Federal Tax Considerations For Life Insurance

Question 1

Is the benefit of a life insurance policy taxed to the beneficiary if it’s received as a lump sum?

Answer 1

No lump sum benefits are received tax free

Question 2

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

Answer 2

Only the portion in excess of the premium paid

Question 3

What is the name for an overfunded life insurance policy?

Answer 3

A Modified Endowment Contract (MEC)

Question 4

In a direct rollover, how is the money transferred from one retirement plan to a new one?

Answer 4

From trustee to trustee

Question 5

What is the primary purpose of a 401(k) plan?

Answer 5

Provide retirement income

Question 6

What is the main purpose of the 7-pay test?

Answer 6

To determine if a life insurance policy is a Modified Endowment Contract

Question 7

What are the consequences of withdrawing funds from a traditional IRA prior to age 59 1/2?

Answer 7

10% penalty

Question 8

Why are dividends in life insurance policies not taxable?

Answer 8

Dividends are not considered income for tax purposes; they are s return of unused premium

Question 9

When would life insurance policy proceeds be included in the insured’s taxable estate?

Answer 9

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

Question 10

What portion of a nonqualified annuity payment would be taxed?

Answer 10

Interest earned on principal

Question 11

An employer is sponsoring a qualified retirement plan for its employees where the employer contributes money whenever the business has profit. What is this type of plan called?

Answer 11

Profit sharing plan

Question 12

If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any will be taxed?

Answer 12

Interest only

Question 13

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

Answer 13

Cash value growth is tax deferred

Question 14

What qualified plan is suitable for the self-employed?

Answer 14

HR-10 or Keogh

Question 15

What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?

Answer 15

Death benefits are generally not subject to income taxes

Question 16

Who qualifies for tax sheltered annuities or 403(b) plans?

Answer 16

Employers of nonprofit organizations under Section c(3) and employees of public school systems

Question 17

What is the penalty for excessive contributions to s traditional IRA?

Answer 17

6%

Question 18

In what form of payment must the contributions to a traditional IRA be made?

Answer 18

In cash

Question 19

What are some examples of qualified plans?5

Answer 19

1 IRA
2 401K
3 HR-10 (Keogh)
4 SEP
5 Simple

Question 20

For a retirement plan to be qualified, it must be designed for whose benefit?

Answer 20

Employees

Question 21

What type of plan is a 401K?

Answer 21

Qualified profit sharing plan

Question 22

What are the income tax benefits of a qualified plan?3

Answer 22

Employer contributions are tax deductible and not taxed as income to employees

Earnings accumulate tax deferred

Question 23

If a retirement plan is qualified, what does that mean?

Answer 23

The plan has favorable tax treatment

Question 24

In qualified plans, are employer contributions taxed as income to the employees?

Answer 24

No, employer contributions are not taxed as income to the employees

Question 25

What is required to qualify an individual to contribute to a traditional IRA?

Answer 25

Earned income

Question 26

SIMPLE plans are available to groups of how many employees?

Answer 26

No more than 100