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Tax Treatment of Life Insurance

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Question 1 of 4

1. Question

If the cash surrender value of a life insurance policy exceeds the net single premium required to fund future benefits or the cash value accounts for more than a certain percentage of the death benefit, which of the following takes place? Page 242

The tax advantages of the contract are lost.
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The life insurance becomes an annuity.
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The policy must be surrendered.
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The excess cash value must be forfeited.
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Question 2 of 4

2. Question

Are dividends paid to participating policyowners taxable? Page 244

Yes, they are taxable as ordinary income.
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Yes, they are taxable at capital gains rates.
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No, they are generally not taxable.
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Only if the policyowner takes the dividends before age 59 1/2.
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Question 3 of 4

3. Question

All of the following are correct statements about group life insurance except: Page 245

Proceeds are not subject to federal income tax when received as a lump sum.
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When all or part of the premiums are paid by the employer, contributions are not considered income to employees for the first $50,000 of coverage.
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Employees are taxed on the cost of coverage in excess of $50,000.
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All employer paid life insurance premiums are taxable to the employee.
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Question 4 of 4

4. Question

When a person makes a gift of life insurance within the statutory limits, does the recipient pay income tax on the gift? Page 247

Yes, income tax is due.
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Yes, income tax is due if the recipient is over the age of majority.
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No income tax is due.
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No income tax is due if the recipient is under age 15 or 16, depending on the state.
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