Chapter 16 MC Flashcards
Sally Snow is the beneficiary of her husband’s $120,000 life insurance policy. Sally’s husband died in September 2000. She elected to receive $7,800 annually under a life income option. Her life expectancy was 20 years when the life income option was chosen. How much of each annual annuity payment is included in her gross income?
A) $1,800
(A). Under the settlement option chosen, Sally receives $7,800 annually; $6,000 represents the death benefit that is nontaxable to her. The remaining portion, $1,800, represents payment of interest, which is taxable as ordinary income.
A woman purchased a $100,000 whole life insurance policy on her life and designated her husband as beneficiary. Several years later the woman surrendered the policy for its cash value of $50,000. At the time of surrender, the woman had paid gross premiums of $45,000 and had received policy dividends of $10,000. What were the income tax consequences to the woman upon receipt of the cash surrender value?
(C) She received $35,000 tax free and $15,000 as ordinary income.
(C). The woman’s basis in the policy is $35,000 ($45,000 premiums ? $10,000 dividends received). Therefore the taxable amount is $15,000 ($50,000 received - $35,000 basis).
A corporation purchased a $50,000 whole life insurance policy on a man who was a key employee. Several years later the man terminated employment and his wife purchased the policy from the corporation with her own funds for $10,000. The wife designated herself as beneficiary and started paying the premiums. If the man were to die after his wife had paid net premiums amounting to $5,000, what would be the income tax consequences to the wife upon receipt of the policy death proceeds?
(B) She would receive $15,000 tax free and $35,000 as ordinary income.
(B). This is a transfer-for-value situation. The wife paid $10,000 for the policy and $5,000 in subsequent premiums, a total basis of $15,000. She must pay tax on the proceeds in excess of $15,000.
Under which of the following circumstances will a corporation’s payment of premiums on a life insurance policy be taxable to an insured employee? I. The corporation purchases group term life insurance of $10,000 payable to the insured employee’s personal beneficiary under a nondiscriminatory plan. II. The insured employee is the owner of an individual policy and the proceeds are payable to the employee’s personal beneficiary.
(B) II only
(B). The insured employee is taxed on the coverage because the employee is the owner of the policy. I is incorrect because the insurance premiums would not be taxable. These premiums will qualify for the exclusion under IRC Sec. 79
A corporation pays the premiums on a life insurance policy on the life of its president. In which of the following situations may the corporation deduct the premiums as an expense? I. The corporation is the absolute owner and beneficiary of the policy. II. The president is the absolute owner of all rights under the policy and the corporation makes the premium payments pursuant to the president’s compensation package.
(B) II only
(B). I is incorrect because a corporation cannot deduct premiums paid on a policy if the corporation is a beneficiary.
All the following transfers by sale of a life insurance policy are excluded from the transfer-for-value rules EXCEPT
(D) sale of the policy to a shareholder in a corporation in which the insured is also a shareholder
(D). This sale of a policy to another shareholder is not an exception to the transfer-for-value rules.
All the following statements concerning the tax aspects of withdrawals from universal life policies are correct EXCEPT
(A) Withdrawals will be taxable only if the policy is a modified endowment contract (MEC).
(A). Withdrawals from such policies may be taxable even if the policy is not a MEC.
