WorksheetsCh. 6 Federal Tax Considerations for Life Insurance & Annuities
Total questions: 11
Worksheet time: 6mins
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
The entire cash value received
Only the portion equal to the face amount
Only the portion in excess of the premium paid
The portion used to pay policy loans
Is the death benefit of a life insurance policy taxed to the beneficiary if it’s received as a lump sum?
Yes, it is fully taxable as income
Yes, but only the portion above premiums paid
No, lump-sum benefits are received tax free
No, unless the policy is whole life
What is the name for an overfunded life insurance policy?
A flexible premium policy
A universal life policy
A Modified Endowment Contract (MEC)
A paid-up life policy
When would life insurance policy proceeds be included in the insured’s taxable estate?
When the beneficiary is a family member
When the policy is permanent insurance
When there is an incident of ownership at the time of death
When the death benefit exceeds a certain dollar amount
In a direct rollover, how is the money transferred from one retirement plan to a new one?
From employer to employee
From employee to trustee
From trustee to trustee
From insurer to beneficiary
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Taxed annually as ordinary income
Taxed when premiums are paid
Cash value growth is tax deferred
Taxed as capital gains
What is the general taxation rule for the death benefits payable to the beneficiary of a life insurance policy?
Fully taxable as ordinary income
Taxed only if paid in installments
Death benefits are generally not subject to income taxes
Taxed as capital gains
What is the main purpose of the 7-pay Test?
To calculate cash value growth
To determine premium payment schedules
To determine if a life insurance policy is a Modified Endowment Contract
To establish surrender charges
What portion of a nonqualified annuity payment would be taxed?
The entire payment
The principal portion only
Interest earned on principal
The surrender charge
If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?
The entire payment
The principal portion
Interest only
None of the payment
Why are dividends in life insurance policies not taxable?
They are classified as investment income
They are interest payments from the insurer
Dividends are not considered income for tax purposes; they are a return of unused premium
They are paid from tax-exempt reserves
