6.1 Federal Tax Consideration for Life Insurance Flash Flashcards
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
Why are dividends in life insurance policies not taxable?
Dividends are not considered income for tax purposes; they are a return of unused.
What is the name of an overfunded life insurance policy
a Modified Endowment Contract (MEC)
Is the death benefit a life insurance policy taxed to the beneficiary if its received as a lump sum?
No, lump-sum benefits are received tax-free.
What is the general taxation rule for the death benefits payable to the beneficiary of a life insurance policy?
Death benefits are generally not subject to income taxes
according to the taxation rules of life insurance policies, how are cash value increases taxed?
cash value growth is tax-deferred.
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
Only the portion in excess of the premium paid
What is the main purpose of the 7-pay Test?
to determine if a life insurance policy is a Modified Endowment Contract (overfunded)
What portion of a nonqualified annuity payment would be taxed?
Interest earned on principal
In a direct rollover, how is the money transferred from the one retirement plan to a new one?
from the trustee to trustee
If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion (if any), will be taxed?
Interest only
