Federal Tax Considerations for Life Insurance and Annuities

Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

Upon surrender of a life insurance policy, what portion of the cash value will be taxed?

In a direct rollover, how is the money transferred from one retirement plan to a new one?

From trustee to trustee

What is the name for an overfunded life insurance policy?

A Modified Endowment Contract (MEC)

If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?

Interest only

When would life insurance policy proceeds be included in the insured's taxable estate?

When there is an incident of ownership at the time of death

Why are dividends in life insurance policies not taxable?

Dividends are not considered income for tax purposes; they are a return of unused premium

What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?

Death benefits are generally not subject to income taxes

What portion of a nonqualified annuity payment would be taxed?

Interest earned on principal

What is the main purpose of the 7-pay Test?

To determine if a life insurance policy is a Modified Endowment Contract

According to the taxation rules of life insurance policies, how are cash value increases taxed?

Cash value growth is tax deferred

Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?

No, lump-sum benefits are received tax free

If taken as a lump sum, life insurance proceeds to beneficiaries are passed

Free of federal income taxation

When the owner of a $250,000 life insurance policy died, the beneficiary left the proceeds with the insurance company using the Interest Settlement Option. If $11,000 in interest was earned, the beneficiary would be required to pay income tax on

$11,000

Which of the following best describes taxation during the accumulation period of an annuity?

Taxes are deferred

What type of annuity activity will cause immediate taxation of the interest earned?

Surrendering the annuity for cash

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?

Withdrawals are not taxable

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

It is only taxable if the cash value exceeds the amount paid for premiums

An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?

$3,000

An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable?

Spouse

What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?

Section 1035 Policy Exchange

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

The entire face value of the policy will be included in J's taxable estate

Which of the following is NOT true of Section 1035 of the Internal Revenue Code regarding policy exchanges?

Any exchange must be completed within 30 days

Life insurance death proceeds are

Generally not taxed as income

During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?

Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?

The interest will continue to accumulate tax deferred

If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate?

Accumulated cash value