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Questions and Answers
In life insurance policies, cash value increases are typically taxed under which condition?
In life insurance policies, cash value increases are typically taxed under which condition?
If an applicant buys a nonqualified annuity but dies before the starting date, for which of the following beneficiaries would the contract's interest NOT be taxable?
If an applicant buys a nonqualified annuity but dies before the starting date, for which of the following beneficiaries would the contract's interest NOT be taxable?
What is the term for a transaction when a policy owner cancels his life policy but instructs the insurance company to transfer the cash value to an annuity?
What is the term for a transaction when a policy owner cancels his life policy but instructs the insurance company to transfer the cash value to an annuity?
When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?
When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?
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If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an:
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it becomes a/an:
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What is the penalty for IRA distributions that are below the required minimum for the year?
What is the penalty for IRA distributions that are below the required minimum for the year?
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Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?
Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?
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Which concept is associated with 'exclusion ratio'?
Which concept is associated with 'exclusion ratio'?
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Which of the following describes the tax advantage of a qualified retirement plan?
Which of the following describes the tax advantage of a qualified retirement plan?
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What method is used to determine the taxable portion of each annuity payment?
What method is used to determine the taxable portion of each annuity payment?
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Study Notes
Taxation of Life Insurance and Annuities
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Cash value in life insurance policies generally grows tax deferred. Tax liability arises only if the policy is surrendered and cash value exceeds the premiums paid.
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If a nonqualified annuity holder dies before the starting date, the contract’s interest is taxable, except when the beneficiary is a spouse, which allows for tax deferral.
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A 1035 exchange allows for a nontaxable transaction when transferring cash value from a life insurance policy to an annuity, as per the Internal Revenue Code.
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Contributions to an immediate annuity made with before-tax dollars result in fully taxable distributions, which must begin by the age of 70.5 to avoid penalties.
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A life insurance policy classified as a Modified Endowment Contract (MEC) develops cash value faster than a seven-pay whole life contract, losing standard life contract benefits.
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The penalty for failing to take required minimum distributions from an IRA is 50% of the shortfall amount.
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Withdrawals from an annuity during the accumulation phase are taxed on a last in, first out (LIFO) basis, meaning that all withdrawals are taxable until the owner's cost basis is reached.
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The "exclusion ratio" relates to annuity payments, designating how much of the payment returned to the annuitant is taxable versus nontaxable; the principal paid in is nontaxable, while earnings are taxable.
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Earnings in a qualified retirement plan accumulate tax deferred, providing tax advantages on contributions and the growth of the funds.
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The exclusion ratio is utilized to determine the taxable portion of each annuity payment, distinguishing between principal and earnings in tax calculations.
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Test your knowledge on the taxation of life insurance policies and annuities with these flashcards. Learn about cash value increases, premium taxation, and the specifics of tax deferral. Ideal for students and professionals looking to deepen their understanding of tax implications in insurance.
