Deck 5: Health: Tax Issues in Life Insurance

Question 1

At what income tax rate is the beneficiary of a life insurance policy charged on the receipt of $100,000 in death benefit proceeds?

A)0%
B)28%
C)33%
D)It depends on the beneficiary's individual income tax bracket

Answer 1

0%

Question 2

The interest that is credited to a whole life insurance policy cash value grows on a __________ basis.

A)Taxable
B)Tax-Free
C)Tax-Deferred
D)None of the Above

Answer 2

Tax-Deferred

Question 3

In most cases, life insurance policy dividends are received __________.

A)As taxable income
B)On a tax-deferred basis
C)Tax-free
D)As ordinary income

Answer 3

Tax-free

Question 4

If an individual owns a life insurance policy, upon their death their estate will be fully subject to tax if which of the following occurs:

A)The proceeds of that life insurance policy are payable either directly or indirectly to the individual's estate
B)If the insured, while still alive, held an ownership interest in the policy
C)Both A and B
D)Neither A nor B

Question 5

Life insurance policy owners can make a full or partial withdrawal of their cash value. This cash value will only be taxable, however, when __________.

A)It is worth more than what the policy owner has paid into the policy
B)It is worth less than what the policy owner has paid into the policy
C)It is not withdrawn
D)It is taken out as a loan

Question 6

A __________ will allow for the direct transfer of money from a non-qualified annuity from one insurance company to another without incurring an IRS penalty or taxation.

A)1031 exchange
B)1035 exchange
C)ERISA exchange
D)TEFRA exchange

Question 7

If an annuity owner passes away prior to the time that his or her annuity contract has annuitized, then the annuity contract will provide for a death benefit to be paid to a beneficiary. This death benefit will be received __________ by the beneficiary.

A)Tax free
B)Tax deferred
C)Taxable for the amount of death benefit that exceeds the contract owner's premium
D)None of the above

Question 8

A __________ is an official contract between an individual and an insurance company for a guaranteed interest bearing policy that provides tax-deferred earnings and includes optional guaranteed income choices.

A)Fixed annuity
B)Variable annuity
C)Index annuity
D)Equity index annuity

Question 9

A(n) __________ is a special type of life insurance trust that is set up for the purpose of excluding life insurance proceeds from an individual's estate, thus shielding these dollars from estate taxes.

A)Revocable life insurance trust
B)Family trust
C)Medicaid trust
D)Irrevocable life insurance trust

Question 10

The premiums paid for life insurance coverage in a qualified retirement plan will be __________ by the plan sponsor.

A)Deductible
B)Non-deductible
C)Tax deferred
D)Tax free

Question 11

In order for life insurance in a qualified retirement plan to be considered incidental, it will have to meet which of the following tests:

A)The cost of the life insurance must be less than 25 percent of the cost to provide all plan benefits
B)The life insurance death benefit cannot exceed 100 times the monthly retirement income that is provided by the qualified retirement plan
C)Either A or B
D)Neither A nor B

Question 12

In most cases, the death benefits on corporate owned life insurance policies are __________.

A)Taxable to the corporation
B)Not taxable to the corporation
C)Tax deductible to the corporation
D)Taxable to the employee

Question 13

If the proceeds of a life insurance policy are paid to the estate of an insured individual, then these proceeds will be __________.

A)Counted outside of the insured's estate
B)Free of estate taxation
C)Fully subject to estate taxes
D)Not counted in the insured's estate

Question 14

If an individual leaves life insurance proceeds to __________, then these proceeds will not be subject to taxation in their estate at the time of the individual's death.

A)Their estate
B)Their spouse
C)Their children
D)Their best friend

Question 15

Withdrawal of a life insurance policy's cash value is typically only taxable when __________.

A)It is worth more than what the policy owner has paid into the policy
B)It is worth less than what the policy owner has paid into the policy
C)It is worth less than the policy's death benefit
D)None of the above

Question 16

If a life insurance policy lapses due to nonpayment of premiums or from borrowing too much from the policy, all policy loans are treated as being "forgiven" by the IRS, meaning that the loan is no longer considered to be a loan and the funds are not required to be paid back. In this case, then, forgiven loan amounts are treated as __________.

A)Dividends that are taxable to the policy holder
B)Tax free withdrawals to the policy holder
C)Ordinary and taxable income to the policy holder
D)Additional premium payments to the policy holder

Question 17

Loans that are taken from a modified endowment contract are considered to be __________ for tax purposes.

A)Dividends
B)Premium adjustments
C)Paid up additions
D)Distributions

Question 18

Most withdrawals from life insurance policy cash value amounts are typically tax free up to __________.

A)The policy owner's basis in the policy
B)The amount of dividends that are received
C)50 percent of the death benefit amount
D)75 percent of the death benefit amount

Question 19

With regard to group life insurance, the IRS has deemed that the first __________ of death benefit coverage may be excluded from the employee's compensation.

A)$25,000
B)$30,000
C)$50,000
D)$80,000

Question 20

When a life insurance policy is surrendered or lapsed, any gain in the policy's cash value will be __________.

