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Taxes on Life Insurance blog
Exchanging a policy that carries a loan and where the tax bill hidesHow an outstanding loan, cash received and partial exchanges can create taxable gain inside a 1035 exchange, with numbers and a pre-application checklist.A 1035 exchange from application to confirmed transferThe paperwork of a 1035 exchange in order: records, applications, underwriting, the insurer-to-insurer transfer, and how to confirm basis carried over.A 1035 exchange from start to finish: forms, timing and pitfallsThe steps of a section 1035 exchange in order, from collecting the old policy's numbers to the tax form that follows, with what to send, ask and leave in force.Moving a policy with a loan in a 1035 exchangeFourteen questions on how a policy loan is treated in a 1035 exchange, when loan relief becomes taxable boot, and what a new insurer does with a carried loan.Dividing an annuity in a divorce: ownership, tax and paperwork pitfallsWhere annuity splits go wrong in divorce: balance versus after-tax value, cash-outs, qualified contracts, insurer forms, riders and the beneficiary left behind.The exclusion ratio: how annuitized payments split into basis and gainHow the exclusion ratio splits each payment from an annuitized non-qualified contract into tax-free basis and taxable gain, with worked and survivor examples.Annuity tax myths: deferral, step-up basis and tax-free pitchesTen common statements about annuities and taxes, tested against how deferral, ordinary income treatment, the earnings-first rule and inherited gain work.Taking annuity money before 59½: when the 10 percent tax appliesQuestions and answers on the 10% additional tax on early annuity withdrawals: what it hits, the main exceptions, the traps and who can confirm.Naming a charity or church as beneficiary: forms, wording and tax questionsExact legal-name wording, splitting a payout between family and a charity, what happens if it merges or closes, and tax questions for a professional.How dividends, premiums and basis interact for tax: a worked exampleA hypothetical participating policy traced over decades to show how premiums, cash dividends, withdrawals and loans move cost basis, with the arithmetic shown.Dividing a cash value policy in a divorce, with ownership and tax basisHow a cash value policy moves between divorcing spouses, why tax basis carries over, how a loan complicates the split and how transfer for value is avoided.The notice and consent checklist for employer-owned life insuranceA checklist for employers and employees on written notice, signed consent, eligible insureds and annual reporting under IRC 101(j), and what is at stake.Your policy turned out to be a MEC: what it means and what you can doSteps after learning a policy is a modified endowment contract: confirm it in writing, understand gains-first tax, weigh your options, see a tax professional.Interest on a delayed payout: the arithmetic and the tax treatmentEstimating the interest owed on a late death benefit with round numbers, why the benefit is generally tax-free but the interest is not, and the forms.A lapse with an outstanding loan, worked through to the tax billA hypothetical owner's policy lapses with a large loan: how the gain is computed, why no cash arrives, and the ways owners avoid or soften the result.A lapse with a loan outstanding, tracked from the first missed chargeIllustrative yearly balances of cash value, loan and interest through a lapse, showing where the taxable gain appears and why the tax bill comes with no cash.Seven beliefs about life insurance payouts that are not quite trueSeven common beliefs about speed, taxes, wills, notification and coverage, each tested against how the contract and the claim process really work.The tax difference between leaving heirs life insurance or an IRAA $500,000 death benefit and a $500,000 traditional IRA are not worth the same to an heir. Illustrative numbers show why and what to spend first.How a benefit increase or a rider can quietly turn a policy into a MECThe material change and exchange rules in principle: which edits restart the seven-pay test, why once-fine premiums can fail, and what to ask first.What you can still do after your policy becomes a MECOptions and deadlines after an over-funded year: returning excess premium, accepting MEC taxation, or borrowing differently, with a decision list for each path.MEC status and 1035 exchanges: questions and answersWhether MEC status follows a 1035 exchange, how a new policy gets its own seven-pay test, why paperwork matters, and what a MEC-to-annuity exchange means.The seven-pay test behind a MEC, explained with arithmeticHow the seven-pay limit works in principle, how funding speed and benefit cuts can trip it, an invented example, and why gains-first taxation makes it matter.Business owner policy ownership: personal, business-owned or partner-ownedCompares a policy owned by the owner, the company or a partner on control, premiums, tax, creditor exposure and what happens when an owner leaves.Figuring your cost basis in a cash value policy before any withdrawalA step-by-step worksheet for finding your basis in a cash value policy, with a worked surrender and a worked MEC loan, plus the records to request first.Policy loans and unpaid premiums that reduce the payout: the mathA worksheet for what a beneficiary really receives when a loan, its interest or a due premium comes off the death benefit, and how to ask for an itemized billA seven-pay test worked through with round numbersBuild an illustrative seven-pay limit, test three years of payments against it, and see the payment that tips a policy into MEC status and what changes after.Split-dollar's two tax regimes compared side by side in plain termsCompare the economic benefit and loan regimes for split-dollar life insurance: who pays, who owns, what is taxed each year and what the family ends up with.Surrender or sell a policy, and how each exit is taxed in principleCompare cash surrender with a life settlement sale on basis, ordinary income versus capital gain, loans and lost coverage, with hypothetical numbers.How the tax on a life settlement sale works in principleBasis, the three layers of gain, policy loans and the special rules for terminally ill sellers: the logic behind the tax on a policy sale.Taxing a non-qualified annuity withdrawal: gains come out firstA repeatable worksheet for the taxable part of each non-qualified annuity withdrawal, with a worked example, the 10% additional tax and records to keep.When selling a life insurance policy makes the death benefit taxableHow selling or trading a policy for value can make part of the death benefit income, which buyers are protected, and the everyday deals that trip the rule.