Taxation Of Life Insurance Annuities

Question 1

Income tax treatment of life insurance comes down to 2 questions

Answer 1

Is the premium tac deductible or not?

Are distributions from insurance products taxable or not?

Question 2

Are premiums for life insurance tax deductible?

Answer 2

No

Question 3

Interest earned on cash values are

Answer 3

Tax deferred

Not taxed while in the policy

Policy owner is taxed if gain is withdrawn

Question 4

Gain equation

Answer 4

Cash value - premiums paid

Question 5

Withdrawals

Answer 5

Taxed only if withdrawal exceeds premiums paid

Only the gain is taxed

Question 6

Cash value loans

Answer 6

Not taxed while policy is in force

Taxed if policy is surrendered and there is a gain

Interest paid on loans is not tax deductible

Question 7

Dividends

Answer 7

Considered to be a return of premium

Not taxed

Interest earned is taxed

Question 8

Death benefits

Answer 8

Not taxed if paid in a lump sum

Interest is taxable

If paid over time part of payment is not taxed and part is taxed

Question 9

Accelerated benefits

Answer 9

Require a certification from a physician

Are tax exempt

Must be critically ill, terminally ill

Question 10

Taxation of business life policies

Answer 10

Premiums not tax deductible except for executive bonus

Death benefits not taxable

Premium me for executive bonus policies are taxable income to the employee

Question 11

Taxation of group life insurance

Answer 11

Premiums paid by employer are tax deductible

Premiums paid by employee are not tax deductible

Death benefits to a named beneficiary are not taxable

Premiums paid by employer for insurance over 50,000$ is taxable income to the employee

Question 12

Modified Endowment Contract

Answer 12

Happens if too much premium is paid in first 7 years of policy

• flexible premium universal life
• single premium whole life

Interest on cash values not taxed while in the policy

Withdrawals or loans are taxed

• interest out first
• 10% penalty on interest if withdrawn before 59.5 unless insured is disabled

Once a MEC always an MEC

Question 13

Are premiums for an annuity tax deductible?

Answer 13

No

Question 14

Annuity accumulations

Answer 14

Taxable when paid out

Interest during accumulation not taxed in contract

Question 15

Annuity withdrawals

Answer 15

Interest out first

Income tax on interest

10% penalty on interest if younger than 59.5
- penalty waived for disability death or annuitization

Question 16

Annuity payments after annuitization

Answer 16

Taxed according to the exclusion ratio

Premiums paid in / total of expected payments over annuitants life expectancy = percent of payment not taxed

If annuitant lives beyond life expectancy, 100% of payment becomes taxable

Question 17

Annuity distributions at death to a beneficiary

Answer 17

Lump sum (all gain is taxable)

Five year withdrawal (interest out first, no 10% penalty)

Annuity payments (taxed according to the exclusion ratio)

If spouse is beneficiary (transfer ownership to spouse with no tax consequences)

Question 18

Section 1035 exchange

Answer 18

Life to life (not taxable)

Annuity to annuity (not taxable)

Life to annuity (not taxable)

Annuity to life does not qualify
- annuity gains are taxable

Question 19

Life insurance proceeds

Answer 19

Taxes are a percentage of the estates value

Question 20

Estate taxes

Answer 20

Taxes due on transfer of wealth

Life insurance death benefits are included as insured’s gross estate if

• payable to the insureds estate
• insured owns the policy at time of death
• insured transferred ownership within 3 years of death

Question 21

Annuities are included in gross estate if

Answer 21

Death occurs during accumulation (entire value including cost is included)

Death occurs during annuization (present value of future payments is included)