Taxation of Life Insurance/Annuities Flashcards
(30 cards)
Tax-Deductible or Not Tax-Deductible:
Premiums
Taxes: Life Insurance
Not Tax-Deductible
Taxable / Tax-Deferred / Non-Taxable:
Cash Value Accumulations
Taxes: Life Insurance
Tax-Deferred
(Interest Earned On Cash Values)
Taxable or Non-Taxable:
Full Surrenders
Taxes: Life Insurance
Cost Basis: Non-Taxable
Gains: Taxable
Taxable or Non-Taxable:
Withdrawal/Partial Surrenders
Taxes: Life Insurance
FIFO
Cost Basis: Non-Taxable
Gains: Taxable
Taxable or Non-Taxable:
Policy Loans
Taxes: Life Insurance
Non-Taxable
(While Policy is in force)
Tax-Deductible or Not Tax-Deductible:
Interest Paid on Policy Loans
Taxes: Life Insurance
Not Tax-Deductible
Key Points:
Taxation of Policy Loans
2 Parts
Taxes: Life Insurance
If Policy is Surrendered/Lapses during Loan Period:
* Excess Amount (above Cost Basis) is Taxable
If Insured dies during Loan Period:
* Outstanding Policy Loan is Not Taxable
Taxable / Tax-Deferred / Non-Taxable:
Dividends
Taxes: Life Insurance
Not Taxable
(Considered a (partial) Return of Principal)
Taxable / Tax-Deferred / Non-Taxable:
Interest Earned on Dividends
Taxes: Life Insurance
Taxable
Taxable or Non-Taxable:
Death Benefit
(Lump Sum Payment)
Taxes: Life Insurance
Not Taxable
(If paid to a named Beneficiary)
Taxable or Non-Taxable:
Death Benefit
(Periodic Payments)
Taxes: Life Insurance
Original Death Benefit: Not Taxable
(If paid to a named Beneficiary)
Interest Earned: Taxable
(Ordinary Income)
Taxable or Non-Taxable:
Accelerated Death Benefits
2 Sub-Parts
Taxes: Life Insurance
Taxable Exempt
- Must be a Qualifying Event
- Written Certification from a Physician is Required
Tax-Deductible or Not Tax-Deductible:
Business Insurance Premiums
Taxes: Life Insurance
Not Tax-Deductible
(except for Executive Bonus Policies)
Taxable or Non-Taxable:
Business Insurance Death Benefits
Taxes: Life Insurance
Not Taxable
Taxable or Non-Taxable:
Premiums (Executive Bonus Policies)
Taxes: Life Insurance
Taxable
(as income for the Employee)
Tax-Deductible or Not Tax-Deductible:
Group Life Premiums
Employer vs. Employee
Taxes: Life Insurance
Employer Paid: Tax-Deductible
Employee Paid: Not Tax-Deductible
Taxable or Non-Taxable:
Group Life Death Benefits
Taxes: Life Insurance
Not Taxable
(If paid to a named Beneficiary)
Taxable or Non-Taxable:
Group Life Premiums
(Employer Paid)
Taxes: Life Insurance
Taxable
(as income for the Employee)
(Above $50,000)
Definition:
Modified Endowment Contracts
(MECs)
3 Parts / 2 Sub-Parts
Taxes: Life Insurance
A Special type of Life Insurance under Federal Income Tax Law
7-Pay Test (MEC Limit):
A “Test” used to differentiate between:
* Policies purchased for tax advantages
* Policies purchased for death protection
Once a MEC; Always a MEC
Definition:
7-Pay Test
(MEC Limit)
Taxes: Life Insurance
The maximum amount of Premiums that can be paid into the contract during the first 7 years (from the date of issue) to avoid MEC status
Taxable / Tax-Deferred / Non-Taxable:
Modified Endowment Contracts
Interest/Loans/Early Withdrawals
Taxes: Life Insurance
Interest on Cash Values
* Tax-Deferred
Withdrawals/Loans (LIFO)
* Gains are Taxable
Early Withdrawals (prior to age 59 ½)
* Additional 10% Penalty on Gains
(unless insured is disabled)
Tax-Deductible or Not Tax-Deductible:
Premiums
Taxes: Annuities
Not Tax-Deductible
(Unless held in an IRA Annuity)
Taxable / Tax-Deferred / Non-Taxable:
Cash Value Accumulations
Taxes: Annuities
Tax-Deferred
(Interest Earned On Cash Values)
Taxable or Non-Taxable:
Withdrawals
(Accumulation Period)
Taxes: Annuities
(LIFO) | (Same as MECs)
Gains are Taxable (Ordinary Income)
Early Withdrawals (prior to age 59 ½)
* Additional 10% Penalty on Gains
(Penalty waived for Death, Disability, or Annuitization)
