Federal Tax Considerations For Life Insurance

Question 1

Generally speaking premiums are or are not tax deductible?

Answer 1

Are not

Question 2

Generally speaking the death benefit is tax free if taken as a _________ to a named beneficiary and principal is _____________; interest is _________ if paid in installments (other than lump sum)

Answer 2

Lump-sum, tax free, taxable

Question 3

Dividends ________ considered income for tax purposes. When left with insurer to accumulate interest the interest is __________ whether or not the interest is paid out to the policy owner.

Answer 3

Are not; taxable

Question 4

Cash values grow _________. Upon surrender any cash value in excess of costs is ___________. Death benefits are generally paid to the beneficiary ________.

Answer 4

Tax deferred, taxable, tax free

Question 5

T/F: policy loans from the cash value are not income taxable.

Answer 5

True

Question 6

When a policyowner surrenders a policy for cash value anything above what premiums were paid is _________.

Answer 6

Taxable

Question 7

In regards to taxation when Accelerated benefits are paid for terminal illness they are ________. When paid for chronically ill they are _______ up until a certain limit.

Answer 7

Tax free; tax free

Question 8

Transfer of value is or is not tax free.

Answer 8

Is not

Question 9

I’m regards to taxation With settlement the interest portion is _______ , the principal amount is __________.

Answer 9

Taxable, tax free

Question 10

True/false: Taxes must be paid either upon contribution or upon distribution. Not both.

Answer 10

True

Question 11

I’m regards to taxes Premiums that an employer pays on group life are or are not tax deductible. If the group policy is _________ or less the employee does not have to report the premium paid as income.

Answer 11

Are not; $50k

Question 12

Anytime the employer is the names beneficiary the premiums are or are not tax deductible.

Answer 12

Are not

Question 13

Cash value of a business owned life policy accumulates on a _______ basis. And is taxed _________ as an individually owned policy.

Answer 13

Tax deferred; the same as

Question 14

Policy loans are or are not taxable for a business? A Corp __________ interest on a life insurance policy loan for loans up to $50k

Answer 14

Are not; may deduct (unlike on an individual)

Question 15

Partial surrenders follow the _______ rule

Answer 15

Fifo (first in first out)

Question 16

The policy owner receives their investment in the contract first before receiving any gains (taxable) in the policy.

Answer 16

FIFO

Question 17

If the insured owns the policy it will be _________ for estate tax purposes. If the policy is given away (to a trust) and the insured dies within _________ of the gift the death benefit will be included in the _________.

Answer 17

Included, 3 years, estate

Question 18

An overfunded insurance policy. and fails what test

Answer 18

MEC, 7-pay test

Question 19

T/F: once an MEC always an MEC

Answer 19

True

Question 20

Tax rules for MEC’s:
- accumulations are _______
- distributions are _________
- distributions are taxed on a ____ basis (also known as interest first)
- distributions before age 59 1/2 are subject to a __ % penalty.

Answer 20

Tax deferred
Taxable
LIFO
10%

Question 21

Taxation of traditional IRA’s:
- must be made in ______
- deductible?
- tax deferred earnings?

Answer 21

• cash
• yes
• yes

Question 22

IRA distributions are taxable when?

Answer 22

I’m the year they are received

Question 23

IRA early withdraws without penalty.

Answer 23

• total disability
  catastrauphic medical expense
  Down payment on first home up to 10k
  Post secondary education

Question 24

ITA rollover must be completed within __ days

Answer 24

60

Question 25

Tax free distribution of cash from one retirement plan to another

Answer 25

Rollover

Question 26

Tax free transfer of funds from one retirement orogram to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another.

Answer 26

Direct transfer

Question 27

If IRA rollover is paid directly to the participant, __% must be withheld by the payor

Answer 27

20

Question 28

I’m an IRA rollover 20% withholding can be avoided by _________________ direct payment into a new plan

Answer 28

Direct payment

Question 29

I’m a direct rollover, how is the money transferred from one retirement plan to a new one

Answer 29

From trustee to trustee

Question 30

What proton of a nonwualified annuity payment would be taxed?

Answer 30

Interest earned on principal

Question 31

What is the name for an overfunded life insurance policy?

Answer 31

MEC

Question 32

Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

Answer 32

Only the portion in excess of the premium paid.

Question 33

When would life insurance policy proceeds be included in the insureds taxable estate?

Answer 33

When there is an incident of ownership at the time of death.

Question 34

According to the taxation rules of life insurance policies, how are cash value increases taxed?

Answer 34

Cash value growth is tax deferred

Question 35

Why are dividends in life insurance policies not taxable?

Answer 35

They are not consider income, they are a return of unused premium.

Question 36

Funds in a qualified plan accumulate on a _________ as basis. However at distribution any amount received by the employee will be treated as _______________ for tax purposes.

Answer 36

Tax deferred; ordinary income

Question 37

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, how much would be taxable annually?

Answer 37

$3,000