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Study Guide - Tax Treatment of Life Insurance Proceeds

The study guide is provided to guide you through the course material in a step by step format.

Introduction

One of the important considerations in many financial transactions is the tax treatment the transaction is given. Often, the impact of taxation is a consideration in the purchase of life insurance every bit as much as it applies to stock purchases, bond purchases and the establishment of qualified retirement plans.

In this course we will look at the tax treatment given proceeds from life insurance policies and will consider the taxation of death benefits, cash value withdrawals, loans and surrenders. In addition, we will examine the differences in tax treatment caused by a life insurance policies.

Learning Objectives

When you have completed this course, you should be able to:

  • Calculate the gain to be recognized as a result of various life insurance policy transactions, including –
    • withdrawals,
    • loans,
    • surrenders, and
    • payment of death benefits;
  • Identify the changes to the customary tax treatment of life insurance policy living proceeds resulting from the policy being deemed a modified endowment contract (MEC);
  • Calculate the reportable gain upon receipt of life insurance policy death benefits when the life insurance policy –
    • has been transferred for a valuable consideration, or
    • was included in a qualified plan;
  • Recognize the types of life insurance exchanges that are tax-free under IRC §1035;
  • Define the terms “terminally-ill” and “chronically-ill” as used in the Health Insurance Portability and Accountability Act; and
  • Identify the income tax treatment of accelerated death benefits, viatical settlements and life settlements.

Course material is an online PDF document available immediately upon purchase.

Prerequisite: None

Course level: Basic

Advanced preparation: None

Teaching method: Online study and exam

Chapter 1 - Life Insurance Death Benefits

The learning objectives for this lesson are to gain an understanding of:

  • Compare the customary income tax treatment given to life insurance policy death benefits with the income tax treatment given to such benefits under a life insurance policy transferred for a valuable consideration;
  • Calculate the taxable portion of life insurance death benefits under a policy included in a qualified plan;
  • Identify the tax treatment of death benefits received as periodic payments under a supplementary contract;
  • Define the terms “terminally-ill ” and “chronically-ill” as used in the Health Insurance Portability and Accountability Act; and
  • Identify the income tax treatment of accelerated death benefits and viatical settlements.

Chapter 2 - Life Insurance Policy Living Proceeds

The learning objectives for this lesson are to gain an understanding of:

  • Recognize the customary income tax treatment given to life insurance policy withdrawals, loans and surrender proceeds;
  • Identify the changes to the tax treatment of life insurance policy living proceeds resulting from the policy being deemed a modified endowment contract ;
  • Identify the types of life insurance exchanges that are tax-free under IRC §1035; and
  • Recognize the income tax treatment of life settlements.

 

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