Ch. 5 - Annuity Taxation

Question 0

Last-in/First out (LIFO)

Answer 0

Funds last put into a contract are deemed first to be withdrawn.

Question 1

Basic principle of annuity taxation

Answer 1

Contract principle is not subject to taxation; interest earnings are subject to taxation.

Question 2

Capital gains

Answer 2

Annuity withdrawals do not receive lower capital gains treatment.

Question 3

Penalty on withdrawals before 59 1/2

Answer 3

Withdrawals made before the age 59 1/2 are subject to a 10% penalty on the taxable portion of the withdrawal.

Question 4

Exceptions to the 10% penalty

Answer 4

Death, disability, annuitization, substantially equal distributions of the owner’s life expectancy

Question 5

Taxation on annuitized income

Answer 5

Each income payment from annuity consist partly of interest or earnings and partly of the owners original investment. The income is taxed in such a way as to exclude principal and tax the balance.

If annuitant lives beyond his or her life expectancy, then ongoing payments will consist entirely of interest and will be fully taxable.

Question 6

Exclusion ratio

Answer 6

Formula used to calculate the portion of an annuitized income that is attributable to principal and is therefore not taxable.

Fixed annuities: Investment in contract/Expected return (monthly income x years of life expectancy)

Variable annuities: Investment in the contract/Number of anticipated payments (life expectancy)

Question 7

Taxation if death occurs before annuitization

Answer 7

Death benefit equal to amount deposited or accumulated value at death, whichever is greater. Any portion over the amount deposited is taxable to the beneficiary as ordinary income.

Question 8

Taxation if death occurs after annuitization

Answer 8

Any remaining balance can be paid out tax-free in the form of payments until the original investment has been paid. Any remaining payments, are fully taxable to the beneficiary.

Question 9

Annuity estate taxes

Answer 9

An annuity is included in the owner’s gross estate. Death before annuitization: Full value. Death after annuitization: Present value of future payments.

Question 10

Code section 1035

Answer 10

Section of the IRS code and dressing the exchange of life insurance, annuities, and qualified long-term care contracts.

Question 11

1035 exchanges

Answer 11

Do you think changes are not taxable. Exchange of a life insurance policy for another policy, exchange of a life insurance policy from annuity, exchange of an endowment policy for an annuity, exchange of an annuity for another annuity, Exchange of a life insurance policy for a qualified long-term care contract, exchange of an annuity for a quote for long-term care contract, an exchange of a qualified long-term care contract for another long-term care contract.

Question 12

1035 exchange rules

Answer 12

Both annuity contracts must be nonqualified.

Both contracts must have the same owner and, with some insurers, the same annuitant.

The exchange must occur between the insurer that issues the old contract and the insurer that it is issuing the new contract.

Question 13

Revenue Ruling 2003–51

Answer 13

A provision that states that partial annuity exchanges are considered tax-free exchanges and provides guidelines as to how the cost basis and gain of the amounts in the contract are treated. All values retain the same portion of principle to earnings is held in the original policy.

Question 14

Revenue Procedure 2008-24

Answer 14

IRS rule that imposes a 12 month moratorium on any further withdrawals from a contract involved in a partial annuity exchange.

Question 15

Exceptions to Revenue Procedure 2008–24

Answer 15

Reaches age 59 1/2, The owner dies, the enemy comes disabled, the owner becomes divorced, unit becomes unemployed, distribution is required as a part of a structured settlement

Question 16

Revenue procedure 2011–38

Answer 16

IRS provision the reduced in twelve-month moratorium to 180 days.

Question 17

Suitability information

Answer 17

Age, income, financial information, financial experience, financial objectives, intended use of annuity, financial time rising, existing assets, quiddity needs, liquid net worth, risk tolerance, tax status, financial concerns, Health

Question 18

Basis for recommendation

Answer 18

The producer must have a reasonable basis to believe in annuity is suitable before here she can recommend and sell it.