Federal Tax Consideration for Life Insurance

Question 1

Are premiums deductible in life insurance policies?

Answer 1

no.

Question 2

Is the death benefit tax free in life insurance policies?

Answer 2

it is if it is paid in one lump sum. Interest is taxable if paid in installments.

Question 3

True or false? Cash values grow tax deferred?

Answer 3

True.

Question 4

When are dividends taxed?

Answer 4

dividends are a return of unused premium. Interest on dividends is taxable.

Question 5

Are policy loans taxaable?

Answer 5

policy loans are not taxable. Only have to pay the interest the loan is charging.

Question 6

When is surrender of policy for cash taxable?

Answer 6

if it exceeds the premium paid.

Question 7

What are the rules for taxiation regrading settlement options?

Answer 7

prinicpial is tax free. Interest is taxable.

Question 8

When is death benefit taxable?

Answer 8

if included as part of the insured’s estate.

Question 9

What are the 3 situations that result in life insurance being included in taxable estate?

Answer 9

1. incidents of ownership
2. estate as a beneficiary
3. transfer of ownership

Question 10

What is a modified endowment contract (MEC)

Answer 10

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.

Question 11

what is the test to determine if a policy is over funded?

Answer 11

7 pay test.

Question 12

True or false. Taxes are deffered during the accumulation phase?

Answer 12

true.

Question 13

What are the rules for corporate owned annuities?

Answer 13

1. gowth in anuity is not taxed deferred

2. interest income is taxed annually

Question 14

What is the excess contrrubution penalty for IRA’s

Answer 14

6%

Question 15

what is the penalty for IRA disrubtuions below the required amount?

Answer 15

50%

Question 16

what happens if annuitant dies during accumulation period?

Answer 16

the insurer is obligated to return all or a portion of the annuity cash value.

Question 17

What happens if the annuitant dies during the annuity period?

Answer 17

benefits will go to the estate and be taxable.

Question 18

when must individual beneficeries withdrawl the amount from the account?

Answer 18

10 years.

Question 19

When must the insurance company pay the estate or beneficiary?

Answer 19

5 years for estate. 1 year for beneficary.

Question 20

What is a roth IRA?

Answer 20

idnivudals can contribute 100% of earned income. ROth iras grow tax free as long as the account has been open for 5 years.

Question 21

When must roll overs be completed?

Answer 21

60 days.

Question 22

what is section 1035 exchange?

Answer 22

non taxable transfer of life insurance policy to an annuity.