Taxation Of Life Insurance

Question 1

How is a MEC defined?

Answer 1

Fails 7 pay test
After June 21, 1988
And meets the requirements as a life insurance contract (1984 act)

Question 2

How is a MEC taxed?

Answer 2

Like a single premium deferred annuity.
-loans treated as distributions
- div’s taked as income if received in cash or to reduced premiums or.. or if they are retained by the insurer in repayment of a loan
- LIFO Plus 59 1/2 penalty— death benefits still tax free

Question 3

What is the 7 pay test?

Answer 3

When excess premium is paid in the first 7 years
-single premium policy after 1988 is always a MEC on the exam

Question 4

What are 2 rules that could make a grandfathered life insurance policy a MEC?

Answer 4

1. If DB increases by more than 150k
2. If to increase the DB, the insured my provide additional evidence of insurability

Question 5

Policy transfers that are not jeopardized by the transfer for value rules are:

Answer 5

Transfer to insured
Transfer to a partner of the insured- partnerships only
Transfer to a corporation in which the insured is a shareholder or officer
Transfer due to divorce agreement

Question 6

What is the transfer for value rule?

Answer 6

=— if a policy is transferred from one owner to another for valuable consideration, the income tax exclusion is lost
I.e. when a corp changes its buy sell agreement from a stock purchase agreeement to a cross purchase plan and transfers company policies to stockholders other than insured
I.e. corporate key person life insurance policy is transferred to insured’s spouse, adult child or a trust
— policy is typically purchased for its current cash value