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Taxation of Life Insurance and Annuities - Premiums and Proceeds 1
Terms in this set (39)
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an
A Modified endowment contract.
B Accelerated benefit policy.
D Nonqualified annuity.
Modified endowment contract.
If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?
AI t is taxable only if it exceeds the amounts paid for premiums by 50%.
B It is automatically taxable.
C It is only taxable if the cash value exceeds the amount paid for premiums.
D It is not considered to be taxable.
It is only taxable if the cash value exceeds the amount paid for premiums.
What method is used to determine the taxable portion of each annuity payment?
A The annuity to age ratio
B The marginal tax formula
C The exclusion ratio
D The excise ratio
The exclusion ratio
An IRA uses immediate annuities to pay out benefits; the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay?
A No penalties, since the owner is older than 59 ½
B 10% for early withdrawal
C 15% for early withdrawal
D 50% tax on the amount not distributed as required
50% tax on the amount not distributed as required
Which of the following statements is TRUE concerning whole life insurance?
A Dividend interest is not taxable.
B Premiums are tax deductible.
C Policy loans are tax deductible.
D Lump-sum death benefits are not taxable.
Lump-sum death benefits are not taxable.
Which of the following statements regarding deferred compensation funds is INCORRECT?
A They can be made with cash deposits to an annuity.
B They generally provide additional retirement benefits.
C They are usually qualified plans.
D They can be established by employers.
They are usually qualified plans.
What type of annuity activity will cause immediate taxation of the interest earned?
A Surrendering the annuity for cash
B Using the contract as collateral for a loan
C Changing a settlement option
D Failing to make a planned contribution
Surrendering the annuity for cash
When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?
A Distributions cannot begin prior to age 72.
B There are no distributions.
C Distributions are taxable.
D Distributions are nontaxable.
Distributions are taxable.
If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate?
A No benefits
C Accumulated cash value
D Full annuity benefit
Accumulated cash value
What is the main purpose of the Seven-pay Test?
A It guarantees the minimum interest.
B It determines if the insurance policy is a MEC.
C It requires level premium payments for 7 years.
D It ensures that the policy benefits are paid out in 7 years.
It determines if the insurance policy is a MEC.
Life insurance death proceeds are
A Generally not taxed as income.
B Taxable to the extent that they exceed 7.5% of the beneficiary's adjusted gross income.
C Taxed as a capital gain.
D Taxed as ordinary income.
Generally not taxed as income.
If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?
Which of the following is NOT true regarding policy loans?
A A policy loan may be repaid after the policy is surrendered.
B Money borrowed from the cash value is taxable.
C Policy loans can be repaid at death.
D An insurer can charge interest on outstanding policy loans.
Money borrowed from the cash value is taxable.
An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?
A The interest will become immediately taxable.
B The premiums will increase.
C The premiums will decrease.
D The interest will continue to accumulate tax deferred.
The interest will continue to accumulate tax deferred.
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a
A Nonforfeiture option.
C Settlement option.
D Nontaxable exchange.
Which of the following is true regarding taxation of accelerated benefits under a life insurance policy?
A There is a 10% penalty for early distribution of the death benefit.
B They are tax free to terminally ill insured.
C They are always taxable to chronically ill insured.
D They are always taxed.
They are tax free to terminally ill insured.
Which of the following describes the tax advantage of a qualified retirement plan?
A Employer contributions are not taxed when paid out to the employee.
B The earnings in the plan accumulate tax deferred.
C Distributions prior to age 59½ are tax deductible.
D Employer contributions are deductible as a business expense when the employee receives benefits.
The earnings in the plan accumulate tax deferred.
During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?
A Neither interest nor principal is taxed, but penalties may be imposed.
B Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½.
C Nontaxable principal may be withdrawn first, but the 10% penalty will be imposed if under age 59 ½.
D Both interest and principal are taxed; no other penalties are imposed.
Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½.
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?
A 401(k) Plan
B Section 457 Deferred Compensation Plan
C Section 1035 Policy Exchange
D Modified Endowment Exchange
Section 1035 Policy Exchange
What is the penalty for IRA distributions that are below the required minimum for the year?
Which of the following is NOT an allowable 1035 exchange?
