One of the strongest arguments for whole life [insurance] is that the cash value of the policy builds up tax-free, which substantially boosts the compounding power of your earnings. If you have maxed out on 401(k) plans, individual retirement accounts, and other tax-sheltered savings and investment plans, then cash-value insurance provides another option. It's entirely possible that a $250,000 policy bought at age 35 could accumulate a cash surrender value of $100,000 by the time you reach age 65 – a nice addition to your retirement nest egg if you decide you don't need the insurance anymore.
Meanwhile, you can turn in your policy any time after the first several years and collect the cash value, no questions asked. The proceeds are tax free to the extent that the cash value doesn't exceed the premiums you've paid. Or as described above, you can borrow against the cash value and leave the policy in force, with no requirement that you pay the money back (although you will owe interest on the loan, and if you die with the loan outstanding, it will be deducted from the face amount paid to your beneficiaries.) It's safe to say that cash-value life insurance has financed many a college education, even though there may have been better ways to do it.
[Miller, Ted. Kiplinger's Practical Guide To Your Money. Washington, DC Kiplinger Books. 1998 p. 246]
5. Which statement about whole-life insurance is true?
a. The entire proceeds of the policy are tax-free at surrender.
b. Only the difference between the premiums paid and the cash surrender value of the policy are taxable.
c. Only the difference between the premiums paid and the cash surrender value of the policy are tax-free.
d. No portion of the cash surrender value of the policy is tax-free.
e. Only proceeds used for loans are tax-free.
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| Student: 12/28/2009 2:33:46 PM |
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Answer is 'B' |
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 Answer |
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