Chap. 6 Flashcards
Q: When would life insurance policy proceeds be included in the insured’s taxable estate?
A: When there is an incident of ownership at the time of death
Life insurance death proceeds are
Generally not taxed as income.
Q: What portion of a nonqualified annuity payment would be taxed?
A: Interest earned on principal
During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?
Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½.
An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable?
Spouse
Q: What is the name for an overfunded life insurance policy?
A: A Modified Endowment Contract (MEC)
Q: What is the main purpose of the 7-pay Test?
A: To determine if a life insurance policy is a Modified Endowment Contract
An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true?
He will have to pay a penalty if he is younger than 59½.
Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?
Withdrawals are not taxable.
Q: Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
A: Only the portion in excess of the premium paid
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?
It is only taxable if the cash value exceeds the amount paid for premiums.
Q: Is the death benefit of a life insurance policy taxed to the beneficiary if it’s received as a lump sum?
A: No, lump-sum benefits are received tax free.
If taken as a lump sum, life insurance proceeds to beneficiaries are passed
Free of federal income taxation.
Q: Why are dividends in life insurance policies not taxable?
A: Dividends are not considered income for tax purposes; they are a return of unused premium.
Which of the following terms is used to name the non taxed return of unused premiums?
Dividend
Q: In a direct rollover, how is the money transferred from one retirement plan to a new one?
A: From trustee to trustee
Q: 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?
A: Interest only
Q: According to the taxation rules of life insurance policies, how are cash value increases taxed?
A: Cash value growth is tax deferred.
In life insurance policies, cash value increases
Grow tax deferred.
Q: What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?
A: Death benefits are generally not subject to income taxes.
Death benefits payable to a beneficiary under a life insurance policy are generally
Not subject to income taxation by the Federal Government.
An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?
$3,000
When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the Interest Settlement Option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on
$11,000.
Which of the following is true regarding taxation of dividends in participating policies?
Dividends are not taxable.
