LLQP Taxation of Insurance Products 5

Question 1

A corporation purchases a life insurance policy on a key executive and pays all premiums. Under what circumstance would the premiums be deductible as a business expense?

Accepted Answer

Premiums on corporate-owned life insurance are never deductible when the corporation is the direct or indirect beneficiary

Answer

Under IRC Section 264, premiums paid on a life insurance policy where the corporation is the direct or indirect beneficiary are not deductible as a business expense.

Question 2

An annuitant receives monthly payments from an annuity and uses the exclusion ratio to determine the taxable portion. If the exclusion ratio is 40%, what portion of each payment is taxable?

Accepted Answer

60%

Answer

The exclusion ratio represents the return of cost basis, so if 40% is excluded from tax, the remaining 60% of each annuity payment is subject to ordinary income tax.

Question 3

For federal estate tax purposes, which of the following would cause a life insurance death benefit to be included in the deceased insured's gross estate?

Accepted Answer

The insured retained incidents of ownership in the policy at the time of death

Answer

Under IRC Section 2042, life insurance proceeds are included in the insured's gross estate if the insured possessed any incidents of ownership at the time of death.

Question 4

A deferred annuity owner surrenders her contract before annuitization and receives $85,000. Her cost basis (total premiums paid) is $60,000. How much of the surrender proceeds is subject to income tax?

Accepted Answer

$25,000

Answer

Upon surrender, the gain (excess of proceeds over cost basis) is subject to ordinary income tax; here, $85,000 − $60,000 = $25,000 is taxable.

Question 5

Which of the following best describes the tax treatment of dividends received from a participating whole life insurance policy?

Accepted Answer

Dividends are considered a return of premium and are not taxable until they exceed the cost basis

Answer

Policy dividends from participating life insurance are treated as a return of premium (basis) and are not taxable until they exceed the total premiums paid into the policy.

LLQP - Life License Qualification Program Practice Test

LLQP - Life License Qualification Program Practice Test

LLQP Taxation of Insurance Products 5