Taxation, Retirement Plans & Business Insurance

Life insurance death benefits paid in a lump sum to a beneficiary are generally received free of federal income tax. Interest paid on retained proceeds can be taxable.

Cash value generally grows tax-deferred. Policy loans are generally not taxable when taken from a policy that remains in force, but tax consequences can arise if the policy lapses or is surrendered with gain.

Policy dividends are generally treated as a return of premium up to the policyowner's basis. Interest earned on accumulated dividends can be taxable.

A life policy that fails the federal 7-pay test may become a Modified Endowment Contract (MEC). MEC distributions can receive less favorable tax treatment than distributions from ordinary life policies.

A Traditional IRA may provide tax-deductible contributions depending on eligibility, with taxable distributions later. A Roth IRA uses after-tax contributions and can provide qualified tax-free distributions.

Employer retirement plans such as 401(k) plans operate under federal tax and retirement-plan rules. Exams commonly test broad distinctions such as qualified vs. nonqualified plans, taxation, and ownership/vesting concepts.

In Key Person Insurance, the business typically owns the policy, pays the premium, and is the beneficiary; the key employee is the insured.

A buy-sell agreement establishes how ownership interests will be transferred upon death or another triggering event. Life insurance can provide the funding.

Life insurance may support executive benefit plans, business continuation, debt protection, and estate-liquidity objectives. The legal and tax structure depends on the arrangement.