6.2 Chapter Recap

Question 1

Policy loans from the cash value are NOT income taxable.

Answer 1

c

Question 2

Lump-sum cash payment of life policy proceeds are tax-free for the beneficiary.

Answer 2

c

Question 3

In settlement options, the principal is tax free, but the interest is taxable.

Answer 3

c

Question 4

Taxes must be paid either upon contribution or upon distribution, NOTboth (if taxed on one end, will not be taxed on the other).

Answer 4

c

Question 5

A MEC is an overfunded life insurance policy = failed the 7-pay test.

Answer 5

c

Question 6

FIFO applies to Life insurance only. Annuities follow a LIFO format.

Answer 6

c

Question 7

Life Insurance taxation

Answer 7

i

Question 8

Annuities taxation

Answer 8

i

Question 9

IRAs taxation

Answer 9

i

Question 10

Roth IRAs taxation

Answer 10

i

Question 11

Rollovers and Transfers

Answer 11

i

Question 12

1035 Exchange

Answer 12

i

Question 13

Modified Endowment Contract (MEC)

Answer 13

i

Question 14

Surrender Ex

Answer 14

Consider the following scenario:

Face amount: $300,000

Premiums paid: $70,000

Total cash value: $100,000

If the insured surrendered $30,000 of cash value, the full $30,000 would be income tax free. If the insured took out $100,000, the last $30,000 would be taxable because the $100,000 exceeds the premiums that were paid in by $30,000.

Question 15

Settlement Example

Answer 15

If $100,000 of life insurance proceeds were used in a settlement option paying $13,000 per year for 10 years

$10,000 per year would be income tax free and $3,000per year would be income taxable.