Federal Tax Considerations for Life Insurance and Annuities
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)
More federal tax considerations for life insurance and annuities questions
- 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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