Life Insurance policy: Taxable?

[Mike007]

Thanks everybody! The scary part, both of them have been in the industry longer than I have so when both of them disagreed with me, I thought I messed up.

 

[DHK]

Whenever you're not sure, yes, do your own research, but now turn the tables on them. Ask THEM why they believe what they believe. Have them cite their source(s).

For this example, ask them if they're referring to this "Goodman Triangle" thing... then show your (my) research... and press for more answers.

Just because they are convinced of something, doesn't make them right.

By the way, here's the link to the VSA - that *I* used to cite my info.
The VSA

 

[Allen Trent]

With improper planning or ignorance of Goodman Triangle, the most common situation where the Goodman Triangle comes into play that I have seen is business life cases or Grandparent policies on kids.

But that doesn't make the life insurance death benefit taxable, it makes the gift of the premiums potentially taxable.

The only situation I am aware of that makes the death benefit is when a life policy is bought or sold as a life settlement. The investor in the policy will be taxed(I believe at capital gains rate) on their gain at death claim receipt. IE they buy a 300k face policy for 100k & then pay another 70k in premiums before death. Their basis would be 170k in the contract & 130k taxable gain. The reason is the investor had no insurable interest & merely bought the policy as a speculative investment.

I also believe some COLI & BOLI death benefits are taxable to extent of gain. But COLI & BOLI can be tax free if only on top execs & IRS forms & disclosures done.

 

[fed up]

I thought Death Benefits can be taxable if the insured takes the DB before he/she dies, as in a case where experimental surgery is paid for with the death benefit and the money becomes income.

 

[DHK]

Accelerated Death Benefit – ADB

Special Considerations
Accelerated death benefits are usually tax-exempt for individuals expected to die within two years. This type of benefit isn’t meant to substitute for long-term care insurance coverage. It should be used to supplement expenses not covered by a long-term care policy.

 

[Allen Trent]

I thought Death Benefits can be taxable if the insured takes the DB before he/she dies, as in a case where experimental surgery is paid for with the death benefit and the money becomes income.

nope. if processed correctly as a acceleration of the death benefit for terminal illness or Chronic Illness access rider (aka LTC benefit), those are tax free because they are not a cash withdrawal of Cash value, but actually a payment of the death claim in advance of death.

obviously, it has to be processed correctly under the endorsement & regulatory language. I have assisted terminally ill clients to process these claims while they were still alive so they could travel, try experimental treatment or give gifts to family members while they could watch them enjoy them. Had to be deemed terminal by Dr with less than 24 months to live.

But if the person isn't imminently terminal, they would have to take cash value from their policy or take a loan to try experimental treatments & thus it wouldn't be processed as a death claim, it would be a run of the mill distribution or loan

 

[fed up]

Thank you for the clarification, DHK & Allen

 

[DHK]

I will say that it's far better to have money and pay taxes... than not have money when you need it.

I would also suggest that if you're accelerating a DB and it's taxable, it would probably be offset by other medical expenses, so you could have a 'wash'.

 

[Allen Trent]

I would also suggest that if you're accelerating a DB and it's taxable, it would probably be offset by other medical expenses, so you could have a 'wash'

Great point that it is better to pay taxes than not have money when you need it.

in regard to deducting, I use to think that too, however it just isn't true in our complicated tax code.

Example. Taking $20k out of an Annuity, IRA or taxable distribution from a Life policy will issue a 1099 with some or all of it as taxable.

Then, when you go to use those funds for say a medical procedure or LTC expenses (or even a charitable donation) they many times wont be deducted for the following reasons:

1. you take the standard deduction & don't have enough to itemize
2. medical expenses are only deductible for the amount that exceeds 7.5% of your AGI & you have to be itemizing deductions
3. Some expenses like nursing home bills are not deductible at all (room, board, food), only the medical portion are.

So, it would be very rare to have it be a wash & in most cases possibly none deductible.

I think I learned this because I would justify in my head a SPWL case that doesn't have any hybrid LTC benefit compared to an actual IUL/UL hybrid CIA. I would figure the SPWL looked so much better cash wise, they could just take PUAR distributions from it to pay for care & turn around & deduct those costs----really doesn't work that way, especially with the higher standard deductions today & the reasons I mention above. Lesson learned, but still better to have the money & pay taxes, but there are better ways.

 

[DHK]

Well, since Trump doubled the standard deduction, and lowered tax brackets... it won't be a huge deal for middle income families - at least with the current tax situation.

So no, it might not be fully deductible or a 'wash', but it won't hurt them much either.

Say an IRA distribution for $20k... and at the 12% bracket = $2,400 additional tax. Not a huge deal.