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14 Cards in this Set
- Front
- Back
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Premiums |
For individually-purchased life insurance are not tax-deductible. |
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Death Benefits |
Are tax-free if received in a lump-sum. |
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Interest |
If the benefit is paid in installments, the portion that is interest on the benefit is taxable. The cash value of a life insurance policy increases upon payment of premiums and interest accrued. If the policy is surrendered for cash value, the amount of interest is taxable. Otherwise, the benefit is tax-free. |
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Dividends |
Are considered a return of overcharged premium, and are not taxable since premiums are paid with after-tax dollars. |
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Loans |
Taken against the policy are repaid or recovered upon policy surrender or maturity, and are not taxable. If the policy is surrendered, the amount of cash value greater than premiums paid is taxable as income. |
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Accelerated Benefits |
Are tax free as long as the distribution is qualified, meaning the insured is terminally ill or expected to die within two years. Transfer of value occurs when the policy is sold to another party for consideration. While benefits are generally tax free, if the policy's proceeds are a result of a transfer of value, the proceeds are taxable. |
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Federal Estate Tax |
Life insurance policies may be included in the taxable estate if the deceased was the owner of the policy or an incident of ownership occurred at the time of death, the deceased's estate was the designated beneficiary, or the deceased gifted, assigned, or transferred ownership within the three years prior to death. An incident of ownership is one or more rights of owning a policy, including rights to surrender the policy for cash value, change the beneficiary, borrow or take a loan against the policy, or assign/transfer the policy. |
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Group Life Insurance |
* Premiums paid by employees are not tax-deductible * The employer can deduct premium payments as a business expense * Proceeds are tax-free if received in a lump-sum * Benefits paid in installments are subject to taxation for the interest portion |
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Life Insurance for Charity |
A life insurance may be given to a charity, and the value of the policy is tax-deductible. If the individual makes the premium payments for the charity, they are tax-deductible. However, the charity must retain ownership rights. if the person makes the charity the beneficiary, while retaining ownership rights, payment of premiums is not tax-deductible and the proceeds will be deducted from the estate as a charitable contribution. |
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Life Insurance as a Gift |
It may be given as a gift, but proceeds may be subject to tax if they exceed the gift tax threshold of $13,000 per person per year, while couples may give $26,000 per person per year. |
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Business Life Insurance |
Life insurance policy premium payments are not tax-deductible if policies are used for business purposes; however, the proceeds are tax-free. This does not include group insurance purchased by employers for its employees. |
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Modified Endowment Contracts (MECs) |
MECs are overfunded life insurance policies and are subject to taxation. Congress and the IRS defined MECs to prevent individuals from using life insurance policies as investment vehicles simply to withdraw tax-free proceeds through partial surrenders. To determine whether a policy is defined as life insurance or a MEC, the IRS uses the seven-pay test. the seven-pay test requires premiums paid in the first even years of the policy not exceed the level annual premium payments for a seven year paid-up policy, or the policy is defined as a MEC. MECs tax withdrawals are made prior to age 59.5, an additional 10% tax penalty is assessed, regardless of principal or interest. The death benefit is tax-free. |
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Non-qualified Annuities |
Annuities are taxed on an exclusion ratio in which the portion of annual payment that is principal is tax free and the portion that is interest is taxed as income. The accumulation phase is the initial period where the interest (tax base) accumulates tax-deferred from the principal (cost base) of premiums payments, which are not tax-deductible. Withdrawals during the accumulation phase are taxed last in, first out. Withdrawals made prior to the person reaching age 59.5 are assessed an additional 10% penalty tax. During the annuity or payout phase, proceeds are taxed based on the exclusion ratio. Premiums paid are included in the person's estate. If the person dies during the accumulation phase, all interest is taxable, unless the spouse is the beneficiary, which allows the interest to remain tax-deferred. Interest earned on annuities owned be corporations or non-living entities is not tax-deferred, but taxed on a current basis. |
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Section 1035 Exchanges |
The gains on exchanges of property, including life insurance policies, endowment, or annuities, are in most cases subject to taxation. Section 1035 of the Internal Revenue Code allows for certain exchanges without recognizing a gain or loss for tax purposes if it is a life insurance policy exchanged for another life insurance policy, endowment, or annuity; an endowment exchanged for another endowment or annuity; or an annuity exchanged for another annuity. |
