Taxation of Life Insurance Annuities Flashcards
What is gain in the context of a policy?
Gain is cash value minus the policy’s cost basis (amount of premiums paid).
What happens to a policy’s cost basis when money is received from it, other than as a death benefit?
It reduces the policy’s cost basis.
Cost basis refers to the total amount of money that has been invested in a policy, which can affect taxation on withdrawals or loans against the policy.
What happens if a policy is surrendered or lapses before paying back a policy loan?
Any portion of the loan amount that exceeds the policy’s cost basis is taxable gain.
Under what tax rules does the taxable gain apply when a policy is surrendered?
The tax rules for full surrenders.
What is considered taxable gain in the context of surrendered policies?
The portion of the loan amount that exceeds the policy’s cost basis.
Fill in the blank: Any portion of the loan amount that exceeds the policy’s _______ is taxable gain.
cost basis
Premiums paid for executive bonus plans are tax deductible to whom?
To the business as employee compensation.
Premiums paid by employer for group life insurance above $50,000 is
taxable income to the employee.
Distributions from annuity during accumulation period receive
the same tax treatment as a modified endowment contract. LIFO- entire taxable gain received before cost basis; 10% penalty if under the age of 59 1/2 in addition to regular tax due on any amount received.
How is the exclusion ratio applied to annuity payments?
It is used to determine the non-taxable portion of each monthly annuity payment.
Exclusion ratio is
premiums paid/total of expected payments over annuitant life expectancy = percent of payment NOT TAXED
Life insurance death benefits (proceeds) are included in deceased insured’s gross estate value if
they are payable to the estate; the insured owned the policy at time of death; or the deceased transferred ownership within three years of death.
When are estate taxes owed?
If an estate’s value exceeds a certain value at the time of the insured’s death. They are a percentage of the estate’s value.
If the annuitant dies during the accumulation period, then
the entire value of the annuity, gain and cost basis, is included in the estate.
If death occurs during the annuity period,
the present value of any future payments will continue to beneficiary or survivor annuitant.
