Qualified Plans & Federal Tax Considerations For Life Insurance & Annuities Flashcards
Earned income
Salary, wages, or commissions, but not income from investments , unemployment benefits and similar
A persons income before taxes or other deductions
Gross income
Principle under which it is assumed that the funds paid into the policy first will be paid out first.
FIFO (First In, First Out)
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.
LIFO ( Last In, First Out)
An organization that uses its surplus to fulfill its purpose instead of distributing the surplus to its owners or members
Nonprofit organization
Maturity date
Policy Endowment
In life insurance, the death benefits
Policy Proceeds
Contribution made before federal and/or state taxes are deducted from earnings.
Pretax contribution
Withdrawal of the money from one qualified plan and placing it into another plan.
Rollover
Early termination of a policy by the policyowner
Surrender
A reduction of taxable income, resulting in lower tax liability
Tax deductible
Subject to taxation, payable to state and federal government
Taxable
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.
Tax deferred
Qualified plans have:
Tax advantages
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
Qualified Retirement Plan
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
Nonqualified Retirement Plan
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.
Individual Retirement Account (IRA)
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.
Traditional IRA
Required minimum distribution (RMD)
Starting at age 72, the owner must receive at least a minimum annual amount.
A form of an individual retirement account funded with after-tax contributions.
Roth IRA
Traditional IRAs and Roth IRAs are for individuals with:
Earned Income
Contributions to a traditional IRA are with
Pre-tax Dollars ( tax deductible)
Contributions to a Roth IRA are with
After-tax dollars (NOT tax deductible)
Distributions are taxable and Payouts must begin by age of 72.
Traditional IRA
Distributions are not taxable; grows tax free if account is free for at least 5 yrs; No required minimum age for payouts
Roth IRA
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.
Direct Rollover
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.
Transfer (or direct transfer)
Premiums are not
Tax deductible
Death benefit
Tax free if paid in lump-sum
Principal is tax free; interest is taxable if paid in installments (other than lump-sum)
Dividends are:
Returns of unused premiums and are not taxable
Cash value accumulated in policies:
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.
Upon death, the death benefits is paid out tax free and there is no more:
Cash value
Policy loans from the cash value are:
Not income taxable
When the owner withdraws cash value from a universal life policy (partial surrender), both the cash value and the death benefit are:
Reduced by the surrender
Lump-sum cash payment of life policy proceeds are tax free for the:
Beneficiary
In ________ ________ , the principal is tax free, but the interest is taxable.
Settlement options
Taxable in the year earned
Dividend Interest
Not income taxable
Policy loans and lump-sum death benefit
Must be paid either upon contribution or upon distribution, NOT both (if taxed on one end, will not be taxed on other).
Taxes
The portion that is nontaxable is the anticipated return of the principal paid in.
Cost base
The portion tat is taxable is the interest earned on the principal.
Tax base
Interest accumulated in annuity is the tax base; taxes are deferred in the
Accumulation period
Represents the premium dollars that have already been taxed and will not be taxed again when withdrawn from the contract.
Cost base
When money is withdrawn from the annuity during the accumulation phase, the amounts are taxed on a:
Last in, First Out Basis (LIFO)
CCash surrender if an annuity results in immediate taxation of:
The interest earned
Used to determine the annuity amounts to be excluded from taxes.
Exclusion Ratio
Premiums
Not deductible (personal expense)
Death benefit
Not income taxable (except for interest)
Cash value increases
Not taxable (as long as policy in force)
Cash value gains
Taxed at surrender
Dividends
Not ta able ( return of unused premium; interest is taxable)
Accumulations
Interest taxable
Policy loans
Not income taxable
Surrenders
Surrender value- past premium = amount taxable
Partial Surrenders
First In, First Out (FIFO)
Death benefit spread evenly over income period (averaged). Interest payments on excess death benefit portion are taxable
Settlement Options
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.
Estate Tax
FIFO
Applies to life insurance only
Annuities follow a:
LIFO format
A 1035 exchange is nontaxable exchange of cash value life insurance or annuity:
on the same life.
