Qualified Plans & Federal Tax Considerations For Life Insurance & Annuities

Question 1

Earned income

Answer 1

Salary, wages, or commissions, but not income from investments , unemployment benefits and similar

Question 2

A persons income before taxes or other deductions

Answer 2

Gross income

Question 3

Principle under which it is assumed that the funds paid into the policy first will be paid out first.

Answer 3

FIFO (First In, First Out)

Question 4

Principle applied to asset management in life insurance products, under which it is assumed that the funds paid into the policy last will be paid out first.

Answer 4

LIFO ( Last In, First Out)

Question 5

An organization that uses its surplus to fulfill its purpose instead of distributing the surplus to its owners or members

Answer 5

Nonprofit organization

Question 6

Maturity date

Answer 6

Policy Endowment

Question 7

In life insurance, the death benefits

Answer 7

Policy Proceeds

Question 8

Contribution made before federal and/or state taxes are deducted from earnings.

Answer 8

Pretax contribution

Question 9

Withdrawal of the money from one qualified plan and placing it into another plan.

Answer 9

Rollover

Question 10

Early termination of a policy by the policyowner

Answer 10

Surrender

Question 11

A reduction of taxable income, resulting in lower tax liability

Answer 11

Tax deductible

Question 12

Subject to taxation, payable to state and federal government

Answer 12

Taxable

Question 13

Taxed on investments or gains (such ad interest or dividends) are paid at a future date instead of in the period in which they are incurred tax.

Answer 13

Tax deferred

Question 14

Qualified plans have:

Answer 14

Tax advantages

Question 15

Retirement plan has:
1. Contributions that are currently tax deductible
2. Plan approved by IRS
3. Plan cannot discriminate
4. Earnings grow Tax Deferred
5. All Withdrawals are Taxed

Answer 15

Qualified Retirement Plan

Question 16

Retirement plan where contributions are NOT currently Tax Deductible; plan Does Not Need IRS Approval; plan can Discriminate; earnings grow Tax Deferred; Excess over cost basis is Taxed

Answer 16

Nonqualified Retirement Plan

Question 17

Allows individuals with earned income to make tax deductible contributions regardless of age.

Individuals 50 or older are entitled to make additional catch-up contributions.

Answer 17

Individual Retirement Account (IRA)

Question 18

The owner may withdraw funds at anytime in this IRA; however if b4 age 59 1/2 then the withdrawal is subjected to 10% additional tax.

Answer 18

Traditional IRA

Question 19

Required minimum distribution (RMD)

Answer 19

Starting at age 72, the owner must receive at least a minimum annual amount.

Question 20

A form of an individual retirement account funded with after-tax contributions.

Answer 20

Roth IRA

Question 21

Traditional IRAs and Roth IRAs are for individuals with:

Answer 21

Earned Income

Question 22

Contributions to a traditional IRA are with

Answer 22

Pre-tax Dollars ( tax deductible)

Question 23

Contributions to a Roth IRA are with

Answer 23

After-tax dollars (NOT tax deductible)

Question 24

Distributions are taxable and Payouts must begin by age of 72.

Answer 24

Traditional IRA

Question 25

Distributions are not taxable; grows tax free if account is free for at least 5 yrs; No required minimum age for payouts

Answer 25

Roth IRA

Question 26

The 20% withholding of funds can be avoided if the distribution is made directly from the IRA plan to the trustee or administrator/custodian of new IRA plan.

Answer 26

Direct Rollover

Question 27

Refers to a tax-free transfer of funds from one retirement program to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another.

Answer 27

Transfer (or direct transfer)

Question 28

Premiums are not

Answer 28

Tax deductible

Question 29

Death benefit

Answer 29

Tax free if paid in lump-sum
Principal is tax free; interest is taxable if paid in installments (other than lump-sum)

Question 30

Dividends are:

Answer 30

Returns of unused premiums and are not taxable

Question 31

Cash value accumulated in policies:

Answer 31

Can be borrowed against the policyowner or paid upon surrender; grow tax deferred and if in excess (more than premiums paid) upon surrender or endowment is taxable (amount over premium amount) as ordinary income.

Question 32

Upon death, the death benefits is paid out tax free and there is no more:

Answer 32

Cash value

Question 33

Policy loans from the cash value are:

Answer 33

Not income taxable

Question 34

When the owner withdraws cash value from a universal life policy (partial surrender), both the cash value and the death benefit are:

Answer 34

Reduced by the surrender

Question 35

Lump-sum cash payment of life policy proceeds are tax free for the:

Answer 35

Beneficiary

Question 36

In ________ ________ , the principal is tax free, but the interest is taxable.

Answer 36

Settlement options

Question 37

Taxable in the year earned

Answer 37

Dividend Interest

Question 38

Not income taxable

Answer 38

Policy loans and lump-sum death benefit

Question 39

Must be paid either upon contribution or upon distribution, NOT both (if taxed on one end, will not be taxed on other).

Answer 39

Taxes

Question 40

The portion that is nontaxable is the anticipated return of the principal paid in.

Answer 40

Cost base

Question 41

The portion tat is taxable is the interest earned on the principal.

Answer 41

Tax base

Question 42

Interest accumulated in annuity is the tax base; taxes are deferred in the

Answer 42

Accumulation period

Question 43

Represents the premium dollars that have already been taxed and will not be taxed again when withdrawn from the contract.

Answer 43

Cost base

Question 44

When money is withdrawn from the annuity during the accumulation phase, the amounts are taxed on a:

Answer 44

Last in, First Out Basis (LIFO)

Question 45

CCash surrender if an annuity results in immediate taxation of:

Answer 45

The interest earned

Question 46

Used to determine the annuity amounts to be excluded from taxes.

Answer 46

Exclusion Ratio

Question 47

Premiums

Answer 47

Not deductible (personal expense)

Question 48

Death benefit

Answer 48

Not income taxable (except for interest)

Question 49

Cash value increases

Answer 49

Not taxable (as long as policy in force)

Question 50

Cash value gains

Answer 50

Taxed at surrender

Question 51

Dividends

Answer 51

Not ta able ( return of unused premium; interest is taxable)

Question 52

Accumulations

Answer 52

Interest taxable

Question 53

Policy loans

Answer 53

Not income taxable

Question 54

Surrenders

Answer 54

Surrender value- past premium = amount taxable

Question 55

Partial Surrenders

Answer 55

First In, First Out (FIFO)

Question 56

Death benefit spread evenly over income period (averaged). Interest payments on excess death benefit portion are taxable

Answer 56

Settlement Options

Question 57

If the insured owns the policy, it will be included for estate tax purposes. If the policy is given away (possibly to a trust) and the insured dies within 3 years of the gift, the death benefit will be included in the estate.

Answer 57

Estate Tax

Question 58

FIFO

Answer 58

Applies to life insurance only

Question 59

Annuities follow a:

Answer 59

LIFO format

Question 60

A 1035 exchange is nontaxable exchange of cash value life insurance or annuity:

Answer 60

on the same life.