A A whole life insurance policy is exchanged for a Universal life insurance policy.
B An annuity is exchanged for another annuity.
C A life insurance policy is exchanged for an annuity.
D A whole life insurance policy is exchanged for a term insurance policy.
A whole life insurance policy is exchanged for a term insurance policy.
An individual has been diagnosed with Alzheimer's disease. He is insured under a life insurance policy with the accelerated benefits rider. Which of the following is true regarding taxation of the accelerated benefits?
A The entire living benefit is considered taxable income.
B A portion of the benefit up to a limit is tax free; the rest is taxable income.
C Principal is tax free, but interest is taxed.
D The entire benefit will be received tax free.
A portion of the benefit up to a limit is tax free; the rest is taxable income.
In which of the following instances would the premium be tax deductible?
A Premiums paid by a mother on her son's policy
B Premiums paid by an employer on the life of a key person
C Premiums paid by an employer on a $30,000 group term life insurance plan for employees
D Premiums paid by an individual on his/her own life insurance
Premiums paid by an employer on a $30,000 group term life insurance plan for employees
A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called
A 1035 exchange.
B Qualified distribution.
C Premature distribution.
Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?
A Withdrawals are not taxable.
B Distributions before age 59 1/2 incur a 10% penalty on policy gains.
C Policy loans are taxable distributions.
D Accumulations are tax deferred.
Withdrawals are not taxable.
In life insurance policies, cash value increases
A Grow tax deferred.
B Are income taxable immediately.
C Are taxed annually.
D Are only taxed when the owner reaches age 65.
Grow tax deferred.
Which of the following is true regarding taxation of dividends in participating policies?
A Dividends are taxable only after a certain amount is accumulated annually.
B Dividends are taxable in some life insurance policies and nontaxable in others.
C Dividends are considered income for tax purposes.
D Dividends are not taxable.
Dividends are not taxable.
The premiums paid by the employer in a business life insurance policy are
A Never taxable to the employee.
B Tax deductible by the employer.
C Tax deductible by the employee.
D Always taxable to the employee.
Tax deductible by the employer.
The advantage of qualified plans to employers is
A Tax-free earnings.
B No lump-sum payments.
C Taxable contributions.
D Tax-deductible contributions.
Which of the following is NOT true of Section 1035 Policy Exchanges?
A It is an IRS Code which permits like kind exchanges of property.
B It is typically used when exchanging or replacing a less competitive life policy with a more competitive life policy.
C Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days.
D It requires an absolute assignment of the existing policy to the replacing company who surrenders the contract and issues a replacement policy.
Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days.
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?
An insured has a Modified Endowment Contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true?
A He will have to pay a penalty regardless of his age.
B He will not have to pay a penalty, regardless of his age.
C He cannot withdraw money from his MEC before age 59½.
D He will have to pay a penalty if he is younger than 59½.
He will have to pay a penalty if he is younger than 59½.
Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?
A Taxes are deferred on withdrawn amounts, but a flat penalty is charged.
B Taxes are deferred on withdrawn amounts.
C Withdrawn amounts are taxed on a last in, first out basis.
D Withdrawn amounts are taxed on a first in, last out basis.
Withdrawn amounts are taxed on a last in, first out basis.
Which concept is associated with "exclusion ratio"?
A How exclusion riders affect an insurance premium
B Policy provisions
C Annuity payments
D Dividend distribution
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?
C Charitable organization
Death benefits payable to a beneficiary under a life insurance policy are generally
A Exempt from income taxation if under $10,000.
B Exempt from income taxation if over $10,000.
C Not subject to income taxation by the Federal Government.
D Subject to income taxation by the Federal Government.
Not subject to income taxation by the Federal Government.
Which of the following statements regarding deferred compensation funds is INCORRECT?
A They can be established by employers.
B They can be made with cash deposits to an annuity.
C They generally provide additional retirement benefits.
D They are usually qualified plans.
They are usually qualified plans.
Which of the following best describes taxation during the accumulation period of an annuity?
A The growth is subject to immediate taxation.
B Taxes are deferred.
C The annuity is subject to state taxes only.
D The annuity is subject to both state and federal taxation.
Taxes are deferred.
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
A Both principal and interest
B Neither principal nor interest
C Principal only
D Interest only
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