Federal Tax Considerations Pt 7

After-tax dollars

Premiums are paid with _______ and are not tax deductible

Cost Basis

The Individual’s after-tax investment in the policy. Or the actual money put into the policy

Taxation on Life Insurance

No taxes, tax deferred, or excess taxable

Net out of pocket premium payments

_____ ____ __ _______ ______ establish the cost basis

Return of Unearned Premium

Dividends are considered a _____ __ _______ ________ since they are paid out with after-taxed premiums, the IRS will not tax it again

Accrue Interest

Earnings are taxable as ordinary income when they

Policy Loans

Are not taxable as long as the policy is in force, regardless of exceeding the cost basis

Policy Lapses

When a policy loan becomes taxable for any amount that is over the cost basis is when the ______ _____

Policy Withdrawals

Since they actually remove the cash value from the policy permanently, any excess over the cost basis is taxable

Cost Recovery Rule

Amounts withdrawn are taxable only to the extent they exceed over the cost basis

First In First Out (FIFO)

Amounts withdrawn are placed in chronological order. Until the amount withdrawn exceeds the amount of actual premiums put towards the policy/cost basis in which any amount withdrawn after that is considered taxable as ordinary income

Group Life Insurance

$50,000 tax free threshold to employees, but not the business

Cost of coverage

When group life insurance goes over the $50,000 and the employees must report the excess as taxable income

Income tax free

Death benefits going to the beneficiary are always

Not taxable

Lump sum death benefit principal (not counting earnings), the insured is terminally ill, or chronically ill and needs it for long term care

Federal Estate Taxes

Applied to death benefits that go towards an estate that would push the estate value past a threshold

Modified Endowment Contracts (MEC)

Meant to curtail tax advantage abuse stemming from permanent life insurance policies. In which there is tax penalties not for overfunding life policies

7 Pay Test

Established by the IRS to limit contributions during the first 7 years of a life insurance policy

Cannot be reversed

MEC Status _____ ___ ________

Excess Premiums

Insurers can refund an ______ _____ (plus its interest) within 60 days after the contract year ends