Unit 10 Taxation of Life Insurance and Annuities Flashcards
premiums
not tax-deductible
tax-deferred
not taxable as long as interest earning remain inside the policy
-interest owned on cash values is not taxed while in the policy. policyowner is taxed if gain is withdrawn
full surrenders
any gain is taxable
gain
cash value minus premiums paid (cost basis: sum of premiums paid)
withdrawals/ partial surrenders
taxed only if the withdrawal exceeds the premiums paid
only the gain (if any) is taxed
cash value loans
-not taxed while the policy is in force
-taxed if the policy is surrendered and there is a 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 (individual or business)
-interest is taxable
-if paid over time, part of the payment is not taxed and part is taxed
accelerated death benefits
an advancement of death benefits. in cases of critical illness, terminal illness, 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 above $50,000 is taxable income to the employee
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+10% penalty on interest if it is withdrawn before age 59.5, unless the insured is disabled
annuities
premiums are not tax deductible
accumulations
-interest during accumulation is not taxed in the contract
-taxable when paid out
withdrawls
-interest out first
-income tax on interest
-10% penalty on interest if the contract owner is younger than 59.5. penalty waived for disability, death, or annuitization
(same treatment as a MEC)
annuity payments after annuitization
-taxed according to the exclusion ratio (used to determine the nontaxable portion of each monthly payment)
if the annuitant lives beyond their life expectancy, 100% of the payment becomes taxable
distributions at death
-lump sum (all of gain is taxable)
-five-year withdrawal (interest out first, no 10% penalty)
-annuity payments (taxed according to the exclusion ration)
-if the spouse is the beneficiary, transfer ownership to the spouse with no tax consequences
section 103 exchange
tax code allowing movement of cash values from one contract to another
-life to life is not taxable
-annuity to annuity is not taxable
-life to annuity is not taxable
-annuity to life does not qualify
-annuity gains are taxable
estate taxes
-taxes are due on transfer of wealth
-taxes are a percentage of the estate’s value
-life insurance death benefits are included in the insured’s gross estate if: they are payable to the insured’s estate, the insured owns the policy at the time of death, the insured transferred ownership within three years of death
estate taxes for annuities
-tax treatment depends on when the death occurs
-if during the accumulation, entire value including cost is included in the estate
-if during the annuitization, present value of future payments is included in the estate
