Taxation

Question 1

True or False:

Premiums paid from individual a Life insurance policy are tax deductible.

Answer 1

False

Question 2

Interest earnings credited to life insurance cash values are tax deferred - not taxable as long as they _________________________.

Answer 2

Remain inside the policy

Question 3

True or False: The policy owner is taxed if gain is withdrawn.

Answer 3

True

Question 4

Full surrenders: When a Life insurance policy is surrendered, any _____ in the cash value is taxable.

Answer 4

Gain

Question 5

Gain =

Answer 5

Cash value - premiums

Question 6

Withdrawals are taxed on a _____________ basis.

Answer 6

(FIFO) first in first out (Gain only)

Question 7

True or False: The interest paid on a policy loan is tax deductible.

Answer 7

False

Question 8

Are Dividends taxable ?

Answer 8

No

Question 9

True or False: While dividends are not taxable, if they are left to accumulate at interest, the interest is taxable.

Answer 9

True

Question 10

Death Benefits: When the entire death benefit amount if paid in a lump sum to the beneficiary it’s _____________ as income whether the policy is owned by an individual or a business. ( taxable or not taxable)

Answer 10

Not taxable

Question 11

Death benefits: What happens when the death benefits are paid under a settlement option instead of a lump sum?

Answer 11

The original death benefit is not taxable, any interest earned on the proceeds are taxable as ordinary income when it’s paid to the beneficiary.

Question 12

How would an insured qualify for the Accelerated Death Benefits ?

Answer 12

Terminal illness expected to end in death within 24 month. (critically ill/ terminally ill)

Question 13

Is the Accelerated Death benefit tax exempt?

Answer 13

Yes

Question 14

Business Life insurance premiums: Are the premiums tax deductible to the business or the Key person?

Answer 14

The Key person

Question 15

Business Life policies: Are premiums tax deductible for Executive bonuses?

Answer 15

Yes

Question 16

Business Life policies: Premiums for Executive bonus policies (are or are not) taxable to the employee ?

Answer 16

They ARE taxable to the employee

Question 17

Group Life insurance: Premiums paid by the employer ( are or are not) tax- deductible as a business expense provided under an employer group benefit plan.

Answer 17

They ARE tax-deductible

Question 18

With Contributory plans, is the employee portion of a Group Life insurance premium taxable ?

Answer 18

No

Question 19

Modified Endowment Contracts (MECs): Withdrawals or Loans are taxed on what basis?

Answer 19

Interest out first

Question 20

True or false: Annuity premiums are not tax-deductible, unless the contract is held in a qualified retirement plan.

Answer 20

True

Question 21

Interest during accumulation is not taxed until its ___________.

Answer 21

Paid out

Question 22

Annuity withdrawals: What is the penalty on interest if it’s withdrawn before the age of 59 1/2 unless they are disabled ?

Answer 22

10%

Question 23

How are annuity payments after annuitization taxed?

Answer 23

It’s taxed according to the exclusion ratio. Premiums paid in divided the total of expected payments over annuitants life expectancy equals percent of payment not taxed.

Question 24

Annuity distributions at death to a beneficiary: When paid as a lump sum what portion is taxable ?

Answer 24

The Gain (total value minus cost basis) is taxable

Question 25

Annuity Death benefit: If a spouse is the beneficiary are there any tax consequences when it’s transferred to the spouse ?

Answer 25

No

Question 26

Annuity Death benefit: When the beneficiary takes the proceeds under the annuity payout option how is it taxed?

Answer 26

The payments are taxed as annuity payments (part taxable gain and part non-taxable cost basis using the exclusion ratio)

Question 27

What is a MEC?

Answer 27

A MEC is a life insurance policy that offers a tax free death benefit and tax deferred cash value accumulation. A premium limit is set and is referred to a seven pay limit or MEC limit. ( Too much premium paid in the first 7 years)

Question 28

Annuity Death benefit: If death occurs during the annuity period what is the tax treatment when the payments are being made out to a survivor annuitant under a joint - and survivor annuity?

Answer 28

The continue to be taxed as they were when made to both annuitants. If the entire cost basis has not yet been paid out, the same exclusion ratio % is used to determine the amount excludable from taxable income even if the payment to the survivor is reduced.

Question 29

Annuity Death benefit: If death occurs during the annuity period what is the tax treatment when the payments are being made out to a beneficiary ?

Answer 29

The entire payment is non-taxable until the entire cost basis has been paid out .

Question 30

MEC policies: Are Withdrawals or loans taxed?

Answer 30

Yes

Question 31

1035 Exchange: Is the Gain in an annuity or Life insurance contract taxable when the policy is surrendered?

Answer 31

Yes

Question 32

1035 Exchange: Moving cash values from one contract to another without any no tax consequences applies when?

Answer 32

(L to L) Life insurance to Life insurance policy, (A to A) annuity contract to another annuity contract, and a (L to A) Life insurance policy to an annuity contract.

Question 33

1035 Exchange: Does an Annuity to Life policy taxable or non-taxable?

Answer 33

It’s taxable