Life insurance and Taxes

Question 1

Tax during life: Dividends

Answer 1

Dividends exceeding basis = Ordinary income

Question 2

Tax during life of Non-MEC withdrawals

Answer 2

FIFO basis recovery

Question 3

Tax during life of MEC withdrawals

Answer 3

LIFO recovery

Question 4

Tax during life of Cash Surrender

Answer 4

Ordinary income

Question 5

Tax during life of interest payments

Answer 5

Maturity or cash surrender and interest-only option selected: Ordinary income

Question 6

Tax during life of installment payments

Answer 6

Portion not return of principal: Ord. Income

Question 7

Tax during life of tax-free exchange

Answer 7

No G/L

Question 8

Tax during life on premiums

Answer 8

• Generally not deductible
• If paid by Employer, deductible / taxable as comp to EE

Question 9

Tax during life on divorce transfer

Answer 9

None

Question 10

Tax during life on premiums paid as divorce settlement

Answer 10

• Not deductible by payor
• Not taxable income to payee

Question 11

Income taxation of death benefit: Lumpsum

Answer 11

Tax-free, unless transfer occurred

Question 12

Income taxation of death benefit: Interest payments

Answer 12

Ordinary income

Question 13

Income taxation of death benefit: Installment payments

Answer 13

• Principal tax free
• Earnings since DOD taxable as Ordinary Inc.