Chapter 15 Questions Flashcards
Accelerated benefits from a life insurance policy are generally included in taxable income.
False. Accelerated benefits are generally not included in taxable income.
If a beneficiary could take a lump sum of $1M but instead opts for an installment with total payments of $1.5M, she will ultimately recognize some of the benefit as taxable income.
True. Only the initial $1M death benefit will be received tax-free.
A physician’s diagnosis is required for favorable tax treatment of viatical settlements.
True. This is one of the requirements for receiving tax-free “death” benefits while one is still alive.
A withdrawal from a universal life insurance policy will likely trigger less favorable tax treatment if made in year 14 instead of year 16.
True. Policy-in-force withdrawals receive less favorable tax treatment if made in the first 15 years.
Withdrawals that reduce death benefit are likely subject to LIFO tax treatment.
True. Reducing death benefit is one condition that triggers unfavorable tax treatment of life insurance withdrawals.
Medical expense riders allow insured to “double dip” to gain both a deductible and tax-free income from a policy payout.
False. If a taxpayer takes a deduction from their medical expenses, they may not receive tax-free income from a policy payout.
Transfer-for-value rules require life insurance death benefits to be included in gross income, unless the insured is also the owner.
False. Transfer-for-value rules allow a number of parties to receive death benefits tax-free.
Taxpayers with charitable intent are incentivized to name charities not only as beneficiaries to a life insurance policy, but also as owners of those policies.
True. Naming the charity as the policy owner allows premiums to be deductible.
Employers may deduct life insurance premiums payments only in split-dollar arrangements.
False. Any time the employer is named as a beneficiary, they may not deduct premium payments.
All of the following statements about the taxation of withdrawals from a universal life policy are correct EXCEPT:
A. There is a ceiling on the amount of a withdrawal subject to tax.
B. Withdrawals are subject to LIFO taxation only if the policy is a MEC.
C. Taxable withdrawals made during the first 5 policy years are likely to be greater than those for policy years 6 through 15.
D. A reduction in the policy’s death benefit with such withdrawals will also be subject to LIFO taxation.
C. Taxable withdrawals made during the first 5 policy years are likely to be greater than those for policy years 6 through 15.
This is incorrect because the opposite is true. Withdrawals are only taxable to the extent they are greater than the policyowner’s basis. Withdrawals made in the first few years of the policy are unlikely to exceed the basis. In fact, they may trigger a non-deductible loss.
Which of the following statements about the exclusion for accelerated death benefits paid to a terminally ill insured is(are) correct?
I. A licensed viatical settlement provider may be the source of payments.
II. A qualifying terminal ill person could have up to 24 months to live.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
C. Both I and II
ABC, Inc. purchases a $1,000,000 policy on key person, Mary Smith. It owns the policy, pays the premium and names itself beneficiary. Which of the following statements are correct?
A. The premium payments made by ABC, Inc. are compensation income to Mary.
B. The matured death proceeds received by ABC, Inc. are includible in its gross income.
C. The premium payments made by ABC, Inc. are not deductible.
D. There is a limit to the number of key employees who may be insured.
C. The premium payments made by ABC, Inc. are not deductible.
Because ABC is the beneficiary, premium payments are not deductible.
All of the following statements about the deductibility of interest expense incurred by a corporate taxpayer are correct EXCEPT:
A. Interest expense incurred on a loan purchased this year on the life of a non-owner, non-officer employee is not deductible.
B. The maximum principal per insured employee that can be borrowed is $50,000.
C. Interest on a loan from a policy this year to insure the life of a 10% owner is not deductible.
D. The Moody’s interest rate must be charged on the outstanding loan balance.
A. The maximum principal per insured employee that can be borrowed is $50,000.
A corporation could potential borrow more than $50,000. However, only interest paid on the first $50,000 of policy loans is deductible.
How much of each annual annuity payment of $7,800 to be paid for 20 years from $120,000 in matured death proceeds will be taxable?
$1,800. The total payout from this annuity will be $156,000. Each payment is therefore return-of-basis of $120,000 / $156,000 = 77%. $7,800 * 77% = $6,000 of each payment will be received tax-free while the remaining $1,800 will be taxable.
