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Insurance Policy

Insurance is a critical tool used in a variety of tax planning strategies for clients. We find that our foreign national and expat clients can benefit from using insurance to help manage their cross-border tax liabilities.

Common questions about life insurance and taxes

If you own a life insurance policy or are the beneficiary of someone else’s life insurance policy, you may be wondering: “How do the taxes work on this thing?”

The following are a few common questions about life insurance and taxes. The answers are general in nature and are not written or intended as specific tax or legal advice. Tax law is highly specific to particular facts and circumstances. This is a good place to start, but if you have specific questions for your situation, you should seek advice from a tax advisor or legal counsel.

I received death proceeds from a life insurance policy. Do I have to pay income taxes?

Generally, life insurance proceeds paid upon the insured’s death are not included in the beneficiary’s taxable income. However, a life insurance death benefit typically includes interest calculated from the date of the insured’s death to the date of distribution. This interest is taxable to the beneficiary.

If I own policy, do I pay taxes on each year’s cash value increase?

No. Life insurance policy values increase on a tax-deferred basis.

Are my premiums tax-deductible?

Generally, premiums are not deductible. However, premiums paid that are taxable to someone else, as alimony, for example, maybe deductible.

Can I claim an investment loss (on my tax return) if I paid more into the policy than I would receive from a full surrender or policy lapse?

No. Tax law does not treat life insurance as an investment asset. It is treated as a personal asset and losses resulting from the sale of personal assets are not deductible.

If I have a loan on my life insurance policy and I pay the loan interest due, is that tax-deductible?

No. Interest paid on individually-owned life insurance contracts is generally not deductible.

What if I donate my policy? Can I take a charitable income tax deduction?

Yes. The taxpayer must transfer full control of the policy to the charity. This includes both the ownership and choice of beneficiary. If the taxpayer retains an interest in the policy, the charitable deduction will not be allowed. There are a couple of methods commonly used to determine the value of the donation. Consult your own tax advisor prior to claiming a charitable income tax deduction for donating a life insurance policy.

Would I be taxed if I needed cash from my policy?

Distributions (including cash dividends and partial/full surrenders) from most life insurance policies are not subject to taxation up to the amount paid into the policy (cost basis). Only distributions that exceed the policy’s cost basis are subject to income tax. Distributions can be used for any reason – for example, to supplement retirement or education expenses.

If I surrender my life insurance policy, what are the tax consequences?

The gross surrender proceeds that exceed the cost basis are included in the policy owner’s income. “Gross surrender proceeds” include cash received by the policy owner, plus any policy loans and accrued interest on those loans that are paid off at the time of surrender.

Are all life insurance policies treated the same for income tax purposes?

No. If the total amount of premium paid into a policy exceeds a certain limit, the policy will be classified as a Modified Endowment Contract (MEC). A MEC receives less-favorable tax treatment than a non-MEC policy. The answers in this article pertain to non-MEC policies only.

The information provided is not written or intended as specific tax or legal advice. Expat Mortgage Broker, its employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Expat Mortgage Broker.

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