Taxation Life Insurance

Question 1

Whole Life Taxation

Answer 1

Cash value- above cost basis at surrender is ordinary income. Not taxable at death

Dividends - not taxable until withdrawn. Unused premium.

Withdrawal/Loan - Cash Value+ Loans = Actual Cash Value
Basis= Premiums billed-dividends used to pay premium
Actual Cash Value-Basis= Ordinary Income

Death Benefit - tax free..unless insured, bene and owner are all different.

Question 2

USDA Uniform Simultaneous Death Act

Answer 2

Persons who die within 120 hrs or each other. Bypass estate of second person to other benes.

Question 3

MEC Modified Endowment Contract

Answer 3

1.Meets the requirements of life insurance
2.After 6/21/1988
unless material change like death Benefit increase 150K(no proof of insurability)

3.Fails 7 pay test -too much premium pd in first 7 years
Single premium always a MEC for test!
Once a MEC always a MEC
4.meets guidline premium and corridor or cash value accumulation test

Withdrawals taxed LIFO
Under 59 1/2 10% penalty
Dividends taxable ordinary income (cash to reduce premiums, retained for loan payment, received in cash)

Death Benefit Excludable from income

Question 4

Transfer for Value

Answer 4

tax exclusion lost

Except:

• transfer to the insured
• transfer to a partner of insured
• transfer to corporation insured is officer or 10% shareholder

A gift/sale of policy to a family member is a taxable gift but not transfer for value

Question 5

1035 Exchange

Answer 5

Same owner and insured/annuitant otherwise not tax free

life -> life
annuity -> annuity
life -> annuity

NO annuity ->life

Question 6

1099

Answer 6

report:
Dividends held accumulate with interest
MEC and a withdrawal occurred
MEC-Dividends used to reduce premiums