Premium Calculations and Tax Treatment Flashcards
6 cards from real Life & Health Insurance Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Premium Calculations and Tax Treatment flashcards as text
Cash value withdrawals from a whole life policy are taxed as:
Answer: Ordinary income only to the extent they exceed the policy's cost basis
Life insurance cash value withdrawals are tax-free up to the policy's cost basis (total premiums paid); amounts above the basis are taxable as ordinary income.
What is the 'mortality and expense risk charge' (M&E) in a variable annuity?
Answer: An annual fee charged by the insurer for insurance guarantees and administrative costs
The M&E charge is an ongoing annual fee deducted from the annuity's account value to compensate the insurer for mortality risk and administrative expenses.
Dividends paid on a participating whole life policy are considered by the IRS as:
Answer: A return of premium and generally not taxable until they exceed premiums paid
Policy dividends are treated as a return of the premium (cost basis) and are not taxable income unless they exceed the total premiums paid.
Which of the following best describes 'experience rating' in group health insurance?
Answer: Adjusting group premiums based on the group's own claims history
Experience rating sets a group's premium based primarily on that group's own past claims experience, rewarding healthy groups with lower rates.
Under the modified endowment contract (MEC) rules, policy loans from a MEC are taxed as:
Answer: Ordinary income to the extent of gain, plus a 10% penalty if under age 59½
Loans and withdrawals from a MEC are subject to LIFO taxation (gain out first) and an additional 10% penalty tax if taken before age 59½.
A self-employed individual can deduct health insurance premiums paid for themselves and their family as:
Answer: An above-the-line deduction on Schedule 1 of Form 1040
Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line adjustment to income on Form 1040, Schedule 1.