Question 1

The best form of life insurance coverage for an individual whose goal is to reduce or eliminate estate taxes upon their death is __________.

Accepted Answer

The best form of life insurance coverage for an individual whose goal is to reduce or eliminate estate taxes upon their death is permanent. As nobody knows exactly when they will die, certain needs will require a permanent type of life insurance coverage. This will help in ensuring that there will be coverage in force for an indefinite period of time.

Question 2

An insured individual owns a life insurance policy with a face amount of $100,000. If they have a need for long-term care services and they access $40,000 from their life insurance policy in the form of "living benefits" to pay for the cost of the nursing home, upon withdrawal of these funds, how much will be subject to income taxation?

Accepted Answer

If an insured life insurance policy owner withdraws $40,000 for the purpose of paying for nursing home care, they will not be subject to income taxation on any of these funds. This is because in most cases, living benefits from a life insurance policy are not taxable. It is important to note that the individual's death benefit will be reduced by the amount of the living benefits that are withdrawn. In this case, the insured's beneficiaries will receive $60,000 from the life insurance policy upon the insured's death.

Question 3

It is possible for an individual's health insurance premiums to be counted as a medical expense for the purpose of income tax deduction, as long as the premium amount and other medical expenses exceed ________.

Accepted Answer

It is possible for an individual's health insurance premiums to be counted as a medical expense for the purpose of income tax deduction, as long as the premium amount and other medical expenses exceed 7.5 percent of the individual's adjusted gross income. An insured may only deduct the amount of medical expenses, inclusive of their health insurance premium amount, that are over this amount. If medical expenses plus the amount of insurance premiums are less than 7.5% of the individual's adjusted gross income, the individual will not be able to deduct any such expenses.

Question 4

Based on IRS rules, if an individual is paying out-of-pocket for their employer group health insurance coverage under COBRA, then the premium amount is considered as __________ for tax purposes.

Accepted Answer

Based on IRS rules, if an individual is paying out-of-pocket for their employer group health insurance coverage under COBRA, then the premium amount is considered as a medical expense for tax purposes. If these premiums, coupled with other medical expenses incurred by the individual, exceed 7.5 percent of their adjusted gross income, the premium amount may be tax deductible. If medical expenses plus the amount of insurance premiums are less than 7.5% of the individual's adjusted gross income, the individual will not be able to deduct any such expenses.

Question 5

The types of insurance premiums that count toward an individual's medical expenses for income taxation purposes include:

Accepted Answer

None of the above types of premiums count towards an individual's medical expenses for income taxation purposes, including medical expenses or health insurance premiums that are paid by a tax-free distribution from an individual's retirement plan directly to the insurer. Some examples of medical expenses that could be deductible include medical equipment and charges for doctor's services. In addition, qualifying health insurance and long-term care insurance premiums may also be deductible. However, to qualify for income tax purposes, the person's medical expenses must exceed 7.5% of their adjusted gross income in order to be deductible.

Question 6

Employers that pay some or all of their employees' group health insurance premiums will be allowed to ____________.

Accepted Answer

Employers that pay some or all of their employees' group health insurance premiums will be allowed to exempt the amount that is paid from both federal income tax and from payroll taxes. This can essentially give an employer a double benefit. In addition, if an employee is responsible for paying some or all of the group health insurance premium, that employee may exclude the amount that they pay from their taxable income.

Question 7

What is the U.S. payroll tax that is imposed by the federal government on both employers and employees to fund Medicare and Social Security?

Accepted Answer

The U.S. payroll tax that is imposed by the federal government on both employers and employees to fund Medicare and Social Security is FICA. This stands for the Federal Insurance Contributions Act tax. Both employees and employers must pay a set percentage towards FICA.

Question 8

If an individual receives benefits from a "qualified" long-term care insurance policy, how are these benefits treated in terms of taxation?

Accepted Answer

All of the benefits that are received from a qualified long-term care insurance policy are treated as a reimbursement for expenses that are incurred for medical care. Such benefits are not considered to be income to the insured. Therefore, these dollars are not included in the insured's taxable income for tax purposes.

Question 9

If an employee earns $40,000 in annual income and her employer pays $10,000 in premiums for her group health insurance coverage, on what amount of total income will the employee be taxed when filing her annual tax return?

Accepted Answer

If an employee earns $40,000 in annual income and her employer pays $10,000 in premiums for her group health insurance coverage, the employee would only be taxed on her gross income amount of $40,000. This is because the $10,000 that the employer pays for her group health insurance coverage is not considered income to the employee. In addition, the employer may deduct the $10,000 in premiums paid as a business expense.

Question 10

If a person earns $50,000 per year and they own an individual health insurance policy, how much would that individual need to spend on his or her medical expenses in order to deduct such expenses on their tax return?

