Income Taxation Principles Flashcards
7 cards from real CLU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Income Taxation Principles flashcards as text
Under IRC Section 101(a), life insurance death benefits paid to a named beneficiary are generally:
Answer: Excluded from gross income
IRC Section 101(a) provides that life insurance death benefits are generally excluded from the beneficiary's gross income.
A policy owner surrenders a life insurance policy with a cash value of $80,000 and a cost basis (premiums paid) of $50,000. What is the taxable gain?
Answer: $30,000 as ordinary income
The gain on surrender is cash value minus adjusted cost basis ($80,000 - $50,000 = $30,000), taxed as ordinary income.
Which of the following describes the tax treatment of dividends received on a participating life insurance policy?
Answer: Tax-free return of premium until they exceed total premiums paid
Policy dividends are treated as a non-taxable return of premium until the cumulative dividends exceed total premiums paid.
The 'transfer for value' rule under IRC Section 101(a)(2) causes life insurance death benefits to become taxable when:
Answer: A policy is sold or transferred for valuable consideration
When a life insurance policy is transferred for valuable consideration, the death benefit becomes taxable to the extent it exceeds the transferee's basis.
Interest earned on life insurance policy loans is generally:
Answer: Not deductible for personal policies under IRC Section 264
IRC Section 264 generally disallows deductions for interest paid on loans against personally owned life insurance policies.
A Modified Endowment Contract (MEC) differs from standard life insurance primarily in that distributions from a MEC are taxed under:
Answer: LIFO (last-in, first-out) basis with a 10% penalty on pre-59½ distributions
MECs are subject to LIFO taxation, meaning gain comes out first and is subject to ordinary income tax plus a 10% penalty if taken before age 59½.
For federal income tax purposes, premiums paid by an employer for group term life insurance coverage up to what face amount are excluded from an employee's gross income?
Answer: $50,000
IRC Section 79 excludes employer-paid group term life insurance premiums from employee income for the first $50,000 of coverage.