Chapter 11 – Taxation Of Life Insurance

Question 1

Death benefits received on a life, auto, or health insurance policy are ________ from gross income.

Answer 1

excluded

Question 2

Death benefits received on an annuity contract are ________ in your gross income.

Answer 2

included

Question 3

Regardless if someone is a primary or contingent beneficiaries, payment installment options from death benefit will be taxed…

Answer 3

the same way.

Question 4

The principle amount given as a death benefit payment is given…

Answer 4

tax-free.

Question 5

If a life insurance death benefit is paid in installments instead of a lump sum, the interest portion is taxable as…

Answer 5

ordinary income.

Question 6

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.

Answer 6

accelerated benefits

Question 7

Terminally ill is when a physician expects someone to die within how many months?

Answer 7

24 months

Question 8

A dividend reinvested into a life insurance policy is considered…

Answer 8

tax-free return of premium.

Question 9

A withdrawal from the cash value of a life insurance policy is returned…

Answer 9

tax-free.

Question 10

If you withdraw cash from your life insurance policy, you will not be taxed on the money as long as you…

Answer 10

stay below your basis.

Question 11

Any cash withdrawal exceeding your basis will be taxed at…

Answer 11

ordinary rates.

Question 12

LIFO basis recovery applies if the life insurance policy turns into a…

Answer 12

MEC.

Question 13

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…

Answer 13

ordinary income.

Question 14

Are life insurance premiums paid by you as an individual tax deductible?

Answer 14

No…

Question 15

Under what circumstances can you deduct the life insurance policy premiums on your taxes?

Answer 15

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.

Question 16

If a policy is transferred for consideration (eg - money), who pays the taxes on the death benefit when the insured dies?

Answer 16

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.

Question 17

A transfer of value happens when a policy is…

Answer 17

Sold or pledged for a loan.

Question 18

What are the 5 ways that a life insurance policy that’s “transfer of value”, can remain tax-free to the beneficiary?

Answer 18

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)

Question 19

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?

Answer 19

The company gets the deduction only if you are the beneficiary.

Question 20

The company will not get a deduction for premiums paid on a life insurance policy if the company is…

Answer 20

the owner and the beneficiary.

Question 21

If you or a company have an insurable interest in a life insurance policy, then the death benefits received from the policy is…

Answer 21

tax-free.

Question 22

Benefits from a life insurance policy is tax free if there is an insurable interest when?

Answer 22

at the start of the policy

Question 23

If an insurable interest does not exist, the life insurance policy is considered a…

Answer 23

“wagering” contract.

Question 24

Transferring a life insurance policy from a shareholder to another shareholder will result in a…

Answer 24

transfer-of-value tax.

Question 25

A life insurance policy issued after June 21 1988 that fails the 7 pay test.

Answer 25

MEC

Question 26

A 10% penalty will apply to withdrawal on a life insurance policy before the insured turns age…

Answer 26

59 ½.

Question 27

When is a life insurance policy considered a MEC?

Answer 27

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.

Question 28

A life insurance policy that passes the 7-pay test can later become a MEC if a…

Answer 28

material change occurs.

Question 29

What are the 3 material changes that can cause a life insurance policy to become a MEC?

Answer 29

Death benefit decreases
Death benefit increases due to you paying more in premiums
Death benefit increases due to certain paid-up additions.

Question 30

What are the 2 material changes that will not cause a life insurance policy to become a MEC?

Answer 30

Death benefit increases because of inflation.

Death benefit increases to meet the definition of a life insurance policy.

Question 31

If you sale your life insurance policy to a business partner, is that sale considered a transfer-of-value rule?

Answer 31

No it’s not considered a transfer-of-value rule.

Question 32

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.

Answer 32

higher

Question 33

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…

Answer 33

death benefit.

Question 34

“Key person rule” states that interest on a loan less than $50,000, is deductible if the person is a…

Answer 34

key person.