1. Life insurance death benefits paid to a named beneficiary in a lump sum are generally:

Received income-tax-free

Lump-sum death benefits are generally received free of federal income tax by the beneficiary.

2. The growth of cash value inside a permanent life insurance policy is generally:

Tax-deferred while it remains in the policy

Cash value grows tax-deferred; a taxable gain may arise only if the policy is surrendered for more than its cost basis.

3. When annuity income payments are received, the portion representing investment earnings is:

Taxable as ordinary income

Earnings in an annuity are taxed as ordinary income when distributed; the exclusion ratio determines the taxable portion.

4. A life insurance policy funded so quickly that it fails the federal 7-pay test becomes a:

Modified endowment contract (MEC), with less favorable distribution tax treatment

A MEC results from over-funding; distributions are taxed on a gain-first (LIFO) basis and may incur penalties.