CLU Income Taxation Principles 2

Question 1

Under IRC Section 101(a), life insurance death benefits paid to a named beneficiary are generally:

Accepted Answer

Excluded from gross income

Answer

IRC Section 101(a) provides that life insurance death benefits are generally excluded from the beneficiary's gross income.

Question 2

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?

Accepted Answer

$30,000 as ordinary income

Answer

The gain on surrender is cash value minus adjusted cost basis ($80,000 - $50,000 = $30,000), taxed as ordinary income.

Question 3

Which of the following describes the tax treatment of dividends received on a participating life insurance policy?

Accepted Answer

Tax-free return of premium until they exceed total premiums paid

Answer

Policy dividends are treated as a non-taxable return of premium until the cumulative dividends exceed total premiums paid.

Question 4

The 'transfer for value' rule under IRC Section 101(a)(2) causes life insurance death benefits to become taxable when:

Accepted Answer

A policy is sold or transferred for valuable consideration

Answer

When a life insurance policy is transferred for valuable consideration, the death benefit becomes taxable to the extent it exceeds the transferee's basis.

Question 5

Interest earned on life insurance policy loans is generally:

Accepted Answer

Not deductible for personal policies under IRC Section 264

Answer

IRC Section 264 generally disallows deductions for interest paid on loans against personally owned life insurance policies.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Income Taxation Principles 2