Chapter Recap
This chapter explained the basic taxation principles for life insurance and annuities. Let's recap the taxable, tax-deductible and tax-free features and transactions:
| TAXATION |
| Life Insurance |
- Premiums - not tax deductible
- Cash value - taxable only if the amount exceeds premiums (taxed on gain)
- Policy loans - not taxable, interest not tax deductible
- Dividends - not taxable as return of premium; any interest is taxable
- Accelerated benefits - tax free
- Death benefit - not taxable if lump-sum; any interest is taxable
- Surrenders - taxable if the cash surrender value exceeds the amount of the premium paid
|
| Annuities |
- Accumulation - tax deferred in individual annuities, not tax deferred in corporate owned
- Withdrawal of principal and interest - Last In, First Out basis
- Lump-sum cash surrenders - taxable
- Premature distribution - tax and 10% penalty
- Distributions at death - interest taxable
|
| IRAs |
- Contributions - pretax, tax deductible (must be made in cash)
- Earnings - tax deferred
- Distributions - taxable; 10% penalty for early withdrawals
|
| Roth IRAs |
- Contributions - after-tax, not tax deductible
- Distributions - not taxable
|
| OTHER RELATED CONCEPTS |
| Rollovers and Transfers |
- Tax-free transactions
- Distribution of money from one qualified retirement plan to another
- Must be completed within 60 days
- If from plan to the participant, 20% of distribution is withheld
- If from plan to trustee, no withholdings (direct rollover)
|
| 1035 Exchange |
Nontaxable if on the same life and one of the following exchanges:
- Cash value policy to another cash value policy, endowment or annuity
- Endowment to another endowment or annuity
- Annuity to another annuity
|
| Modified Endowment Contract(MEC) |
- Overfunded life insurance policy (7-pay test)
- Accumulation - tax deferred
- Distributions - taxable Last In, First Out
- Distributions before age 59 ½ - 10% penalty
|