- 25,026
Bob, How would you do that in an ROP?
Tax on ROP?
- Thread starter table83
- Start date
- 7,790
Ditto, briko3!!!!
- 1,405
Fine, but you will agree that IF there is a gain, then the gain would be taxable, correct?
- 1,405
Well here's what happened in the tax hungry socialist nation of Canada. In 1982 someone got the bright idea that the formula:
taxable income = cash received - premiums paid
really wasn't fair because it didn't take into account the fact that the capital in the policy earned interest. Further, they decided it just isn't fair to use interest only to pay the insurance costs of the policy and argue that it was only capital involved if a policy was cashed out. So they modified the formula to say:
taxable income = cash received - premiums paid - cost of insurance in the policy
The government then published a standard set of YRT table so that life companies could calculate the cost of the insurance in the contract.
So let's say a 40 year buys a $500,000, 30 year ROP policy. The premium is $980 per year. At the end of 30 years the policy refunds to the consumer 30 X $980 which is $29,400.
The argument is that he got his premiums back and the insurance was free. But we all know that there is no such thing as free insurance. What is actually happening is the company in taking part of $980 and using it to pay for insurance, and it invests the rest. That invested difference, WITH interest, is what gives the company the money to pay out the $29,400.
So given the left turn that our government is taking, and it is a hard left turn, and given that the Democrats will be looking for things to tax, you cannot guarantee anyone that the tax rules won't change to close what they will call a loophole - tax those rich people.
And if you ignore what I just told you, and assure your client that there is NO WAY they will have to pay tax on the ROP benefits in 30 years, then you better keep your E & O insurance topped up.
You should say that according to current tax rules it is not taxable - AND NOTHING MORE!
taxable income = cash received - premiums paid
really wasn't fair because it didn't take into account the fact that the capital in the policy earned interest. Further, they decided it just isn't fair to use interest only to pay the insurance costs of the policy and argue that it was only capital involved if a policy was cashed out. So they modified the formula to say:
taxable income = cash received - premiums paid - cost of insurance in the policy
The government then published a standard set of YRT table so that life companies could calculate the cost of the insurance in the contract.
So let's say a 40 year buys a $500,000, 30 year ROP policy. The premium is $980 per year. At the end of 30 years the policy refunds to the consumer 30 X $980 which is $29,400.
The argument is that he got his premiums back and the insurance was free. But we all know that there is no such thing as free insurance. What is actually happening is the company in taking part of $980 and using it to pay for insurance, and it invests the rest. That invested difference, WITH interest, is what gives the company the money to pay out the $29,400.
So given the left turn that our government is taking, and it is a hard left turn, and given that the Democrats will be looking for things to tax, you cannot guarantee anyone that the tax rules won't change to close what they will call a loophole - tax those rich people.
And if you ignore what I just told you, and assure your client that there is NO WAY they will have to pay tax on the ROP benefits in 30 years, then you better keep your E & O insurance topped up.
You should say that according to current tax rules it is not taxable - AND NOTHING MORE!
- Thread starter
- #27
First of all I'm just going to call the IRS today and ask them.
Second the amount paid is the lost amount assuming the time value of money. so I am paying 71.82/mo today. it is assumed that money is worth more tommorow than it is today. because I'm not getting that back I'm essentially paying it to the insurance company.
Lastly I do understand the argument listed above, and must agree there is sound logic in saying that the IRS could tax you on it and feel ok with themselves. If term is 20/mo and rop is 30/mo the extra 10/mo essentially accrues interest to pay for my premium back to me. There is a lot more to it I agree but that is the jist. Because of that we cannot say it's not taxable without someone who has been there done that, or have it in writing from the IRS. I'll post my findings. Again if you have seen someone collect on rop was it taxed?
Second the amount paid is the lost amount assuming the time value of money. so I am paying 71.82/mo today. it is assumed that money is worth more tommorow than it is today. because I'm not getting that back I'm essentially paying it to the insurance company.
Lastly I do understand the argument listed above, and must agree there is sound logic in saying that the IRS could tax you on it and feel ok with themselves. If term is 20/mo and rop is 30/mo the extra 10/mo essentially accrues interest to pay for my premium back to me. There is a lot more to it I agree but that is the jist. Because of that we cannot say it's not taxable without someone who has been there done that, or have it in writing from the IRS. I'll post my findings. Again if you have seen someone collect on rop was it taxed?
Last edited:
- Thread starter
- #29
- 1,405
You wrote:
"I would frankly be surprised if that happened."
Right, but you know about it and were forewarned. If the laws don't change - no harm done. If you had not been forewarned, and the laws changed, you'd be looking for a lawyer if the amount was significant.
It's fine to speculate one way or the other, just make sure the client understands the ROP is not taxable based upon current tax laws, you cannot guarantee it will never be taxable.
When I say what happened in Canada, I speak from experience. I was selling life insurance in Canada and was caught in those cross hairs when those laws changed there.
And as to the grandfathering rules in taxation, they won't help you with ROP because they will say any taxability is from this time forward. Well you won't receive the payout from the old policy until later, and so that payout can easily be made to come under the new rules - which is how the tax hungry liberals in Canada did it.
If you think your socialist Dems in the U.S. are any different than the socialists in Canada you're crazy. Socialists are socialists are socialists wherever you find them and right now they are running this country.
"I would frankly be surprised if that happened."
Right, but you know about it and were forewarned. If the laws don't change - no harm done. If you had not been forewarned, and the laws changed, you'd be looking for a lawyer if the amount was significant.
It's fine to speculate one way or the other, just make sure the client understands the ROP is not taxable based upon current tax laws, you cannot guarantee it will never be taxable.
When I say what happened in Canada, I speak from experience. I was selling life insurance in Canada and was caught in those cross hairs when those laws changed there.
And as to the grandfathering rules in taxation, they won't help you with ROP because they will say any taxability is from this time forward. Well you won't receive the payout from the old policy until later, and so that payout can easily be made to come under the new rules - which is how the tax hungry liberals in Canada did it.
If you think your socialist Dems in the U.S. are any different than the socialists in Canada you're crazy. Socialists are socialists are socialists wherever you find them and right now they are running this country.
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