Federal Tax Considerations for Life Insurance and Annuities — New York exam
5% of the scored questions — about 5 of 100. This section is general life insurance knowledge, shared with every state's exam.
1 / 8
A death benefit is excluded from the beneficiary's income. Does that settle the position for estate tax as well?
Answer and explanation
Answer: C. Income tax and estate tax are separate questions: proceeds excluded from income are still included in the gross estate where the insured held incidents of ownership or the estate is the payee. Naming an individual does not by itself remove them, and there is no one year purchase rule of that kind.Source: 26 U.S.C. § 101 — 26 U.S.C. §§ 101, 2042
2 / 8
A participant takes an eligible rollover distribution as a cheque rather than by direct transfer. What follows?
Answer and explanation
Answer: C. An eligible rollover distribution paid to the participant is subject to mandatory twenty per cent withholding, so completing a full rollover means making up the withheld amount from elsewhere and recovering it as a credit. A direct trustee-to-trustee transfer avoids the withholding altogether.Source: 26 U.S.C. § 402 — 26 U.S.C. § 3405(c)
3 / 8
A participating policyowner in good health wants each declared dividend to increase the amount of insurance without new underwriting. Which use fits?
Answer and explanation
Answer: B. NAIC guidance on participating whole life states that dividends can be used to lower premiums or buy more coverage, and buying additional coverage is what raises the amount of insurance. Cash, an interest-bearing deposit, and loan repayment each put the dividend to a different use that leaves the face amount unchanged.Source: NAIC — Life Insurance — Whole Life Insurance; buying more coverage
4 / 8
A participating policyowner wants a declared dividend to reduce the amount due at the next premium date. Which use fits?
Answer and explanation
Answer: A. NAIC guidance states that dividends can be used to lower premiums or buy more coverage, so reducing the next premium is a standard use. Accelerating the death benefit is a separate feature, the contestable period is fixed by statute, and complete premium waiver is a rider benefit rather than a dividend option.Source: NAIC — Life Insurance — Whole Life Insurance; use of dividends
5 / 8
A policy is sold to an unrelated investor who collects the amounts received at the insured's death. How is the exclusion affected?
Answer and explanation
Answer: A. Where a policy is transferred for valuable consideration the exclusion is cut back to the consideration paid and subsequent premiums, so the balance is taxable. Exceptions restore the full exclusion for transfers to the insured, a partner, a partnership of the insured, or a corporation in which the insured is an officer or shareholder.Source: 26 U.S.C. § 101 — 26 U.S.C. § 101(a)(2)
6 / 8
A policy with a large outstanding loan lapses while gain remains in the contract. What is the tax consequence of the policy loans?
Answer and explanation
Answer: B. On lapse or surrender the outstanding debt is treated as received by the owner, which can produce taxable income even though no cash changes hands. The debt is neither forgiven tax free nor deductible, and only the excess over basis is taxed.Source: 26 U.S.C. § 72 — 26 U.S.C. § 72
7 / 8
An owner surrenders a policy whose cash value increases have brought it to forty thousand dollars, having paid thirty thousand in premiums. What is the tax result?
Answer and explanation
Answer: C. On surrender the owner is taxed on the excess of the amount received over the cost basis, here forty thousand less the thirty thousand of premiums paid, so ten thousand is taxable. That gain is ordinary income, not capital gain, however long the policy was held.Source: 26 U.S.C. § 72 — 26 U.S.C. § 72
8 / 8
How are amounts received by a beneficiary by reason of the insured's death generally treated for income tax?
Answer and explanation
Answer: B. Amounts received under a life insurance contract by reason of the insured's death are excluded from gross income. Interest the insurer adds after the death, and certain transfers for value, are the exceptions to that treatment.Source: 26 U.S.C. § 101 — 26 U.S.C. § 101(a)
All 19 federal tax considerations for life insurance and annuities questions
- How are increases in the cash value of a life insurance policy treated while the policy stays in force?
- How are policy loans from a life insurance contract that is not a modified endowment contract generally treated for income tax?
- How does classification as a modified endowment contract change the taxation of cash value increases taken out?
- How is the interest an individual pays on personal policy loans generally treated?
- On what basis are dividends paid under a participating whole life policy?
- What is the tax effect of a properly executed section 1035 exchange?
- When a permanent policy is surrendered for cash, how is the taxable portion of the surrender proceeds calculated?
- Which of these is a permitted exchange under section 1035?
- Why is a direct trustee-to-trustee transfer usually preferred to a sixty day rollover?
- Why must a section 1035 exchange be carried out between the two insurers rather than by the owner?
- Within what period must a distribution be rolled over to another qualified plan or individual retirement arrangement to avoid current tax?
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