Chapter 16 T/F

Question 1

Death benefits received under an annuity contract are tax free in the same manner as life insurance proceeds.

Answer 1

False. Death benefits payable under an annuity contract do not qualify for the exclusion applicable to life insurance proceeds.

Question 2

Life insurance death benefits are generally excluded from the gross income of an individual beneficiary but are taxable income to a trust.

Answer 2

False. Lump-sum proceeds payable by reason of the insured’s death are generally excluded from the gross income of individuals, trusts, and estates.

Question 3

A surviving spouse may exclude from income up to $1,000 of interest payable under any settlement option.

Answer 3

False. If the amount is received with respect to a death occurring on or before October 22, 1986, a surviving spouse is entitled to the $1,000 income exclusion for payments received under all options except the interest-only option. With respect to insureds whose death occurred after October 22, 1986, the $1,000 interest exclusion was repealed.

Question 4

Accelerated death benefits paid under a life insurance contract to a terminally ill insured are generally excludible from gross income as amounts paid by reason of death.

Answer 4

True

Question 5

Certain withdrawals from universal life policies that result in a reduction in the death benefit may be taxed on a last-in, first-out (LIFO) basis.

Answer 5

True

Question 6

When a life insurance policy is surrendered during the period that the contract is in force, the owner will be subject to income taxation on the amount received in excess of his or her cost basis.

Answer 6

True

Question 7

The portion of each installment of life insurance living benefits received income tax free under an installment option is found by dividing the investment in the contract by the expected total return.

Answer 7

True

Question 8

A policyowner who surrenders a level-premium whole life insurance policy and elects one of the installment options will be taxed under the annuity rules.

Answer 8

True

Question 9

When the primary beneficiary dies before receiving all installments under a fixed-period or fixed-amount option, the contingent beneficiary will be taxed on installment payments based on his or her life expectancy

Answer 9

False. The contingent beneficiary will be taxed in the same manner as the primary beneficiary. The contingent beneficiary may exclude the same portion of each installment from his or her gross income as the primary beneficiary was entitled to exclude.

Question 10

Premium payments for life insurance generally constitute personal nondeductible expenses.

Answer 10

True

Question 11

The transfer-for-value rule provides that if an insured transfers a policy on his or her life to another for valuable consideration, the transferee will receive the death proceeds free of income tax.

Answer 11

False. The transfer-for-value rule applies to the transfer of a life insurance policy for valuable consideration. When the insured dies, the transferee will have taxable income on that portion of death proceeds in excess of the amount of consideration paid on the transfer, plus the total net premiums subsequently paid by the transferee.

Question 12

One exception to the transfer-for-value rule is a transfer from the insured to another shareholder of a corporation in which the insured is a shareholder or officer.

Answer 12

False. A transfer to another shareholder is not an exception to the transfer-for-value rule

Question 13

If the transfer of a life insurance policy falls within one of the enumerated exceptions to the transfer-for-value rule, the entire death proceeds will be received income tax free by the beneficiary.

Answer 13

True

Question 14

Local law generally requires an insurable interest only at the time a life insurance policy is originally purchased

Answer 14

True

Question 15

An individual who transfers a policy on his or her life to a qualified charity and continues to pay the premiums may deduct the amount of the premium payments each year as a charitable contribution only if the charity is the owner of the policy and has exclusive rights as owner.

Answer 15

True

Question 16

An employer who pays the premiums on an individual policy owned by an employee and insuring the employee’s life may deduct these payments as additional compensation to the employee.

Answer 16

True

Question 17

Under a split-dollar life insurance plan, the covered employee receives the full value of the insurance coverage income tax free.

Answer 17

False. The covered employee must generally include in gross income each year the value of the “economic benefit” received as determined by IRS guidance on this subject.

Question 18

A corporation may take a deduction for premium payments made for insurance on the life of an officer of the corporation if the beneficiary is the corporation.

Answer 18

False. IRC Sec. 264 prohibits a deduction by any taxpayer for premiums paid on life insurance contracts if the taxpayer is directly or indirectly a beneficiary.

Question 19

nterest on a life insurance policy loan of $50,000 may be deductible if the insured is a “key person” with respect to the taxpayer.

Answer 19

True

Question 20

Allowable interest deductions for loans from business-owned policies are now subject to limitations based upon the “Moody’s” rate.

Answer 20

True

Question 21

Interest deductions for loans from business-owned single-premium life insurance policies are limited to $1,000 annually.

Answer 21

False. Interest on loans from single-premium life insurance policies cannot be deducted.