Unit 10: Taxation of Life Insurance and Annuities Flashcards
premiums
not tax deductible
interest earn on cash values
- tax deferred
- not taxed while in the policy
- policyowner is taxed in gain is withdrawn
GAIN —–> INTEREST
full surrenders
any gain is taxable
gain
cash value - premiums paid
partial surrenders
- taxed only if the withdrawal exceeds the premiums paid
- only the gain is taxed
cash value loans
not taxed while the policy is in force
taxed if the policy is surrendered and there is gain
interest paid on loans is not tax deductible
dividends
not taxed
considered to be a return of premium
interest earned is taxed
death benefits
not taxed if paid in a lump sum to a named beneficiary
interest is taxable
if paid over time, part of the payment is not taxed and part is taxed
accelerated benefits
- critically ill
- terminally ill
- death
- not taxed
taxation of business life policies
premiums are not tax deductible, except for an executive bonus
death benefits are not taxable
premiums for executive bonus policies are taxable income to the employee
taxation of group life insurance
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 about 50k is taxable income to the employees
modified endowment contract (MEC)
seven-pay limit - too much premium paid in the first seven years of the policy
- flexible premium universal life
- single premium whole life
interest on cash values is not taxed while in the policy
withdrawals or loans are taxed
- interest out first
- 10% penalty on interest if withdrawn before the age of 59 1/2 unless insured is disabled
Once a MEC always a MEC
annuities
premiums not tax deductible
accumulations
taxable when paid out
interest during accumulation not taxed in the contract
withdrawals
same treatment as a MEC
interest out first
income taxed on interest
10% penalty on interest if younger than 59 1/2
-penalty waived for disability death or annuitization
annuity payments
taxed according to the exclusion ratio
premiums paid in divided total of expected payments over the annuitant’s life expectancy = percent of the payment not taxed
in the annuitant lives beyond their life expectancy 100% of the payment becomes taxable
distributions at death
tax treatment varies depending on how the money is paid out.
lump sum - all of gain is taxable
five year withdrawal - interest out first - no 10% penalty
annuity payments - taxed according to the exclusion ratio
if the spouse is the beneficiary - transfer ownership to the spouse
section 1035 exchange
L to L = no penalty (life to life)
A to A = no penalty (annuity to annuity)
L to A = no penalty (life to annuity)
A to L = GAINS TAXED (annuity to life)
life insurance proceeds
taxes are a % of the estates value
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 three years of death
annuities
tax treatment depends on when death occurs
annuities are included in gross estate if:
- death occurs during accumulation - entire value include cost is included
- death occurs during annuitization - present value of future payments is included
