tax treatment of Life insurance and Annuities

transfer of ownership

assigns or transfers ownership of the policy or making it a gift within 3 years prior to his or her death. the entire face value amount of the policy will be included in their taxable estate

Lump Sum Cash Surrenders

cash surrenders of an annuity results in immediate taxation of the interest earned

Life insurance proceeds paid to a named beneficiary are generally

free of federal income taxation if it is taken as a lump sum

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

endowment policy

investment instrument. this policy promises to pay the face amount if the insured survives until the end of the specified period

death benefit paid in installments

principle is tax free; interest is taxable

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.

In premature distributions of IRA, what are the exceptions to the penalty tax? HIM DEAD

10% penalty is imposed on the annuity tax base for early withdrawals prior to age 59 1/2

A policy owner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This non taxable transaction is called

1035 exchange

Doctrine of Economic Benefit

If an employee receives property or benefit in lieu of income and that property or benefit would have been taxable income if it were received in cash, an economic benefit has been received and will be taxed accordingly.

Estate as Beneficiary

If the insured's estate is the designated beneficiary at the time of the insured's death, the entire face amount of the policy will be included in his or her taxable estate.

which of the following terms is used to name the nontaxed return of unused premiums?

dividend

7 Pay Test

if premiums paid during the first 7 years exceed the net level premium that should have been paid, it is a MEC (Modified Endowment Contract)

exclusion ratio

method of determining which part of an annuity payment is taxable, and which part represents the tax-free return of the annuitant's after-tax cost basis.

incident of ownership

right of policy ownership, such as the right to cash value, the right to change the beneficiary, the tight to obtain policy loans, right to assign a policy

Premiums are

not tax deductable

Federal Estate Tax

A tax imposed on the transfer of property at death.

Modified Endowment Contract (MEC)

Any life insurance policy that fails a 7-pay test

Section 1035 (Policy Exchanges)

Due to the fact that life insurance, annuities and endowments are all similar in nature (though they have their differences), the IRS, under certain circumstances, allows for the exchange of one policy for another without taxation to the individual, as long as funds are not distributed to the individual in the process.

Federal Gift Tax

Federal tax imposed on the transfer of securities, property or other assets. The DONOR must pay the tax based on the fair market value of the transferred assets.

what part of 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

the premiums paid by the employer in a business life insurance policy are

Tax deductible by the employer

direct rollover

The plan administrator can transfer a distribution directly to another retirement plan or IRA. Sometimes a check will be issued made payable to your new account. No taxes will be withheld from your transfer amount.

A distribution from an IRA is subject to

income taxation In the year the withdraw is made

policy loans are...

not taxable to a business.

which of the following described the tax advantage of a qualified retirement plan?

the earnings in the plan accumulate tax deferred

Taxation of Individual Annuities

when an annuity is used to fund traditional IRA, distributions are fully taxable if contributions where maid on pretaxed dollars

Withdrawal of Interest and Principal

when money is withdrawn from the annuity during the accumulation phase, the amounts are taxed on LAST in FIRST out basis. therefor all withdraws will be taxable until the owners cost bass is reached

settlement options

when the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is taxable as income

The following taxation rules apply to Roth IRA's

Contributions are not tax deductible excess contributions are subject to a 6%tax penalty

Distributions at Death

-if contract holder dies before annuitization date, the contract's interest becomes taxable -if the beneficiary of the annuity is a spouse, however, the tax can continue to be deferred

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

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

Policy death benefits

paid under a business owned or an employee provided life insurance policy are received income tax free by the beneficiary (in the same manner as individually owner policies)

For an individual who is NOT covered by an employer-sponsored plan, IRA contributions are

tax deductible

the following rules apply the CONTRIBUTIOS made to traditional IRA plans:

tax deductible contributions for the year of the contribution contributions must be made in cash in order to be cash deductible Tax deferred earnings meaning the money that accumulates in the account are not taxed until withdrawn

rollover

tax free distribution of cash from one retirement plan to another

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

cost based

the portion that is nontaxable is the anticipated return of the principle paid in

taxed deferred accumulation

the premium dollars have already been taxed and will not be taxed again when withdrawn from the contract

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.

which of the following describes the tax advantage of a qualified retirement plan?

The earnings in the plan accumulate tax deferred.

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.

Corporate-Owned 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