Federal Tax Considerations for Life
Insurance + Annuities Exam
Questions & Answers (Grade A+)
Personal Life Insurance Taxation -
correct answer ✅1) Premiums are not tax deductible, 2) Death
benefits are tax free if taken as a lump-sum distribution, 3) Death
benefits in installments, principal is tax-free, interest is taxable.
Cash Value Increase -
correct answer ✅any cash value accumulations in the policy can
be borrowed against by the policy owner, or may be paid to the
policy owner upon surrender of the policy. Cash values grow tax
deferred.
Dividends -
correct answer ✅since dividends are a return of unused
premiums, they are not considered income for tax purposes.
Policy Loans -
correct answer ✅the policy owner may borrow against the policy's
cash value. Money borrowed against the cash value is not income
taxable.
Surrenders -
correct answer ✅when a policy owner surrenders a policy for cash
, Federal Tax Considerations for Life
Insurance + Annuities Exam
Questions & Answers (Grade A+)
value, some of the cash value received may be taxable as income if
the cash surrender value exceeds the amount of the premiums paid
for the policy.
Beneficiary General Rule + Exceptions -
correct answer ✅life insurance proceeds paid to a named
beneficiary are generally free of federal income taxation if taken as
a lump sum.
Settlement Options -
correct answer ✅with settlement options, when the beneficiary
receives payments consisting of both principal and interest, the
interest portion of the payments received is taxable as income.
Values Included in Insured's Estate -
correct answer ✅the death benefit or face amount of a life
insurance policy may be included in the insured's taxable estate at
death and subject to the federal estate tax.
Incidents of Ownership -
correct answer ✅an incident of ownership is defined as any one of
the rights of policy ownership, such as the right to cash value, the
Insurance + Annuities Exam
Questions & Answers (Grade A+)
Personal Life Insurance Taxation -
correct answer ✅1) Premiums are not tax deductible, 2) Death
benefits are tax free if taken as a lump-sum distribution, 3) Death
benefits in installments, principal is tax-free, interest is taxable.
Cash Value Increase -
correct answer ✅any cash value accumulations in the policy can
be borrowed against by the policy owner, or may be paid to the
policy owner upon surrender of the policy. Cash values grow tax
deferred.
Dividends -
correct answer ✅since dividends are a return of unused
premiums, they are not considered income for tax purposes.
Policy Loans -
correct answer ✅the policy owner may borrow against the policy's
cash value. Money borrowed against the cash value is not income
taxable.
Surrenders -
correct answer ✅when a policy owner surrenders a policy for cash
, Federal Tax Considerations for Life
Insurance + Annuities Exam
Questions & Answers (Grade A+)
value, some of the cash value received may be taxable as income if
the cash surrender value exceeds the amount of the premiums paid
for the policy.
Beneficiary General Rule + Exceptions -
correct answer ✅life insurance proceeds paid to a named
beneficiary are generally free of federal income taxation if taken as
a lump sum.
Settlement Options -
correct answer ✅with settlement options, when the beneficiary
receives payments consisting of both principal and interest, the
interest portion of the payments received is taxable as income.
Values Included in Insured's Estate -
correct answer ✅the death benefit or face amount of a life
insurance policy may be included in the insured's taxable estate at
death and subject to the federal estate tax.
Incidents of Ownership -
correct answer ✅an incident of ownership is defined as any one of
the rights of policy ownership, such as the right to cash value, the
