Table of Contents

Course Learning Objectives. v

Introduction. v

Chapter 1 – Life Insurance Death Benefits. 8

Chapter Learning Objectives. 8

Introduction. 8

Nature of Life Insurance. 8

Premiums 8

Cash Value Accumulation. 9

Taxation of Life Insurance Policy Death Benefit Proceeds. 9

Statutory Definition of Life Insurance 9

Cash Value Accumulation Test 10

Guideline Premium and Cash Value Corridor Test 10

Taxation of Death Benefits under Contracts not Meeting Definition of Life Insurance 11

Transferred Policy Ownership. 11

Policies Transferred as a Gift 12

Policies Transferred for Value 12

Exceptions to Transfer for Value Rule 12

Life Insurance in Qualified Retirement Plans 13

Plan Participant Taxed on Current Life Insurance Benefit 13

Beneficiary Taxed on Part of Qualified Plan Life Insurance Death Benefit 14

Employer-Owned Life Insurance 14

Income Taxability of Viatical Settlement Proceeds. 15

Viatical Settlement Proceeds Tax-Free to Terminally-ill Insured. 15

Viatical Settlement Proceeds Tax-Free up to Daily Limits to Chronically-ill Insured. 16

Viatical Settlements in Business Situations an Exception to Tax-Exemption. 17

Taxability of Accelerated Death Benefits. 17

Death Benefits Received under Settlement Options. 17

Interest-Only Settlement Option. 18

Temporary Annuity. 18

Life Annuity. 19

Variable Payout Settlement Options 20

Life Annuity with Minimum Payment Guarantee 20

Summary. 21

Chapter 1 Review Questions. 23

Chapter 2 – Life Insurance Policy Living Proceeds. 24

Chapter Learning Objectives. 24

Introduction. 24

Definition of Life Insurance Impacts Tax-Deferred Accumulation. 24

Taxation of Living Proceeds of Life Insurance Policies. 25

Policy Loans Not Generally Considered Distributions 25

Policy Dividends Generally Considered Return of Premium. 25

Cash Value Withdrawals Generally Receive FIFO Tax Treatment 26

Gain on Surrender Includible in Income 26

Seven-Pay Test Determines MEC Status 27

Tax Consequences of MEC Status 27

Dividends Taxable 28

Cash Value Withdrawals 28

Loans Considered Distributions 28

Gain Included in Cash Surrender Proceeds Taxable 29

MEC Tax Penalty May Apply. 29

Qualified Long Term Care Charges from MECs Exempt 29

Distributions in Payment of Long Term Care Insurance Coverage 29

Tax Deduction for LTC Premiums Denied if Paid by Charge Against Cash Value 31

Tax-Free Exchanges under IRC §1035. 31

Tax Treatment of Life Settlement Proceeds. 32

Calculating the Life Settlement Gain. 33

Determining Adjusted Basis in a Cash Value Policy. 33

Determining Adjusted Basis in a Term Life Insurance Policy. 33

Identifying the Tax Treatment of the Life Settlement Gain. 34

Sale of Term Life Insurance Policy Results in Capital Gains Treatment 34

Sale of Cash Value Policy May Result in Capital Gains and Ordinary Income 34

Life Insurance Living Proceeds Received under Settlement Options. 35

Interest-Only Settlement Option. 35

Surrender or Maturity Proceeds Settled in Installments 35

Temporary Annuity. 36

Life Annuity. 37

Variable Payout Settlement Options 38

Life Annuity with Minimum Payment Guarantee 38

Summary. 39

Chapter 2 Review Questions 41

Answers to Chapter Review Questions. 42

CPE Exam Answer Sheet 52

Final Examination. 53

CPASelfstudy.com Course Evaluation. 59