Chap. 6

Question 1

Q: When would life insurance policy proceeds be included in the insured’s taxable estate?

Answer 1

A: When there is an incident of ownership at the time of death

Question 2

Life insurance death proceeds are

Answer 2

Generally not taxed as income.

Question 3

Q: What portion of a nonqualified annuity payment would be taxed?

Answer 3

A: Interest earned on principal

Question 4

During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?

Answer 4

Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½.

Question 5

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?

Answer 5

Spouse

Question 6

Q: What is the name for an overfunded life insurance policy?

Answer 6

A: A Modified Endowment Contract (MEC)

Question 7

Q: What is the main purpose of the 7-pay Test?

Answer 7

A: To determine if a life insurance policy is a Modified Endowment Contract

Question 8

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?

Answer 8

He will have to pay a penalty if he is younger than 59½.

Question 9

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?

Answer 9

Withdrawals are not taxable.

Question 10

Q: Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

Answer 10

A: Only the portion in excess of the premium paid

Question 11

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

Answer 11

It is only taxable if the cash value exceeds the amount paid for premiums.

Question 12

Q: Is the death benefit of a life insurance policy taxed to the beneficiary if it’s received as a lump sum?

Answer 12

A: No, lump-sum benefits are received tax free.

Question 13

If taken as a lump sum, life insurance proceeds to beneficiaries are passed

Answer 13

Free of federal income taxation.

Question 14

Q: Why are dividends in life insurance policies not taxable?

Answer 14

A: Dividends are not considered income for tax purposes; they are a return of unused premium.

Question 15

Which of the following terms is used to name the non taxed return of unused premiums?

Answer 15

Dividend

Question 16

Q: In a direct rollover, how is the money transferred from one retirement plan to a new one?

Answer 16

A: From trustee to trustee

Question 17

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?

Answer 17

A: Interest only

Question 18

Q: According to the taxation rules of life insurance policies, how are cash value increases taxed?

Answer 18

A: Cash value growth is tax deferred.

Question 19

In life insurance policies, cash value increases

Answer 19

Grow tax deferred.

Question 20

Q: What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?

Answer 20

A: Death benefits are generally not subject to income taxes.

Question 21

Death benefits payable to a beneficiary under a life insurance policy are generally

Answer 21

Not subject to income taxation by the Federal Government.

Question 22

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?

Answer 22

$3,000

Question 23

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

Answer 23

$11,000.

Question 24

Which of the following is true regarding taxation of dividends in participating policies?

Answer 24

Dividends are not taxable.

Question 25

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

Answer 25

It is only taxable if the cash value exceeds the amount paid for premiums

Question 26

Which of the following is used to determine the annuity amounts that are not taxable?
Q:What method is used to determine the taxable portion of each annuity payment?

Answer 26

Exclusion ratio

Question 27

Which concept is associated with “exclusion ratio”?

Answer 27

Annuity payments

Question 28

A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called

Answer 28

1035 exchange.

Question 29

What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?

Answer 29

Section 1035 Policy Exchange

Question 30

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant’s wife is the beneficiary, what will occur?

Answer 30

The interest will continue to accumulate tax deferred.

Question 31

An IRA uses immediate annuities to pay out benefits; the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay?

Answer 31

50% tax on the amount not distributed as required

Question 32

What is the penalty for IRA distributions that are below the required minimum for the year?

Answer 32

50%

Question 33

Which of the following best describes taxation during the accumulation period of an annuity?

Answer 33

Taxes are deferred.

Question 34

Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?

Answer 34

Withdrawn amounts are taxed on a last in, first out basis.

Question 35

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

Answer 35

The entire face value of the policy will be included in J’s taxable estate.

Question 36

Which of the following is NOT true regarding policy loans?

Answer 36

Money borrowed from the cash value is taxable.

Question 37

Which of the following is NOT an allowable 1035 exchange?

Answer 37

A whole life insurance policy is exchanged for a term insurance policy.

Question 38

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?

Answer 38

Distributions are taxable.

Question 39

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?

Answer 39

Interest only

Question 40

What type of annuity activity will cause immediate taxation of the interest earned?

Answer 40

Surrendering the annuity for cash

Question 41

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Answer 41

Settlement option.