a group annuity for its employees and each employee receives a certificate of participation
Cash value exceeding premium paid is
taxable at surrender
Dividend interest is
taxable in the year earned
Direct rollover
distribution is made directly from the first plan to the trustee or administrator/custodian of the new IRA plan
When contributions to an immediate annuity are made with before tax dollars, what is true of the distributions?
distributions are taxable
In a direct rollover, how is the money transferred from one plan to a new one?
from trustee to trustee
Any life insurance policy that fails a 7-pay test is classified as a ________ and loses the standard tax benefit of a life insurance contract
modified endowment contract (MEC)
If an IRA annuitant pays the entire fund's premiums before her death, what effect will this have on her estate when she dies?
the entire value of the premiums and benefits will be included
What method is used to determine the taxable portion of each annuity payment?
the exclusion ratio
Endowment life insurance policies
promise to pay the face amount if the insured survives until the end of a specified period and if the insured dies within the same specified period
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 that amount paid for premiums
Endowments require
premiums far in excess of the amount required to fund the death benefit
What is the penalty for IRA distributions that are below the required minimum for the year?
50%
Transfer
a tax free transfer of funds from one retirement program to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another
When the owner withdraws cash value from a universal life policy,
both the cash value and the death benefit are reduced by the surrender
Since dividends are a return of unused premiums, they are not
considered income for tax purposes
What is used to determine the annuity amounts that are not taxable?
exclusion ratio
An insured has a MEC. He wants to withdraw some money in order to pay medical bills. What is true?
he will have to pay a penalty if he is younger than 59.5
Cash surrender of an annuity results in
immediate taxation of the interest earned
3 situations that will result in life insurance being included in the insured's taxable estate
incident of ownership, estate as beneficiary, transfer of ownership
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
Whats is true concerning whole life insurance?
lump-sum death benefits are not taxable
Policy loans are
not income taxable
Premiums are
not tax deductible
Regarding whole life insurance, policy loans are
not tax deductible
Policy dividends are
not taxable
When a policy owner exchanges a cash value life insurance policy for another cash value life insurance policy, or a cash value life policy for an annuity, or an annuity for an annuity, the policies or annuities must be
on the same life
When a policy owner 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 premium paid for the policy
Dividends are not
taxable
The death benefit or face amount of a life insurance policy may be included in the insured's ___________ at death and subject to the _____
taxable estate, federal estate tax
Taxes are deferred during
the accumulation period
A 60 year old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. What is true?
the amount of the distribution is reduced by the amount of a 20% withholding tax
When money is withdrawn from the annuity during the accumulation phase
the amounts are taxed on a Last in, First out basis (LIFO)
If a life insurance policy develops cash value faster than a 7-pay whole life contract, it is
a modified endowment contract
Death benefit
tax free if taken as a lump-sum distribution to a named beneficiary; principal is tax free; interest is taxable if paid in installments
Settlement options
when the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is taxable as income
What best 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
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
Who can make a fully deductible contribution to a traditional IRA?
an individual not covered by an employer-sponsored plan who has earned income
Life insurance proceeds paid to a named beneficiary are generally
free of federal income taxation if taken as a lump sum