A)Received tax free by the insured
B)Taxed as ordinary income
C)Taxed as a capital gain
D)Taxed at estate tax rates

Question 21

The best form of life insurance coverage for an individual whose goal is to reduce or eliminate estate taxes upon their death is __________.

A)Term
B)Permanent
C)Group
D)Split dollar

Question 22

An insured individual owns a life insurance policy with a face amount of $100,000. If they have a need for long-term care services and they access $40,000 from their life insurance policy in the form of "living benefits" to pay for the cost of the nursing home, upon withdrawal of these funds, how much will be subject to income taxation?

A)$100,000
B)$60,000
C)$40,000
D)$0

Question 23

It is possible for an individual's health insurance premiums to be counted as a medical expense for the purpose of income tax deduction, as long as the premium amount and other medical expenses exceed ________.

A)7)5 percent of the individual's insurance benefits
B)7)5 percent of the individual's adjusted gross income
C)100 percent of the individual's deductible
D)Health insurance premiums are never deductible

Question 24

Based on IRS rules, if an individual is paying out-of-pocket for their employer group health insurance coverage under COBRA, then the premium amount is considered as __________ for tax purposes.

A)Medical expense
B)Taxable income
C)Tax free income
D)Medical benefits

Question 25

The types of insurance premiums that count toward an individual's medical expenses for income taxation purposes include:

A)Unused sick leave amounts at retirement that are used for post-retirement health coverage
B)Payroll tax for Medicare Part A hospitalization coverage
C)Both A and B
D)Neither A nor B

Question 26

Employers that pay some or all of their employees' group health insurance premiums will be allowed to ____________.

A)Exempt the amount paid from federal income taxes
B)Exempt the amount paid from payroll taxes
C)Both A and B
D)Neither A nor B

Question 27

What is the U.S. payroll tax that is imposed by the federal government on both employers and employees to fund Medicare and Social Security?

A)FDIC
B)FICA
C)FHLIC
D)FNMA

Question 28

If an individual receives benefits from a "qualified" long-term care insurance policy, how are these benefits treated in terms of taxation?

A)All benefits are considered to be ordinary income and are taxed as such
B)All benefits that are received must be adjusted against the total amount of premium that the insured paid in to the policy
C)Only the amount of benefits that exceed 7.5 percent of the insured's gross income may be deducted
D)All benefits received are treated as reimbursement for expenses that are incurred for the insured's medical care and are therefore not considered as part of taxable gross income (subject to a per diem dollar amount)

Question 29

If an employee earns $40,000 in annual income and her employer pays $10,000 in premiums for her group health insurance coverage, on what amount of total income will the employee be taxed when filing her annual tax return?

A)$10,000
B)$30,000
C)$40,000
D)$50,000

Question 30

If a person earns $50,000 per year and they own an individual health insurance policy, how much would that individual need to spend on his or her medical expenses in order to deduct such expenses on their tax return?

A)$7,500
B)$5,000
C)$3,750
D)$2,500

Question 31

In most cases, employers can deduct __________ of the health insurance premiums that they pay for qualifying group health plans.

A)None
B)25%
C)50%
D)100%

Question 32

If an individual is self-employed, they may take a deduction for health insurance expenses that are incurred for __________.

A)Himself or herself
B)Their spouse
C)Their dependents
D)All of the above

Question 33

Are the benefits received from a health insurance policy taxable?

A)Yes, if the premium was paid with pre-tax dollars
B)Yes, if the premium was paid with after-tax dollars
C)No, regardless of how the premiums were paid
D)None of the above

Question 34

Why do individual life insurance policy beneficiaries receive death benefits free from income taxation?

A)There is a standard deduction for insurance proceeds
B)The proceeds always pass outside of probate
C)The policy is paid for using after tax dollars via a contract
D)Life insurance beneficiaries do not receive proceeds free from income taxation

Question 35

If a life insurance policy holder takes out a loan from their whole life insurance policy's cash value, what happens with the portion of the loan that has not been paid back if the policy is later cancelled or lapsed?

A)The outstanding amount of the loan will be considered as gain and will therefore be treated as taxable income
B)The outstanding amount of the loan will be considered gain and will therefore not be treated as taxable income
C)The outstanding amount of the loan will not be considered gain as it came from the policy's cash value
D)The outstanding amount of the loan will automatically be subject to the maximum amount of estate taxation

Question 36

When can dividends that are received by a life insurance policy holder be taxed?

A)When the dividend amount that is received exceeds the amount that the policy holder has paid in as premiums
B)When they are received via a term life insurance policy
C)When the death benefit is paid out to the beneficiary
D)All of the above

Question 37

With a Modified Endowment Contract, or MEC, distributions (including policy loans) are subject to income tax to the extent that the gross cash value of the policy exceeds the policy owner's basis in the contract. In addition, a penalty of __________ may also apply if the distribution was made prior to the recipient attaining the age of 59 ½.

