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General Insurance > Taxation of Life Insurance Annuities > Flashcards

Taxation of Life Insurance Annuities Flashcards

1
Q

Income tax treatment of life insurance and annuities comes down to 2 questions:

A
  1. Is the premium tax-deductible or not?
  2. Are distributions from insurance products taxable or not?
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2
Q

Premiums made for individual life insurance are _____ tax-deductible

A

NOT

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3
Q

Interest earnings credited to life insurance cash values are tax-_________, ____ taxable as long as they remain inside the policy

A

Deferred; not

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4
Q

When a life insurance policy is surrendered, any ______ in the cash value is taxable

A

Gain

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5
Q

Full surrenders:
Gain=

A

Cash value – premium paid

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6
Q

Cost basis

A

Sum of all premiums paid

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7
Q

Withdrawals (partial surrenders) (are/are not) taxable to the extent of any gain

A

Are

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8
Q

Withdrawals are taxed on a _________ basis

A

First-in-first-out (FIFO); money withdrawn is considered to come from the premiums paid FIRST and cost basis withdrawals are not taxable

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9
Q

The death benefit is _______ by a withdrawal of cash value

A

Reduced

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10
Q

When a withdrawal exceeds the cost basis, the excess (is/is not) taxable

A

Is

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11
Q

_____ ______ of a life insurance policy is used as collateral for a policy loan

A

Cash value

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12
Q

Policy loans reduce:

A

The cash value and policy death benefit. However can be repaid

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13
Q

Generally, policy loans (are/are not) taxable to the policyowner

A

Are not

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14
Q

The interest paid on policy loans (is/is not) tax-deductible

A

Is not

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15
Q

Dividends (are/are not) taxable

A

Are not

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16
Q

For tax purposes, dividends are considered to be:

A

A returns of a portion of the premium paid for the policy

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17
Q

While dividends are not taxable, if they are left to:

A

Accumulate at interest, the interest IS taxable

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18
Q

When the entire death benefit is paid in a “lump-sum” to a named beneficiary it (is/is not) taxable as income

A

Is not

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19
Q

If the death benefit payment is made under other settlement options- not a “lump-sum”- the original death benefit (is/is not) taxable, any interest earned on the proceeds (are/are not) taxable as originally income when paid to the beneficiary

A

Is not; are

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20
Q

An advance of death benefits

A

Accelerated death benefits

21
Q

Qualified events for accelerated death benefits

A

-terminal illnesses expecting to end in death within 24 months
-acute illness,
-emergency organ transplants
-permanent confinement to nursing homes
-long-term care (if ADLs can no longer be performed

22
Q

Accelerated benefits (are/are not) tax exempt

A

Are

23
Q

Business life insurance premiums for the following purposes are not tax deductible to the business:

A

-key person life insurance policies
-life insurance policies funding buy-sell agreements
-life insurance policies that will reimburse the company for benefits paid under deferred compensation arrangements

24
Q

Premiums paid for executive bonus plans (are/are not) tax deductible to the business as employee compensation

A

Are

25
Q

Premiums paid for executive bonus policies (are/are not) taxable income to the employee

A

Are

26
Q

Group life insurance premiums paid by the employer (are/are not) tax-deductible as a business expense provided under an employer group benefit plan

A

Are

27
Q

With contributory life insurance plans, the employee portion of the group life premium (is/is not) tax-deductible

A

Is not

28
Q

Premiums paid by employer for group life insurance coverage above $50,000 (is/is not) taxable as income to the employee

A

Is

29
Q

This law prescribes a test that is interested to differentiate between policies that are purchased primarily for certain tax advantages, versus policies that are purchased primarily for death protection

A

Modified endowment contract (MEC)

30
Q

To determine if a contract is a MEC:

A

A premium limit is set and is referred to as a seven-pay limit or MEC limit

31
Q

The seven-pay or MEC limit is based on:

A

The annual premium that would pay up the policy after the payment of seven level premiums

32
Q

Seven-pay test or MEC test

A

The cumulative amount paid at any time in the first 7 years cannot exceed the cumulative MEC limit applicable in that policy year

33
Q

Annuity premiums (are/are not) tax deductible

A

Are not; unless the contract is held in a qualified retirement plan

34
Q

Similar to life insurance, interest earnings credited to individual annuities (are/are not) tax-deferred

A

Are

35
Q

Earnings on annuities owned by corporations (are/are not) taxable when they are credited

A

Are

36
Q

Distributions received from an annuity during the accumulation period receive the same tax treatment as a:

A

Modified endowment contract

37
Q

Annuity withdrawals:

A

-interest out first
-income tax on interest
-10% penalty on interest if younger than 59 1/2 (penalty waived for disability, death, or annuitization)

38
Q

If an annuity owner withdrawals money from an annuity in a lump sum, they face severe

A

Tax penalties on their savings

39
Q

Used to determine the non taxable portion of each monthly annuity withdrawal payment

A

Exclusion ratio

40
Q

The exclusion ratio is applied to each annuity payment to find:

A

The portion that is excludable from gross income. The remainder is taxable at ordinary income rates

41
Q

Exclusion ratio=

A

Premiums paid in / TOTAL of expected payments over annuitants life expectancy

42
Q

Lump sum annuity death distribution

A

The beneficiary can take proceeds all at once. The gain (total value minus cost basis) is taxable

43
Q

Five year withdrawal annuity death distribution

A

The beneficiary must withdraw all proceeds within 5 years. These withdrawals are taxed the same as withdrawals during the owner’s life. The gain is taxable and all the gain must be taken out before any non-taxable cost basis

44
Q

Annuity payout death distribution option

A

Beneficiary must select within one year from the date of the owner’s death. The payments are taxed as annuity payments- part taxable gain and part non-taxable cost-basis, with the non-taxable amount determined using the exclusion ratio

45
Q

Spousal option annuity distribution at death

A

If the beneficiary is the owner’s spouse, ownership may be transferred to spouse without any tax consequences

46
Q

Section 1035 exchange

A

-applies to life insurance and annuities
-move cash values from one to another
-life to life- non taxable
-annuity to annuity- not taxable
-annuity to life does not qualify

47
Q

Life insurance death benefits are counted as value in a deceased insured’s estate if:

A

-payable to the insured’s estate
-insured owns the policy at time of death
-insured transferred ownership within three years of death

48
Q

Annuities are included in gross estate if:

A

-death occurs during accumulation- entire value including cost is included
-death occurs during annuitizatioin- present value of future payments is included

49
Q
A

General Insurance (20 decks)

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