Taxation at and After the Insured’s Death

Taxation at and After the Insured’s Death

Implications of Meeting Definition Essentially, what is defined as life insurance under income tax law will be treated as life insurance under the rest of federal tax law. If a contract meets the definition of life insurance, death benefits will be (generally) exempt from income tax. So, for instance, a death benefit that is not considered taxable as ordinary income will not be included in the calculations for the Net Investment Income tax (NIIT). Proceeds…

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Is Interest Paid on a Life Insurance Policy Loan Deductible?

Is Interest Paid on a Life Insurance Policy Loan Deductible?

Depending on the disbursements of the loan to specific expenditures, the IRS will classify interest incurred on a loan as: (1) trade or business interest; (2) investment or passive activity interest; or (3) personal interest. Trade or business situations – Contracts purchased before June 21, 1986 are not subject to any limit on deductibility of interest. Severe limitations on interest deductions apply in all other policy loan situations making it almost impossible to obtain an…

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Are Life Insurance Premiums Tax-Deductible?

Are Life Insurance Premiums Tax-Deductible?

No deduction is allowed for the premiums paid on a personally owned life insurance policy, regardless of who is the premium payer or who is the policyowner. Such outlays are considered a nondeductible personal expense. This rule applies even where the owner of the policy is someone other than the insured. Business policyowners generally fare no better. No deduction is allowed for premiums paid on any life insurance policy if the taxpayer is directly or…

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Taxation of Annuities

Taxation of Annuities

An annuity is a systematic liquidation of principal and interest over a fixed or contingent period of time. Thus, the term annuity includes payments for a fixed period or payments of a fixed amount in addition to payments lasting for one or more lives. Payments of interest only will not qualify for annuity taxation because there is no liquidation of principal. Amounts received as an annuity are taxed under special rules that allow the annuitant…

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Taxation of Life Insurance Surrenders, Redemption or Maturity of Policy

Taxation of Life Insurance Surrenders, Redemption or Maturity of Policy

Gain, in the form of ordinary income, is realized in many surrender, redemption, or maturity situations. Understanding them will help you back a better financial decision regarding your chosen policies. These include: Lump sum cash-in – The excess of the amount received by a policyholder in the complete redemption or surrender of a policy) over the policyowner’s investment in the contract (i.e., cost) is taxable as ordinary income. The policyowner determines the amount of lump…

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Taxation of Life Insurance Policy Withdrawals

Taxation of Life Insurance Policy Withdrawals

A withdrawal is the partial surrender of a policy. A policyowner will not have taxable income until withdrawals (including previous withdrawals and other tax free distributions from the policy such as dividends) made from the cash reserves of a flexible premium (i.e., universal or adjustable life) policy exceed the policyowner’s cost (accumulated premiums). Until the policyowner has recovered his aggregate premium cost, he will generally be allowed to receive withdrawals tax free under what is…

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Taxation of Life Insurance Dividends

Taxation of Life Insurance Dividends

Dividends are considered the result of favorable insurer experience in mortality, income, and loading that make possible a return of a policyowner’s outlay and are usually income tax free. Until total dividends received exceed the policyowner’s cost, whether or not the policy is paid up, these distributions are income tax free regardless of whether received in the form of cash, used to purchase paid-up additions, one year term insurance, or left to accumulate at interest….

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Taxation of Life Insurance Cash Values

Taxation of Life Insurance Cash Values

As noted above, as the cash value in a policy grows each year, the owner of the policy is not currently taxed on the increase. No current income tax is payable no matter how large the internal build up may be. Discover our articles archive here. View the latest policies Lifequotes has to offer. Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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Taxation During the Insured’s Lifetime

Taxation During the Insured’s Lifetime

All currently issued contracts must contain elements of both risk shifting and risk distribution in order to be considered life insurance and be taxed for federal purposes according to the rules that follow. Currently issued contracts must also meet Code section 7702 requirements of either a cash value accumulation test or fall within a cash value corridor and meet certain guideline premium requirements. These tests are incredibly complex and require actuarial determinations beyond the practical…

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