A)25%
B)15%
C)10%
D)0%

Question 38

The cash value in a permanent life insurance policy typically grows on a __________ basis.

A)Tax free
B)Taxable
C)Tax neutral
D)Tax deferred

Question 39

Under which circumstances could the proceeds of a life insurance policy be included in the decedent's taxable estate?

A)There is a transfer of ownership within three years of death (within certain guidelines)
B)The decedent at his or her death possessed an incident of ownership in the policy
C)The proceeds of the life insurance policy are paid to the executor of the decedent's estate
D)All of the above

Question 40

If an insured individual has an estate that is valued at $4 million and the estate tax exemption in the year of their death is $1 million, how much of their estate will be subject to estate taxes?

A)$4 million
B)$3 million
C)$1 million
D)None would be subject to estate tax as they owned a life insurance policy

Question 41

The IRS states that the value of life insurance proceeds will be included in the insured's gross estate if the policy proceeds are payable to __________.

A)The insured's estate, in either a direct or indirect fashion
B)Named beneficiaries, if the insured possessed an ownership interest in the policy at the time of their death
C)Both A and B
D)Neither A nor B

Question 42

With regard to federal income taxes, the premiums that are paid into a personal life insurance policy are __________.

A)Fully deductible
B)Partially deductible
C)Not deductible if they are a business expense
D)Not deductible as they are considered a personal expense

Question 43

Life insurance death benefits that are paid out to a beneficiary in a lump sum are typically not included as income to the recipient of such proceeds if the death benefit payment was made under a(n) __________.

A)Endowment contract
B)Worker's compensation insurance contract
C)Employer's group life insurance plan
D)All of the above

Question 44

Inclusion of life insurance death benefits as part of an insured's estate may cause the benefits paid to the estate to be taxable at the __________ level(s).

A)Federal
B)State
C)Local
D)Both federal and state

Question 45

If a beneficiary opts to receive a life insurance death benefit in installments rather than in a lump sum, what are the beneficiary's tax consequences?

A)The total amount of installment payments received by the beneficiary, regardless of how much, will not be subject to income taxation
B)The amount of installment payments received by the beneficiary that is in excess of the total amount of death benefit at the insured's death will be subject to income taxation
C)The entire amount of all installment payments received by the beneficiary will be subject to income taxation
D)If the beneficiary dies within three years of receiving the final installment payment, the entire amount of installment payments they received will be subject to income taxation

Question 46

The group term life insurance premiums paid by an employer for up to $50,000 of coverage are considered to be a(n) __________.

A)Taxable benefit to the employer
B)Taxable benefit to the employee
C)Tax free benefit to the employee
D)Tax deferred benefit to the employee

Question 47

The premiums that an insured chooses to contribute to their life insurance cash value are made with __________ dollars.

A)Tax free
B)Tax deferred
C)After tax
D)Tax indexed

Question 48

The proceeds from a group life insurance policy may be removed from the insured's gross estate by assigning the ownership interests to __________.

A)Their spouse
B)Their adult child
C)An irrevocable trust
D)All of the above

Question 49

If a life insurance policy violates the __________ rule, the proceeds that are received by the beneficiary, with limited exception, will be taxable as ordinary income.

A)1035 exchange
B)Premium payment
C)Transfer for value
D)Policy proceeds

Question 50

Life insurance policy dividends may be used in the following ways:

A)To purchase paid-up additions
B)To reduce the policy premiums
C)Left to accumulate
D)All of the above

Question 51

Life insurance policy withdrawals and loans are not considered to be taxable income, unless the policy has been lapsed or surrendered with an unpaid loan. In this case, the unpaid portion of the loan must be reported by the policy holder as taxable income. The amount that is reportable as income is known as __________.

A)Phantom income
B)Loan income
C)Dividend income
D)Interest income

Question 52

The interest that is repaid by a life insurance policy holder who has taken out a loan is considered to be consumer interest and is therefore __________.

A)Fully deductible
B)Partially deductible
C)Non-reportable
D)Not deductible

Question 53

The inside build-up of cash value in a life insurance policy is not considered to be taxable unless or until the policy is __________. This is true even if the cash value is taken out as a loan.

A)Surrendered
B)Lapsed
C)Cancelled
D)All of the above

Question 54

Under IRS Section 1035 rules, a life insurance policy may be exchanged penalty-free for a(an) __________.

A)Annuity
B)Endowment contract
C)Both A and B
D)Neither A nor B

Question 55

Corporate owned life insurance, or COLI, is life insurance on employees' lives that is owned by the employer. In most cases, these policies are taxed as if they were individually-owned life insurance. This means that premiums are __________ and proceeds are __________.

A)Deductible, taxable
B)Deductible, not taxable
C)Not deductible, not taxable
D)Not deductible, taxable

Question 56

Voluntary group life insurance plans, or those that are elected by and paid for by an employee, may be included in a cafeteria plan under IRS __________ of the tax code.

A)Section 1035
B)Section 1031
C)Section 401k
D)Section 125