Individual Life Insurance Planning Flashcards

Under the IRC Section 101(a) general rule, how is a life insurance death benefit treated for federal income tax purposes when paid to a named beneficiary?

Answer: Excluded from the beneficiary's gross income

IRC §101(a) generally excludes life insurance death benefits from federal income tax when paid by reason of death of the insured.

A 'transfer for value' rule violation causes which portion of a life insurance death benefit to become taxable?

Answer: Only the amount received in excess of the value paid for the policy plus subsequent premiums paid is taxable

When a policy is transferred for valuable consideration, the death benefit exceeding the buyer's investment (amount paid plus premiums paid after transfer) loses its income-tax exclusion.

Which of the following transfers of a life insurance policy is an exception to the transfer for value rule?

Answer: A transfer to the insured

Transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, and to a corporation in which the insured is a shareholder or officer are excepted from the transfer for value rule.

What is the primary function of an irrevocable life insurance trust (ILIT) in estate planning?

Answer: To keep life insurance proceeds out of the insured's taxable estate

An ILIT owns the life insurance policy so that, if properly structured, the death proceeds are excluded from the grantor's gross estate under IRC §2042.

A client age 62 is considering a 1035 exchange. Which statement about IRC Section 1035 exchanges is CORRECT?

Answer: A life insurance policy can be exchanged tax-free for another life insurance policy or an annuity

IRC §1035 allows a tax-free exchange of a life insurance policy for another life insurance policy, an endowment, or an annuity, but not the reverse (annuity to life insurance).

Under the 'Goodman triangle' (unholy trinity), an estate planning problem arises when which three parties are all different individuals?

Answer: Policyowner, insured, and beneficiary

When the policyowner, insured, and beneficiary are three different people, the death benefit may be treated as a taxable gift from the policyowner to the beneficiary.

A client's $250,000 whole life policy has accumulated $60,000 in dividends left on deposit with the insurer. If the insured dies, the total death benefit paid will be:

Answer: $310,000 ($250,000 face amount plus $60,000 dividends on deposit)

Dividends left on deposit earn interest and are paid in addition to the policy's face amount, so the total proceeds equal $250,000 + $60,000 = $310,000.