Federal Tax Consideration for Life Insurance Flashcards
Are premiums deductible in life insurance policies?
no.
Is the death benefit tax free in life insurance policies?
it is if it is paid in one lump sum. Interest is taxable if paid in installments.
True or false? Cash values grow tax deferred?
True.
When are dividends taxed?
dividends are a return of unused premium. Interest on dividends is taxable.
Are policy loans taxaable?
policy loans are not taxable. Only have to pay the interest the loan is charging.
When is surrender of policy for cash taxable?
if it exceeds the premium paid.
What are the rules for taxiation regrading settlement options?
prinicpial is tax free. Interest is taxable.
When is death benefit taxable?
if included as part of the insured’s estate.
What are the 3 situations that result in life insurance being included in taxable estate?
- incidents of ownership
- estate as a beneficiary
- transfer of ownership
What is a modified endowment contract (MEC)
if life insurance policy is over funded it becomes a modified endowment contract. it loses its tax benefit. Once it becomes a mec it is always a mec.
what is the test to determine if a policy is over funded?
7 pay test.
True or false. Taxes are deffered during the accumulation phase?
true.
What are the rules for corporate owned annuities?
- gowth in anuity is not taxed deferred
2. interest income is taxed annually
What is the excess contrrubution penalty for IRA’s
6%
what is the penalty for IRA disrubtuions below the required amount?
50%
what happens if annuitant dies during accumulation period?
the insurer is obligated to return all or a portion of the annuity cash value.
What happens if the annuitant dies during the annuity period?
benefits will go to the estate and be taxable.
when must individual beneficeries withdrawl the amount from the account?
10 years.
When must the insurance company pay the estate or beneficiary?
5 years for estate. 1 year for beneficary.
What is a roth IRA?
idnivudals can contribute 100% of earned income. ROth iras grow tax free as long as the account has been open for 5 years.
When must roll overs be completed?
60 days.
what is section 1035 exchange?
non taxable transfer of life insurance policy to an annuity.
