Chapter 11 – Taxation Of Life Insurance Flashcards
Death benefits received on a life, auto, or health insurance policy are ________ from gross income.
excluded
Death benefits received on an annuity contract are ________ in your gross income.
included
Regardless if someone is a primary or contingent beneficiaries, payment installment options from death benefit will be taxed…
the same way.
The principle amount given as a death benefit payment is given…
tax-free.
If a life insurance death benefit is paid in installments instead of a lump sum, the interest portion is taxable as…
ordinary income.
These are tax-free benefits paid by an insurance/viatical company when the insured is terminally or chronically (2 or 6 activities of daily living) ill.
accelerated benefits
Terminally ill is when a physician expects someone to die within how many months?
24 months
A dividend reinvested into a life insurance policy is considered…
tax-free return of premium.
A withdrawal from the cash value of a life insurance policy is returned…
tax-free.
If you withdraw cash from your life insurance policy, you will not be taxed on the money as long as you…
stay below your basis.
Any cash withdrawal exceeding your basis will be taxed at…
ordinary rates.
LIFO basis recovery applies if the life insurance policy turns into a…
MEC.
If you let your policy lapse, then decide to leave the cash value with the insurance company under an interest only option, the interest earned on the policy will be taxed as…
ordinary income.
Are life insurance premiums paid by you as an individual tax deductible?
No…
Under what circumstances can you deduct the life insurance policy premiums on your taxes?
If the policy is owned by a charity, your ex-wife, or your job, but only if they don’t benefit on the benefit payments.
If a policy is transferred for consideration (eg - money), who pays the taxes on the death benefit when the insured dies?
the person who gets the policy; but they only have to pay for tax on the benefit minus the amount they paid for the policy.
A transfer of value happens when a policy is…
Sold or pledged for a loan.
What are the 5 ways that a life insurance policy that’s “transfer of value”, can remain tax-free to the beneficiary?
Policy is transferred to me, my business partner, partnership, business corporation where I’m a shareholder, or transferred due to a carryover exception (divorce or gift)
If the company pays the premiums on a life insurance policy (even if its a key person policy), who gets the deduction on the premiums?
The company gets the deduction only if you are the beneficiary.
The company will not get a deduction for premiums paid on a life insurance policy if the company is…
the owner and the beneficiary.
If you or a company have an insurable interest in a life insurance policy, then the death benefits received from the policy is…
tax-free.
Benefits from a life insurance policy is tax free if there is an insurable interest when?
at the start of the policy
If an insurable interest does not exist, the life insurance policy is considered a…
“wagering” contract.
Transferring a life insurance policy from a shareholder to another shareholder will result in a…
transfer-of-value tax.
A life insurance policy issued after June 21 1988 that fails the 7 pay test.
MEC
A 10% penalty will apply to withdrawal on a life insurance policy before the insured turns age…
59 ½.
When is a life insurance policy considered a MEC?
When the premiums during the first 7 years exceed the total net level premiums that would have been paid if the policy were a seven-pay policy.
A life insurance policy that passes the 7-pay test can later become a MEC if a…
material change occurs.
What are the 3 material changes that can cause a life insurance policy to become a MEC?
Death benefit decreases
Death benefit increases due to you paying more in premiums
Death benefit increases due to certain paid-up additions.
What are the 2 material changes that will not cause a life insurance policy to become a MEC?
Death benefit increases because of inflation.
Death benefit increases to meet the definition of a life insurance policy.
If you sale your life insurance policy to a business partner, is that sale considered a transfer-of-value rule?
No it’s not considered a transfer-of-value rule.
Cash withdrawals from a life insurance policy during the first 5 policy years will have a ______ taxable portion then cash withdrawals after the 5th year mark.
higher
Cash withdrawals from a universal life insurance policy during the first 15 years are subject to LIFO recovery if it’s associated with the reduction in the…
death benefit.
“Key person rule” states that interest on a loan less than $50,000, is deductible if the person is a…
key person.
