6.0 Federal Tax Consideration for Life Insurance Flashcards
Earned income
salary, wages, or commissions;
-but not income from investments, unemployment benefits, and similar
Gross income
a person’s income before taxes or other deductions
FIFO (First In, First Out)
principle under which it is assumed that the funds paid into the policy first will be paid out first
LIFO (Last In, First Out)
principle applied to asset management in life insurance products, under which it is assumed that the funds paid into the policy last will be paid out first
Nonprofit organization
an organization that uses its surplus to fulfill its purpose instead of distributing the surplus to its owners or members
Policy endowment
maturity date
Policy proceeds
in life insurance, the death benefit
Pretax contribution
contribution made before federal and/or state taxes are deducted from earnings
Rollover
withdrawal of the money from one qualified plan and placing it into another plan
Surrender
early termination of a policy by the policyowner
taxation in life insurance
-Premiums are not tax deductible
-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 (other than lump sum).
True or False: Policy loans from the cash value are income taxable.
No. They are NOT income taxable
Surrender (for cash value) example Face amount: $300,000 Premiums paid: $70,000 Total cash value: $100,000 How much is taxable?
If insured took out 100k, 30k would be taxable since 100k exceeds the premiums paid.
When accelerated benefits are paid under a life insurance policy to a terminally illinsured, are the benefits are received tax free
Yes
Life insurance proceeds paid to a named beneficiary are generally free of ___
federal income taxation
