An investor is evaluating the tax considerations and product mechanics of non-qualified variable annuities compared to variable life insurance policies. Which of the following statements regarding these insurance-based products are correct?
- Death benefits paid to a beneficiary from a variable life insurance policy are generally received income-tax-free, whereas the accumulated earnings portion of a variable annuity death benefit is taxable as ordinary income.Cevap
- Partial surrenders from a non-qualified variable annuity prior to annuitization are taxed on a last-in, first-out (LIFO) basis, making earnings taxable prior to any tax-free return of principal.Cevap
- CSurrender charges imposed by an issuing insurance company during the early years of a variable annuity contract are remitted directly to the Internal Revenue Service (IRS) to satisfy federal tax penalties.
- DStandard policy loans taken against the cash value of a variable life insurance contract are treated as taxable ordinary income distributions up to the amount of growth in the policy.
Cevap
The correct statements are that variable life insurance death benefits are generally received income-tax-free while annuity death benefit earnings are taxable as ordinary income, and that partial surrenders from non-qualified variable annuities are taxed on a last-in, first-out (LIFO) basis.
The statements highlighting that variable life insurance death benefits are income-tax-free while annuity death benefit earnings are taxable as ordinary income, and that non-qualified annuity surrenders follow LIFO taxation rules, are accurate applications of FINRA regulations and federal tax law.
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Anahtar Kavram
Tax mechanics of variable annuities versus variable life insurance, including LIFO taxation, death benefit taxability, policy loans, and insurer surrender fees versus IRS tax penalties.