Taxation Flashcards
True or False:
Premiums paid from individual a Life insurance policy are tax deductible.
False
Interest earnings credited to life insurance cash values are tax deferred - not taxable as long as they _________________________.
Remain inside the policy
True or False: The policy owner is taxed if gain is withdrawn.
True
Full surrenders: When a Life insurance policy is surrendered, any _____ in the cash value is taxable.
Gain
Gain =
Cash value - premiums
Withdrawals are taxed on a _____________ basis.
(FIFO) first in first out (Gain only)
True or False: The interest paid on a policy loan is tax deductible.
False
Are Dividends taxable ?
No
True or False: While dividends are not taxable, if they are left to accumulate at interest, the interest is taxable.
True
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)
Not taxable
Death benefits: What happens when the death benefits are paid under a settlement option instead of a lump sum?
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.
How would an insured qualify for the Accelerated Death Benefits ?
Terminal illness expected to end in death within 24 month. (critically ill/ terminally ill)
Is the Accelerated Death benefit tax exempt?
Yes
Business Life insurance premiums: Are the premiums tax deductible to the business or the Key person?
The Key person
Business Life policies: Are premiums tax deductible for Executive bonuses?
Yes
Business Life policies: Premiums for Executive bonus policies (are or are not) taxable to the employee ?
They ARE taxable to the employee
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.
They ARE tax-deductible
With Contributory plans, is the employee portion of a Group Life insurance premium taxable ?
No
Modified Endowment Contracts (MECs): Withdrawals or Loans are taxed on what basis?
Interest out first
True or false: Annuity premiums are not tax-deductible, unless the contract is held in a qualified retirement plan.
True
Interest during accumulation is not taxed until its ___________.
Paid out
Annuity withdrawals: What is the penalty on interest if it’s withdrawn before the age of 59 1/2 unless they are disabled ?
10%
How are annuity payments after annuitization taxed?
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.
Annuity distributions at death to a beneficiary: When paid as a lump sum what portion is taxable ?
The Gain (total value minus cost basis) is taxable
Annuity Death benefit: If a spouse is the beneficiary are there any tax consequences when it’s transferred to the spouse ?
No
Annuity Death benefit: When the beneficiary takes the proceeds under the annuity payout option how is it taxed?
The payments are taxed as annuity payments (part taxable gain and part non-taxable cost basis using the exclusion ratio)
What is a MEC?
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)
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?
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.
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 ?
The entire payment is non-taxable until the entire cost basis has been paid out .
MEC policies: Are Withdrawals or loans taxed?
Yes
1035 Exchange: Is the Gain in an annuity or Life insurance contract taxable when the policy is surrendered?
Yes
1035 Exchange: Moving cash values from one contract to another without any no tax consequences applies when?
(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.
1035 Exchange: Does an Annuity to Life policy taxable or non-taxable?
It’s taxable
