Insurance Ch 7 Flashcards
Taxation of whole life insurance
Cash value above cost basis at the time of surrender is taxed as __________________.
Ordinary income
Income taxation of life insurance
Dividends paid are generally treated as a return of unused premium and are not income taxable with the exception of dividends from __________________.
Modified Endowment Contracts (MECs)
WIthdrawals and loans against a life insurance policy do not count as taxable income unless the policy is _________________.
Surrendered or lapses and the amount owed exceeds what was paid in.
The death benefits are generally _________________ to the beneficiary.
income tax free
Provides that any persons who die within 120 hours of each other, by law, ___________________.
Predecease each other.
This keeps the property of one deceased person from passing thru the estate of another deceased person before passing to those who survive both.
For income tax purposes, a life insurance policy must meet two tests:
___________
___________
Cash value accumulation test
guideline premium and corridor test
If a life insurance contract does not meet either the cash value accumulation test or the guideline premium and corridor test, it is classified as a __________ and taxed like a(n) ________.
Modified endowment contract
annuity
A contract is define as a _____________________ if it meets the requirements for classification as a life insurance contract (the 1984 act) and has both of the following characteristics:
* Enter into on or after June 21, 1988
* Fails to meet the “seven pay test”
Modified endowment contract
A single premium policy issued after 1988 is always a _______ on the CFP Exam.
Modified Endowment Contract
Once a MEC, always a MEC.
The problem with MECs is that withdrawals and loans are ___________. The death benefits are still tax-free.
LIFO plus 59 1/2 penalty.
A policy that at first passes the 7-pay test when issued can later become a MEC is there is a __________ in the policy.
material change
any increase in the death benefit under the contract
Grandfathered life insurance rules (apply to contracts issued both prior to June 1988 and the death benefit increases after 1988):
RULE 1: If the death benefit increases by more than ________, the contract becomes subject to material change rules and may lose its grandfathered status.
$150,000
Grandfathered life insurance rules (apply to contracts issued both prior to June 1988 and the death benefit increases after 1988):
RULE 2: If the policy death benefit is increased or additional qualified benefit is purchased and the contract owner did not have the right to obtain such an increase or addition without providing _________, it may lose its grandfathered status.
providing additional evidence of insurability
This rule provides that if a policy is transferred from one owner to another for valuable consideration, the income tax exclusion is lost.
Transfer for value rule
These policy transfers ________ jeopardized by the transfer for value rule:
* Transfer to the insured
* Transfer to a partner of the insured (partnerships)
* Transfer to a corporation in which the insured is a shareholder or an officer
* Transfer pursuant to a divorce agreement
are not
