Federal Tax Considerations for Life Insurance and Annuities
How are increases in the cash value of a life insurance policy treated while the policy stays in force?
Answer and explanation
Answer: C. Growth inside a life insurance contract is not currently taxed, which is the inside build-up that makes permanent insurance attractive. Tax arises on surrender or lapse, and then only on the amount by which what is received exceeds the owner's cost basis.Source: 26 U.S.C. § 72 — 26 U.S.C. § 72
More federal tax considerations for life insurance and annuities questions
- 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?
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