Federal Tax Considerations for Life Insurance and Annuities - Practice Questions

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy? a. It is only taxable if the cash value exceeds the amount paid for premiums b. It is not considered to be taxable c. It is taxable only if it exceeds the amounts paid for premiums by 50% d. It is automatically taxable

a

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

a

Which concept is associated with "exclusion ratio"? a. Annuities payments b. Dividend distribution c. How exclusion riders affect an insurance premium d. Policy provisions

a

An insured decides to surrender his Whole Life insurance policy. The cash value at surrender is higher than the premiums paid into the policy, due to interest. What part of the surrender value would be income taxable? a. The amount equal to the premiums paid b. The difference between the premiums paid and the cash value c. The entire cash value amount d. Nothing

b

Contributions to Roth IRAs are a. Tax deductible b. Not tax deductible c. Made with pre-tax dollars d. Always subject to a 6% tax penalty

b

For federal tax purposes, which of the following is true regarding lump-sum life insurance benefits? a. It is taxed as an ordinary income b. It is received tax free c. It is subject to capital gains tax d. It is taxed as a percentage of income

b

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. Nontaxable exchange b. Settlement option c. Nonforfeiture option d. Rollover

b

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income? a. Principal only b. Interest only c. Both principal and interest d. Neither principal nor interest

b

Which of the following is NOT true regarding policy loans? a. Policy loans can be repaid at death b. Money borrowed from the cash value is taxable c. An insurer can charge interest on outstanding policy loans d. A policy loan may be paid upon policy loans

b

A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of the policy to an annuity. This nontaxable transaction is called a a. Rollover b. Direct transfer c. 1035 exchange d. Qualified distribution

c

An IRA owner who is 57 years old wants to make a withdrawal from her traditional IRA. What penalty will be imposed? a. No penalty b. 6% c. 10% d. 20%

c

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. $8,000, tax on growth only b. $8,000, no tax consequence c. $10,000, no tax consequence d. $10,000, tax on growth only

c

In a direct rollover, how is the money transferred from one plan to the new one? a. From the participant to the new plan b. From the original plan to the original custodian c. From trustee to trustee d. From trustee to the participant

c

Life insurance death benefits paid in a lump sum are generally a. Taxed as a capital gain b. Taxed as ordinary income c. Not taxed as income d. Taxable to the extent that they exceed 7.5% of the beneficiary's adjusted gross income

c

Which of the following is true regarding taxation of dividends in participating polices? a. Dividends are taxable only after a certain amount is accumulated annually b. Dividends are taxable in some life insurance policies and nontaxable in others c. Dividends are considered income for tax purposes d. Dividends are not taxable

d