Group Life & AnnuitiesQuestion 118 of 716
During the accumulation phase of a non-qualified deferred annuity, how is the interest credited inside the contract treated for federal income tax purposes?
a.Tax-deferred; not taxed until withdrawn
b.Permanently exempt from federal income tax
c.Taxed each year as ordinary income whether withdrawn or not
d.Taxed each year at long-term capital gain rates
Explanation
An annuity's accumulation phase enjoys tax deferral: interest, dividends, and gains credited to the contract are not taxed each year. They are taxed only when withdrawn, generally as ordinary income on the gain portion.
Law Reference: 26 U.S.C. §72This topic, taught in full in the California Life & Health Insurance Producer Exam guide. California Life & Health Insurance Producer Exam — Complete Study Guide (2026) — PDF + EPUB, $19.99 · 14-day refund →
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Related questions on this topic
- What is the additional IRS penalty (on top of ordinary income tax) for taking a taxable withdrawal from a non-qualified annuity before age 59½?
- Which of the following exchanges is NOT permitted on a tax-free basis under Internal Revenue Code Section 1035?
- Which statement about a typical annuity surrender charge schedule is correct?
- Which of the following is NOT one of the eligible group categories for group life insurance in California?
- If the owner of a deferred annuity dies during the accumulation phase, before annuitization begins, who normally receives the contract's remaining value?
- An employee with group life coverage dies 10 days after leaving the job, having not yet applied for conversion. What is the insurer's obligation?
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PrepPass team · Verified against California Life & Health Insurance License Exam · How we review
Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)