Accepted Answer

If a person earns $50,000 per year and they own an individual health insurance policy, they would need to spend at least $3,750 on medical expenses in order to deduct such expense on their tax return. This is because $3,750 is 7.5 percent of $50,000. This is calculated as $50,000 x 7.5% = $3,750.

Question 11

In most cases, employers can deduct __________ of the health insurance premiums that they pay for qualifying group health plans.

Accepted Answer

In most cases, employers can deduct 100%of the health insurance premiums that they pay for qualifying group health plans. In addition, when an employer offers group health insurance coverage, it is possible for an employee's share of the premium to be paid with pre-tax dollars. This will help to reduce the employee's annual income tax amount due, as it will be calculated on a lesser amount of annual income received.

Question 12

If an individual is self-employed, they may take a deduction for health insurance expenses that are incurred for __________.

Accepted Answer

If an individual is self-employed, they may take a deduction for health insurance expenses that are incurred for himself or herself, as well as for their spouse and their dependents. This is true regardless of whether the self-employed person's spouse or dependents work in the business. However, prior to claiming such a deduction, the individual must calculate their allowable health insurance deduction.

Question 13

Are the benefits received from a health insurance policy taxable?

Accepted Answer

Regardless of who pays the health insurance premium, health insurance benefits are not taxable. This also holds true whether the premiums are paid with pre-tax or after-tax dollars. Likewise, the benefits that are received from long-term care insurance policies are also not considered to be taxable income to the insured.

Question 14

Why do individual life insurance policy beneficiaries receive death benefits free from income taxation?

Accepted Answer

Because the premiums on individually owned life insurance policies are paid with funds that have already been subject to income taxes and therefore, the proceeds from these types of policies are received income tax free by the beneficiary. Such proceeds, however, could still be subject to estate taxation. This is based in large part on whether or not the insured has an ownership interest in the policy at the time of their death.

Question 15

If a life insurance policy holder takes out a loan from their whole life insurance policy's cash value, what happens with the portion of the loan that has not been paid back if the policy is later cancelled or lapsed?

Accepted Answer

If a life insurance policy holder takes out a loan from their whole life insurance policy's cash value, if the policy is later cancelled or lapsed, only the portion of the loan that has not been paid back will be considered as gain. Therefore, this amount will also be treated as taxable income and will be subject to income taxation. In this case, the policy holder must include this amount as income on his or her income taxes.

Question 16

When can dividends that are received by a life insurance policy holder be taxed?

Accepted Answer

Dividends that are received by a life insurance policy holder can be taxed to the policy holder when the amount of dividends that are received exceeds the amount that the policy holder has paid in as premiums to the policy. Term life insurance policies do not pay dividends. Death benefits that are received by beneficiaries are also not subject to income tax.

Question 17

With a Modified Endowment Contract, or MEC, distributions (including policy loans) are subject to income tax to the extent that the gross cash value of the policy exceeds the policy owner's basis in the contract. In addition, a penalty of __________ may also apply if the distribution was made prior to the recipient attaining the age of 59 ½.

Accepted Answer

With a Modified Endowment Contract, or MEC, distributions (including policy loans) are subject to income tax to the extent that the gross cash value of the policy exceeds the policy owner's basis in the contract. In addition, a penalty of 10% may also apply if the distribution was made prior to the recipient attaining the age of 59 ½. Due to their tax advantaged elements, the funds that are withdrawn from a MEC prior to the policy owner reaching age 591/2 would be considered an "early withdrawal," similar to withdrawals from qualified retirement plans.

Question 18

The cash value in a permanent life insurance policy typically grows on a __________ basis.

Accepted Answer

The cash value in a permanent life insurance policy typically grows on a tax deferred basis. Because of this, the gain in the cash value will be taxed to the recipient as ordinary income if it is withdrawn. There may also be tax consequences on the amount of any policy loan that has not been repaid if the policy lapses or is cancelled.

Question 19

Under which circumstances could the proceeds of a life insurance policy be included in the decedent's taxable estate?

Accepted Answer

There are many circumstances in which the proceeds of a life insurance policy could be included in a decedent's taxable estate. These may include having a transfer of ownership take place within three years of the insured's death (within certain guidelines). Likewise, proceeds could also be includable in the estate if the decedent held an incident of ownership in the life insurance policy, and/or if the proceeds of the life insurance policy are paid out to the decedent's executor.

Question 20

If an insured individual has an estate that is valued at $4 million and the estate tax exemption in the year of their death is $1 million, how much of their estate will be subject to estate taxes?

Accepted Answer

If an insured individual has an estate that is valued at $4 million and the estate tax exemption in the year of their death is $1 million, then $3 million of their estate would be subject to estate taxes. This is calculated at $4 million estate - $1 million exemption = $3 million subject to estate taxation. Even if the individual owns a life insurance policy, unless the individual's ownership interest in the policy was removed, the death benefit proceeds would still be counted as a taxable portion of their estate.

Quiz 5: Health: Tax Issues in Life Insurance