Taxation of Life Insurance

Question 1

Taxes on Dividends in LI policy?

Answer 1

• Not taxable, considered return of basis (or premiums)
• If dividends received exceeds premiums, then taxable

Question 2

Withdrawals on MEC

Answer 2

Becomes a MEC if fails 7 Pay Test

• Taxed on LIFO (interest first)
• Taxed as ordinary income until CV = accumulated premiums
• 10% penalty if w/d before 59.5

Question 3

Withdrawals on NOT a MEC

Answer 3

• Taxed FIFO (basis first)
• W/d’s considered return of principal until basis has been distributed, then taxed as ordinary income

Question 4

How are Group Life Premiums Taxed?

Answer 4

• Insurance paid by employer are deductible by employer
• Premiums paid by employer are taxable income to employee for coverage excess $50k

Question 5

Taxation of Viatical Settlement

Answer 5

• Insured sells LI policy
• Must be terminally ill (expected to die in 24 months) or chronically ill
• Proceeds NOT income taxed to insured
• Buyer has tax liability to extent the proceeds exceed purchase price