Taxation Principles in Life Insurance and Health Plans

These flashcards cover key terms and concepts related to taxation principles in life insurance and health plans.

Taxable

Subject to state or federal taxes.

Tax Deferred

Taxes are paid when you withdraw funds in the future, rather than paying them upfront when making contributions.

Tax Deductible

An expense that can be subtracted from taxable income, resulting in lower tax liability.

Policy Premiums

The price paid for insurance coverage, which is never tax deductible.

Death Benefit

The sum received by beneficiaries upon the insured's death, typically tax-free if received in a lump sum.

Lump Sum

A single payment made at one time, generally tax-free for life insurance benefits.

Installments

Payments received over time where the interest earned is taxable but the principal is not.

Living Benefits

Benefits available to policy owners, such as cash value in permanent life insurance.

Policy Loans

Loans taken against the cash value of a policy, which are not taxable as income.

Dividends

Refunds on overpaid premiums from mutual insurance companies, not taxable unless interest is earned.

Accelerated Benefit

A tax-free benefit received if the insured becomes terminally ill, with limits on the amount.

Deferred Annuity

An annuity that offers tax-deferred accumulation of funds until withdrawal.

Last In, First Out (LIFO)

The taxation method where interest is withdrawn and taxed before the principal.

59 and a half Rule

An IRS rule that imposes a penalty for early withdrawals from annuities before age 59 and a half.

Modified Endowment Contract (MEC)

An overfunded life insurance policy subject to different tax rules that loses its tax advantages.

Incidents of Ownership

Refers to instances where the insured's estate is liable for taxes upon the insured's death.

Seven Pay Test

A test to measure if a policy is overfunded and potentially becomes a modified endowment contract.

Noncontributory Plan

An employer-paid plan where the employee receives taxable benefits.

Contributory Plan

A plan where both employer and employee pay premiums, with varying tax implications.

Medical Expense Policies

Policies that allow unreimbursed medical expenses to be claimed as deductions.

Long Term Care Insurance

Insurance that offers tax deductions for premiums if itemized, with benefits paid tax-free below limits.