Taxation Of Personal Life Flashcards
All of the following are times in which life insurance policy cash values can become taxable, except: A When a policy loan is taken out B If the policy fails to meet the IRS definition of life insurance C When the policy is sold D At policy surrender
A
When a policy loan is taken out
Clayton is asking his life insurance producer about any potential taxation issues related to his $100,000 personal Whole Life policy. All of the following are TRUE, except:
A
Since his policy is a personal policy, he cannot deduct the premiums he pays for the policy
B
Annual increases in the policy’s cash value are not taxable at the time they are credited to the policy
C
Upon surrender of the policy, he will be taxed on any amount by which the cash value exceeds the cost basis (premiums paid) of the contract
D
The interest that he pays on policy loans is tax-deductible
D
The interest that he pays on policy loans is tax-deductible
When withdrawing cash from a cash value life insurance policy, the amount of the withdrawal up to the policy's cost basis is tax-free. This tax accounting rule is referred to as: A First-In, Still There (FIST) B Dollar Cost Averaging C Last-In, First-Out (LIFO) D First-In, First-Out (FIFO)
D
First-In, First-Out (FIFO)
The restrictions on the amount of life insurance that can be held in a qualified plan are known as: A Unsuitability B Overinsurance C Incidental benefits limitation D Undue concentration
C
Incidental benefits limitation
When a life insurance policy does not pass the \_\_\_\_\_\_-pay test, it becomes classified as a MEC. A 7 B 9 C 10 D 8
A
7
Which of the following best defines the ‘Cost Recovery Rule’?
A
When a policy is surrendered, the earnings within the policy are accounted for first
B
Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender
C
The earnings on the policy’s cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender
D
The amount of the policy’s internal expenses plus the life producer’s commission make up the total cost of the policy
C
The earnings on the policy’s cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender
Which of the following statements about a Modified Endowment Contract (MEC) is FALSE?
A
Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains
B
The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy
C
Taxable distributions include cash value surrenders and policy loans
D
If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment
D
If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment
Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received \_\_\_\_\_\_\_\_\_\_. A Income tax-deferred B Income tax-free C Income tax-deductible D Income tax penalty-free
B
Income tax-free
If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit? A Quarterly B Annually C Semi-annually D Monthly
D
Monthly
What is the main purpose that IRC section 1035 was enacted?
A
To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one
B
To allow policyowners to obtain features and benefits not available on their existing policies
C
To allow consumers to obtain less expensive life insurance policies
D
To allow consumers to get better performance from a new policy
A
To allow for continued tax-deferral on any gains in an existing policy when a policyowner moves into a new one
Death benefits are paid to the estate of the policyowner/insured in which of the following situations?
A
The primary beneficiary is the deceased’s spouse
B
The beneficiary is the estate
C
The primary beneficiary is a minor
D
The contingent beneficiary has outlived the primary beneficiary
B
The beneficiary is the estate
In which of the following circumstances is an annuity's tax-deferral benefit lost? A The annuity is owned by a corporation B The annuity is owned by someone other than the annuitant C The annuity is held beyond age 70 1/2 D The annuity has a long-term care rider
A
The annuity is owned by a corporation
Cash values within an ordinary straight whole life insurance policy \_\_\_\_\_\_\_ over time. A Remain constant B Increase C Decrease D Vary
B
Increase
Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured’s estate?
A
A business partner owns a life insurance policy on the other partner that died
B
An employer owns a policy on the life of a key employee who dies
C
The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up
D
The insured is also the policyowner and at death no beneficiaries are alive
D
The insured is also the policyowner and at death no beneficiaries are alive
Any employee-paid group life insurance premiums are \_\_\_\_\_\_\_\_\_\_. A Tax-exempt B Tax-deductible C Tax-deferred D Not tax-deductible
D
Not tax-deductible
