Insurance Chapter7 Exam 4

The cost recovery rule states:

• Premiums paid in can be refunded at the policyowner's request

• That the excess cash value over premiums paid is considered taxable income when withdrawn

• The first dollar out of a permanent life insurance policy is considered taxable income

• The insurer can hold back funds associated with any costs of underwriting, issuing, and maintaining the policy

If dividends are left on deposit with an insurer to earn interest:

• The dividend is tax-free, but the interest is taxable

• The dividend is taxable as well as the interest

• The dividend is taxable, but the interest is tax-free

• The interest is tax-free as well as the dividend

Withdrawals from a non-qualified annuity that is not part of an annuitization are taxed on which of the following methods?

• Cost basis identification

• Last-in, first-out basis (LIFO)

• Weighted average

• First-in, last-out basis (FIFO)

___________ are not taxable because they are considered a return of excess premium.

• Policy loans

• Cash Values

• Death Benefits

• Dividends

Generally, life insurance death proceeds are income tax free to the policy beneficiary, except:

• When the death benefit option B is selected on a Variable Universal Life policy

• When a transfer of ownership has taken place

• When the policy is classified as a MEC

• If the employer deducts the premiums on a group life insurance plan covering the employees

Which of the following statements about a Modified Endowment Contract (MEC) is FALSE?

• Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains

• The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy

• Taxable distributions include cash value surrenders and policy loans

• If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment

Withdrawals from a non-qualified annuity prior to annuitization are taxed on a ___________ basis.

• Average cost basis (ACB)

• First-in, first out (FIFO)

• First in, last out (FILO)

• Last-in, first out (LIFO)

Employer-paid premiums for employee group term life do not constitute taxable income to the employee for coverage up to ___________.

• $25,000

• $40,000

• $30,000

• $50,000

If a non-qualified variable annuity owned for 15 years is surrendered, what is the income tax consequence?

• The amount received in excess of cost basis is taxed as a long-term capital gain

• The entire amount received is subject to ordinary income tax

• Any amount that represents an excess over cost basis that has been held for over 1 year is treated as long-term capital gain with the balance considered short-term capital gain

• Any amount received in excess of its cost basis is taxable as ordinary income

If the annuitant, now deceased, was receiving income from a pure life or straight life annuity, how much goes into the annuitant's estate for valuation?

• The cost basis

• The cost basis and the remaining tax-deferred earnings

• The tax-deferred earnings

• Nothing