Chapter 8 Flashcards
Name four items that may be included in a persons estate.
Real and personal property, life death benefits, annuity values, retirement funds, and ownership rights in real property.
List some of the taxable distributions from a MEC.
Cash value surrender, dividends received, and policy loans
The death benefit received by a beneficiary is received ________________.
Tax free
In a non qualified annuity, how is the payout taxed?
Only the earnings portion is subject to tax as ordinary income
Any interest earned in dividends left to accumulate with interest would be taxable as ___________.
Ordinary income
A negative tax consequence may be created when the cash value policy is _____________.
Surrendered
What percentage of income from a qualified plan is typically taxable?
100% since qualified plans are normally funded with pre tax funds and have a zero cost basis
Dividends are paid by a ___________ company.
Mutual
What is the dollar limit that may be contributed annually to a no qualified annuity?
There is no contribution limit
Describe a modified endowment contract.
A life insurance policy in which the premiums paid are not in proportion to the death benefit provided.
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre tax dollars
What type of annuity may be used as a platform for an IRA?
A qualified annuity
Is the death benefit of an annuity included in a deceased clients estate?
Yes. It becomes part of the estate and any amount over the cost basis may be taxable to the beneficiary.
Are dividend returns on a life insurance policy ever guaranteed?
No
T/F: Dividends are treated as a return of overpaid premium, and are not taxable when returned to policyowner.
T
Is there a tax consequence to taking out a loan against a policy’s cash value?
No, there are no tax consequences
What percentage of the benefit received from a qualified annuity is subject to taxation?
100% since the annuity is funded with pre tax dollars
How is the death benefit in a life insurance policy taxed?
The death benefit is always received by the beneficiary on a tax free basis
Interest earned is always _______.
Taxable
How is non qualified annuity benefit taxed?
The benefit is taxed on a LIFO basis
If classified as a MEC, distributions from the policy will be considered ______________.
Taxable as income
Estate taxes comprise both ________ and _________ taxes.
State; federal
The term MEC is a _______________ of a life insurance contract, according to the IRS.
Classifications
Can a policy classified as a MEC ever be classified as a “non-MEC” policy?
No, once a MEC, always a MEC
In a no qualified annuity, how is a single distribution taxed?
Earnings first. In other words, LIFO
The cash value of a whole life contract usually begins to show a value sometime in the ______ year following issue.
Third
Which annuity is funded with after tax dollars — qualified or nonqualified?
Nonqualified annuity
In a MEC policy, premiums paid during the first ___ years of the policy exceeds what’s needed to fund a ___-pay life plan?
7; 7
Distributions from a MEC are considered premature if taken prior to age ______.
59 1/2
When paid to a beneficiary, is the death benefit from a MEC classified policy taxable?
No. The death benefit is paid on a tax free basis.
A qualified annuity allows for _________ contributions and the annuity value grows on a ________ basis.
Pre tax; tax deferred
Are life insurance death benefits included in the value of the deceased insureds estate?
Yes
Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What’s Joan’s basis and what’s taxed?
Her basis is zero, since the annuity is qualified (funded pretax) and the entire 22,000 is taxed as ordinary income
The cost basis of a cash value contract consists of premiums paid for the ________ policy, but not _____.
Base; riders
Upon policy surrender, any cash value in excess of premiums paid will be taxable as _____________.
Ordinary income
Distributions from a qualified plan are taxed at ____________ rates.
Ordinary income
A nonqualified annuity allows for _________ contributions and the annuity value grows on a __________ basis.
After tax; tax deferred
What is the effect of an outstanding loan if the insured dies?
The death benefit will be reduced by the loan amount and any interest owed.
Are life insurance death benefits taxable?
No. Death benefits are received tax free
Premature distributions from a MEC will be subject to ____________ and a ____% IRS penalty.
Taxation; 10
T/F: Premiums paid for individual life insurance are not deductible.
T
Which annuity allows for pretax contribution — qualified or nonqualified?
Qualified annuity
Identify the acronym: MEC
Modified Endowment Contract
The death benefit provided by a qualified annuity is __________ to the beneficiary.
Taxable
What rule states that property must be sold within 3 years prior to death to eliminate inclusion in a persons estate?
The transfer of value rule
Does the cash value of a MEC grows on a tax deferred basis?
Yes. As long as money remains inside of the contract, MEC cash value grows tax deferred. However, withdrawals are taxable.
T/F: Distributions from a MEC are taxed on a FIFO basis.
F; taxes LIFO
T/F: Individual life insurance premiums are generally paid with pre tax dollars.
F; individual life insurance premiums are generally paid with after tax dollars
A client who contributed $100,000 to an annuity does when it is worth $200,000. To hat is her death benefit?
$200,000. The death benefit on an annuity is the greater of contributions or the account value at death
_____________ is the equity that grows within a whole life policy.
Cash value
A premature distribution penalty of __% is assessed against annuity withdrawals taken prior to age _____.
10; 59 1/2
If no beneficiary is listed or alive upon an insureds death, a death benefit will be able to pay to the insureds ____________.
Estate
The cash value grows within a contract on a ________ basis.
Tax deferred
What occurs when an insured dies and how policy has an outstanding loan?
The loan amount and any interest owed will be subtracted from the death benefit.
What technique may be used to roll assets from one annuity to another without taxation?
A 1035 exchange
Ann invests $15,000 in a nonqualified annuity. At age 64, she withdraws all $22,000. Whats her basis and what’s tax deferred?
Ann’s basis is $15,000. The annuity is funded after tax and the $7,000 of earnings would be taxed as ordinary income.
A client who contributed $100,000 to an annuity dies when it is worth $50,000. What is the death benefit?
$100,000. The death benefit on an annuity is the greater of contributions or the account value at death.
What is another name for all of the deceaseds assets?
The estate
A policy is considered a MEC based on the __-pay test.
7
To be excluded from a persons estate, a piece of property must be sold within ____ years of death.
3
What is the typical cost basis for a qualified retirement plan?
$0, since qualified plans are typically funded on a pre tax basis
Joes policy has a cash value of $30,000 and his premiums were $28,000. If he surrenders the policy, what is taxable?
The cash value that exceeds premiums paid for the base policy would be taxable. This amount to $2,000
Are variable life insurance loans taxable?
No, but interest is charged to the policyholder.
